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10-Discussion Questions - Solutions

10-Discussion Questions - Solutions - Lecture 10 Technology...

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Lecture 10: Technology and Production (II) Suggested questions and exercises (Pindyck and Rubinfeld, Ch.7). Questions: 3, 7, 9 Exercises: 3, 4, 7, 9, 11 QUESTIONS 3. Please explain whether the following statements are true or false. a. If the owner of a business pays himself no salary, then the accounting cost is zero, but the economic cost is positive. True. Since there is no monetary transaction, there is no accounting, or explicit, cost. However, since the owner of the business could be employed elsewhere, there is an economic cost. The economic cost is positive, reflecting the opportunity cost of t he owner’s time. The economic cost is the value of the next best alternative, or the amount that the owner would earn if he took the next best job. b. A firm that has positive accounting profit does not necessarily have positive economic profit. True. Accounting profit considers only the explicit, monetary costs. Since there may be some opportunity costs that were not fully realized as explicit monetary costs, it is possible that when the opportunity costs are added in, economic profit will become negativ e. This indicates that the firm’s resources are not being put to their best use. c. If a firm hires a currently unemployed worker, the opportunity cost of utilizing the worker’s services is zero. False. The opportunity cost measures the value of the worke r’s time , which is unlikely to be zero. Though the worker was temporarily unemployed, the worker still possesses skills, which have a value and make the opportunity cost of hiring the worker greater than zero. In addition, since opportunity cost is the e quivalent of the worker’s next best option, it is possible that the worker might have been able to get a better job that utilizes his skills more efficiently. Alternatively, the worker could have been doing unpaid work, such as care of a child or elderly person at home, which would have had a value to those receiving the service. 7. Assume the marginal cost of production is increasing. Can you determine whether the average variable cost is increasing or decreasing? Explain. Marginal cost can be increasing while average variable cost is either increasing or decreasing. If marginal cost is less (greater) than average variable cost, then each additional unit is adding less (more) to total cost than previous units added to the total cost, which implies that the AVC declines (increases).
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