Question

Question 4

i. Evaluate the view that the main goal of firms will always be profit maximization. [3 marks]

ii. You are interested in starting a coffee shop at the University of the West Indies. Provide examples with explanations of explicit costs, implicit cost and sunk costs related to this business. [6 marks]

iii. Explain with the use of examples the difference between the following concepts: producer surplus and economic profit [4 marks]

Answer 1

1.The main goal of the firm would be profit maximisation because if the firm would not focus on profit maximisation it would not be able to continue the business and will incur losses.

2. Explicit cost is the cosf of hiring factors from outside. For example : hiring the university space to open coffee shop or purchasing chairs and tables for the shop.

Implicit cost is tbe cost of self owned resources used in the activity. For example: Using own coffee maker, microwave which was purchased earlier for self consumption can be used at the coffee shop.

Sunk cost is the cost that has been occured and will not be able to recovered in future. For example: rent paid to the university for coffee shop cannot be recovered once paid.

3. The difference between producer surplus and economic profit is that while calculating producer surplus we do not take consideration of the fixed cost but will calculating economic profit we subtract fixed cost.

Economic profit is the profit over and above cost while producer surplus is the difference between at how much price producer is willing to sell and how much he actually gets by selling.