Distinction Between Marginal Cost And Incremental Cost Economics Essay

Distinction Between Marginal stop And Incremental Cost Economics Essay2) (a) What is the distinction amid borderline salute and additive damage? (b) How atomic number 18 sunk embodys treated in managerial last making? Why(a)Incremental salutes atomic number 18 closely connect to the concept of borderline woo simply with a relatively wider con nonation. go marginal damage refers to the change in meat be pass oning from producing an extra unit of proceeds, incremental woo refers to summarize redundant make up associated with the decision to expand come input or to add a new figure of growth etc. It represents the difference between two alternatives. So both be concerned with the change in the im authority salute where marginal cost refers to the amplification or decrease in that results from producing or distributing an add-onal unit of take and, incremental cost refers to the change in the total output as a result of change in the methods of issue or distribution much(prenominal) as addition of a proceeds or territory, map of improved technology or selection of a additional gross sales channel.(b)A sunk cost is a cost that has been already incurred and can non be changed or altered by every decision watch now or in future. For example , once it is decided to make incremental investment expenditure and funds ar allocated and spent, all antedate cost are considered as sunk cost. Such cost are based on prior commitment and cannot be revised or recovered when there is a change in market causation or in art decision makings. The sunk cost are ignored in managerial decision making as they are irrelevant cost which forget not affect the decision. Suppose a keep company paid $50000 to purchase machinery five years back. The machine was utilize to produce for last few years and now it is obsolete and no hankerer can be sold .The amount paid is already incurred and cannot be recovered. So the cost of the obsolete mach ine impart not be considered in making managerial decisions.(8) What shape of the LAC wriggle has been prime in many empirical studies? What does this mean for the survival of miniscule squares in the patience? conclude In the empirical studies the shape of long trial movement come cost curve to be L-shaped with a scale of economics . This means largest firms tend to consider cost advantage and the industry tends to fix monopoly which is called natural monopoly. The L-shaped shows that per unit producing a harvest-festival winnow out initially and and thus forms L- shaped which cost advantage for longer period resulting to economies of scale collectable to optimum utilization of recourses. It was believed that economics outstrips diseconomies of scale as firms expand from small size up to a certain size. For the smaller firms in the industry depart face diseconomies of scale and no economic earn as there will be lesser amount of recourses and output take aim.As marginal cost are raising puzzle out of rate of out and move function of the saturation.(9) (a) What is the meaning of economies of mountain chain? How do they differ from economies of scale? (b) What do learnedness curves show? How do they differ from economies of scale? What is the usefulness of eruditeness curves as a managerial dick? What is the contend for rising worldwide trade in inputs and the use of external skilled labor? answer(a) Economies of scope exist if a firm can produce some(prenominal) product lines at a given output level more(prenominal) cheaply than a combination of separate firms each producing a sensation product at the same output level. Economies of scope occur where it is cheaper to produce awider range of products quite an than specialize in just a handful of products. Expanding the product range toexploit the value of existing brandsis a good way of exploiting economies of scope. E.g. Amazon expanding into selling toys, sports goods or McDo nalds expanding the range of their products to take salads and health foods. Economies of scope is relatively a new approach to business strategy, and is heavily based on the development of high technology. Economies of scale are reductions in honest be imputable to production volume increments. Economies of scope differ from economies of scale in that a firm receives a cost advantage by producing a complementary variety of products with a preoccupancy on a core competency. While economies of scope and scale are often despoticly correlated and interdependent, strictly speaking the clears from scope have little to do with the size of output.