Theme5_couts_A08AN - Costs 2 Introduction Opportunity cost...

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Costs
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2 Introduction Opportunity cost Production costs : Short run Long run
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3 A business decision You are contemplating starting your own business. Your estimate: revenue of $60,000 per year Estimated costs (by accountant): $25,000 per year What would your profit be? Should you start this business?
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4 Opportunity cost How would your answer change if you were currently employed at $40,000 per year? Opportunity cost : the value of the best alternative use of a resource. Accounting π = Revenue – Accounting Costs Economic π = Revenue – Economic costs Accounting costs + Opportunity cost
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5 Short-run costs In the short run: K is fixed and L is variable Fixed costs (F) : independent of output (=cost of K) Variable costs (VC): varies with output Total Cost : C = F + VC
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6 Average cost (AC) AC = C/q = F/q + VC/q = AFC + AVC Interpretation:
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7 MC = ∆C/∆q (discrete case) = C’ (continuous case) Interpretation: Marginal cost (MC)
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8 Output F VC C MC AFC AVC AC 0 50 0 ___ n/a
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This note was uploaded on 11/01/2010 for the course BUSINESS 2789 taught by Professor Carl during the Fall '08 term at HEC Montreal.

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Theme5_couts_A08AN - Costs 2 Introduction Opportunity cost...

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