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Unformatted text preview: HOMEWORK V (DUE WEDNESDAY OCT 29TH) ANSWER KEY 7.1. The accounting cost includes only the explicit expenses, which are Joe’s salary and his other expenses: $40, 000 + $25, 000 = $65, 000. Economic cost includes these explicit expenses plus opportunity costs. Therefore, economic cost includes the $24, 000 Joe gave up by not renting the building and an extra $10, 000 because he paid himself a salary $10, 000 below market ($50, 000- $40, 000). Economic cost is then $40, 000 + $25, 000 + $24, 000 + $10, 000 = $99, 000. 7.2. a. This tax is a fixed cost because it do not vary with the quantity of output produced. If T is the amount of the tax and F is the firm’s original fixed cost, the new total fixed cost increases to TFC = T + F . The tax does not affect marginal or variable cost because it does not vary with output. The tax increases both average fixed cost and average total cost by T / q . It has no effect on average variable cost, because the variable cost do not change as a result of the tax. b. Let t equal the per unit tax. When a tax is imposed on each unit produced, variable cost increases by tq and fixed cost does not change. Average variable cost increases by t , and because fixed costs are constant, average total cost also increases by t . Fur- ther because total cost increases by produced, marginal cost increases by t ....
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- Spring '07
- Opportunity Cost