(b)The aircraft industry was the first to develop the learning curve. The curve that represents the declining trend in the long run bonny cost of production is called the learning curve. Economies of scale is the are the reduction in reasonable cost as the result of increase in production volume whereas learning curve shows the graphical presentation of the falling average cost curve with respect to increase in production. The learning curve is widely apply by business managers and serves as an important managerial tool to foresee and predict the possible trend in long run average cost of production and plan production accordingly. The basic purpose behind the use learning curve is to forecast the unit cost with cumulative increase in output. It is as well used to forecast manpower, machinery, poppycock needs of the company, to fall and quote the future competitive toll of the product and for planning production.(c) International trade is the exchange of goods, services and capital crossways the international territory or borders. The use of contrasted labor will be more costly due to the reason that borders imposes additional cost such as tariffs , time costs due to border delays and costs associated field difference . A progress in the use of foreign skilled labor will have a direct impingement in the i nternational trade resulting in an increase in the imports which whitethorn affect the balance of trade.Chapter 7 Problems2) precondition the adjacent total cost schedule of a firm, (a) derive the total frozen cost and total variable cost schedule of the firm, and from them derive the average set cost, average variable cost, average total cost, and marginal cost schedules of the firm.Q 0 1 2 3 4 5TC $30 50 60 81 118 clxxx exercise come in cost = Total fixed cost +Total variable costMarginal cost= Total cost of producing additional unit total cost of producing the front unit. honest variable cost=Total variable cost/ chassis of units clean fixed cost=Total fixed cost / arm of unitsTotal average cost=Average fixed cost + Average variable costQ 0 1 2 3 4 5TC $30 50 60 81 118 180TFC $30 30 30 30 30 3TVC $0 20 30 51 88 150MC $ 20 10 21 37 62ATC $ 50 30 27 29.5 36AFC $ 30 15 10 7.5 6AVC $ 20 15 17 22 363) air duct Express has an evening escape cock from Los Angeles to New Y ork with an average of 80 passengers and a save course the adjacent afternoon with an average of 50 passengers. The plan makes no other trip. The vex for the plane remaining in New York overnight is $1, two hundred and would be $0 in Los Angeles. The airline is considering eliminating the night charge out of Los Angeles and replacing it with a morning leak. The estimated number of passengers is 70 in the morning flight and 50 in the come about afternoon flight. The one-way ticket is $200 for any flight. The operate cost of the plane for each flight is $11,000. The fixed costs for the plane are $3000 a twenty-four hourslight whether it flies or not.3(a) interest calculate and compare the profit under each flight. 3(b) is asking should airway Express continue providing the flight between Los Angeles and New York. Even Airway Express decides not to fly, it still have to pay the fixed costs of $3,000 per day. repartee-Given,Cost of the ticket =$200Operating cost =$11,000Fixe d cost=$3000Overnight charge=$1,200Total cost = $11,000+$3,000+$1,200=$15,200I. service for the evening flight from Los Angeles to New York which has average passengers of 80 and cost of the tickets is given as $200 so the average revenue will be $16,000.Profit=Revenue-Cost$16,000-$15,200$800Thus, average Profit for the flight is $800II. Profit for the afternoon flight next day from New York to Los Angeles carrying average passengers of 50, so the average revenue will be $myriadProfit=$10,000 -$15,200-5,200The fight is showing average loss of $5,200III. Profit for the morning flight eliminating with the night flight from Los Angeles to New York carrying an average passengers of 70, the revenue will be $14,000.Cost of operation =fixed cost + operating cost$3,000+$11,000$14000Profit=Revenue earned cost incurred$14000 $14000$0The flight is nor earning average profit or average loss.IV. Profit for the afternoon flight from New York to Los Angeles with estimated passengers of 50, the revenue will be $10,000Profit=$10,000-$14000$4000The flight is subject loss of $4000.(b)The Airway express flying evening flight from Los Angeles is earning a profit of $800 with average passengers of 80 and whereas incurring loss of $5,200 in the return trip. In the next case, the airline is making no profit and no loss in the morning flight from Los Angeles to New York, whereas making a loss of $4000 in the return trip . The airline should discontinue providing flights between Los Angeles and New York. Although, it has a fixed cost of $3000 per day which come to $90,000 but the airline will be incurring huge cost of $14000 per day which comes to $42, 00,000 in a month. So it would be a break in preference to discontinue the operation of the airline from Los Angeles to New York.4) Electric profit companies ordinarily operate their most modern and efficient equipment continuously (i.e. around the clock) and use their previous(a) less efficient equipment only to meet periods o f peak consider.4(a) go out the short-run marginal cost decrease or increase?Answer Electric Utility firms retire old plants, modernize generating units, and occasionally build new plants, generally after a lengthy period of licensing, regulatory review, and construction. But this not possible in short run as in short run there are fixed factors which cannot be changed in short run as they tend to use their older less efficient equipment to meet the periods of peak demand. In Electric utility companies variable cost consist mainly zippo costs. Fixed cost are the cost which cannot be changed with the level of output and in voltaic utility companies fixed are analogues to capacity cost. As a result the marginal cost in the short run decreases . The reason is the marginal cost curve will turn up when utility will be forced to less efficient during on peak-periods.11) The Goldberg-Scheinman Publishing association is publishing a new managerial economics text for which it has estima ted the following total fixed and average variable costsTotal fixed costsCopy editing $10,000Typesetting $70,000Selling and promotion $20,000Total fixed cost $100,000Average Variable costPrinting and binding $6Administrative costs $2Sales commission $1 bookstall discounts $7Authors royalties $4Average variable cost $20 escort selling determine $30Determine the breakeven output and total sales revenues. (b) Determine the output that would generate a total profit of $60,000 and the total sales revenues at that output level.Answer(a)At the breakeven point is the point where cost and revenue are equal.CalculationsBreakeven point (sales) =Fixed cost/(Selling bell -Variable cost)=$100,000/($30-$20)=$10,000Breakeven output=$10,000/$30=333.3 units(b)Sales=Variable cost + fixed cost +profit=$20+$100000+$60000=$160020Output level-$160020/$30=5334 units.Chapter 8 Discussion2) (a) Under what conditions should a firm continue to produce in the short run if it incurs losses at the outperform level of output? (b) Are the convening returns on investment included as part of costs or as part of profits in managerial economics? WhyAnswerIn short run, there is only one variable input (labor) and other inputs (especially capital) are held constant. In other words, the size of labor may increase or decrease but the capital and other inputs will remain fixed. If the Incurs losses at its best level of output then, the firm should try to reduce marginal cost and operate at the level where marginal and average product are positive or increasing. If price falls down the stairs average total cost, but remains to a higher place average variable cost, the firm will continue to operate in the short run, producing the sum whereMR=MCdoing so minimizes its losses. Whereas If price falls below average variable cost, the firm will shut down in the short run, reducing output to nothing. The lowest point on the average variable cost curve is called the shutdown point.(b)Normal returns on investment is also referred as normal profit, is the level of profit required to keep the booked in a particular activity .The normal rate of return is the Average profit necessary to attract and retain investment .A normal rate of return, or profit, is necessary to induce individuals to invest funds rather than spend them for current pulmonary tuberculosis. Normal profit is simply a cost for capital as it is no different from the cost of other recourses (materials, energy or labor).As a result , the normal rate of return are included as a part of cost in managerial economics.8) What happen to the Dollar price that a U.S. (a) importer pays and (b) exporter receives if prices are agreed in Euros and the Dollar then appreciates by 10 percent with respect to the Euro?AnswerThe exchange rate is the price of one currency expressed in terms of another. If the importer pays i.e. in dollars to the foreign country and the value of the foreign country currency is devalued the dollar value of promised payment will fall. Whereas if the foreign currency value appreciates the dollar value of the promised payment will rise resulting to a disfavor to the importer country.If prices are agreed in Euros and the Dollar then appreciates by 10 percent with respect to the Euro and the exporters pay, the value of the promised payment will fall.13) (a) What are the choice-related variables for a firm under monopolistic aspiration? (b) What is non-price competition? (c) Product Variation? (d) Selling expenses?Answer(a)Monopolistic competition is defined as market setting in which large number of sellers sells differentiated products. A firm will produce output where MR=MC. The consumers are willing to purchase given amount of product for the given price. The price is determined by demand curve. In short run firms can give positive profits .Positive profits encourages new firms to enter in the market. In the long run due to the entrance of new firms economic profit is zero i.e. P=AC . The main objective of firms under monopolistic competition is profit maximization.(b)Non price competition- The market situation in which firms or the competitors will not lower the price for a fear of price war. So, instead they focusing on extensive promotion to highlight distinctive features or benefit of the products. It refers to the competition among firms that choose to distinguish between their products on the basis of attribute, conception are non price means e.g. promotions, style etc. It is often used by firms that want to differentiate between virtually identical products. The reason for this is that firms are that operate in monopolistic competition are the price taker as they do not have the influence in ever-changing the price of their goods. Consequently to distinguish themselves they use the strategy of non price such as product innovation and advertisement.(c) Product innovations-Product variation is the change in the product properties or features in timing. For example, passenger cars companies bring new models out in the exiting classs e.g. Gulf I, gulf II. Product variation is the modification by changing one or more features of the product to enhance consumer apostrophize .It will provide a competitive advantage as the company may be able to charge a higher price and enhance loyalty. The variation is made on quality, performance and design. The product variation is, thus, the improvements in the existing product line with new features, appearance, better quality, better performance etc giving a new outlook to it.(d)Selling expenses-Selling expenses are the part of operating expenses along with administrative expenses. Selling expense is the cost incurred to sell or distribute merchandise .Selling expenses includes advertising, sales commission, promotional materials distributed, salaries and fringe benefits of sales personnel , rent of sales office, utilities usage in the sales department.Chapter 8 Problems-2) Starting with the mar ket demand and supply functions in Problem 1, determine algebraically the new equilibrium price and quantity if the demand function changes to QD= 12,000- 1,000P or to QD= 8,000- 1,000P. (b) the market supply function changes to QS*= -4,000+1,000P or to QS**= 1,000P.SolutionWe go , at the equilibrium point Quantity supplied equals quantity demanded i.e. QD=QS or QS=QDWe have,QD=10000-1000PQS= -2000-1000PIf demand function changes to QD=12000-1000P or QD=8000-1000We get ,12000-1000P=2000-1000P-1000P+1000P= -12000P-2000P P = 12000P= 12000The new equilibrium price will be $12000BY substituting the value of P in the demand function and supply function,12000-1000(12000)=-2000-1000(12000)12000-120,00,000= -2000-120,00,00014000The new equilibrium quantity is 14000For market supply function, QS= 4000 +1000P or QS=1000PNow, the equation will be10000-1000P=-4000+1000P-1000P-1000P= -4000- 10000-P= -14000P=14000The equilibrium price is $16000By substituting the value of P, will be ,10000-10 00P=1000P10000-1000(16000)=-4000+1000(16000)10000-140,00,000=-4000+140,00,0006000The equilibrium quantity will be 60007) From Figure 8-4, determine the effect of a 33 percent import tariff on commodity X.* The tariff-inclusive price will be $3(1+.33) = $4. What are the impacts of tariff on house servant consumption, domestic production, imports, and governings tariff revenue? Please show the numbers, for example, the domestic consumption will decrease from 600X to 500X.Solution The tariff inclusive price will be $3(1+.33)=$4 , the price of the commodity will be $4 and as a result the price of the commodity X will rise from $3 to $4.Tariff is a tax added to the costs import goods and sometimes to exported goods. The domestic consumption will decrease due to the addition of tariff which will result to an increase in the price of the commodity. As the price of the commodity will increase, the demand for the commodity will decline which will result in a reduction in consumption from 60 0X to 500X. The domestic production will increase as the producers in the importation country will experience an increase in well-being as a result of tariff from 200X to 300X. The increase in the price of their product on the domestic market increases producer surplus in the industry. The government activity tariffs revenue will increase as a result of increase in tariffs as governments receives the tariff and also depends on the way how the government spends.9) Starting from Figure 8-6 showing the short-run price and output tendency by the monopolist, suppose that the average fixed costs of the monopolist increase by $5 and that its AVC is $6 less than the new ATC at the best level of output.ATC=AFC+AVC. After AFC increases by $5, ATC will increase by $5 (ATC curve moves up vertically by $5 for every output Q) and MC, D and MR stay the same. The AFC for 500 units is $6, in other words, the TFC is $3,000.Answer Average total cost-Average fixed cost + Average variable costGiven A TC=$8, a increase in average fixed cost $5 and AVC is $6 less then,After the increase in AFC the ATC will be appreciated by $5 as a result of this ATC curve will move upwards vertically by $5 for every level of output. The best level of out is where MC=MR which is 500 units. AFC for best level of output i.e. 500 is $6 and TFC is $30,000.