Question

8.

a. What are the three types of firms? b. Explain the advantage and disadvantage of each type of firm.

c. Which type of firm produces the most revenue?

9.

a. What are implicit costs?

b. Do implicit cost contribute to the opportunity cost of production? Explain

c. Should an implicit cost be counted as cost in determining profit? Explain

d. Give two examples of implicit costs

Answer 1

Solution

8.The 3 types of firms are :

a. b.Sole Proprietorship - Under this there is only individual who is the owner.

Advantage - The owner takes all the decisions

Disadvantage - The owner has to perform all the tasks ; & if in case the owner is sued,he is personally liable

Partnership - It is a business collectively owned by two(or) more people.

Advantage - The roles / responsibilities and investment is shared among the business partners.

Disadvantage - 1.There may be conflicts among the partners on a variety of issues,in that case the business suffers

2. The partnership agreement is valid only during the lifetimes of the partners.It is void even if anyone of them expires.

Private corporation - It is a business owned by the shareholders.It protects its owners with limited liability for debt and other obligations.It means that your liability as an owner is only limited to the amount by which you own the company in the corporation.

c.Private companies produce the most revenue because they are largest in terms of operating size /scale

9. a.Implicit costs are the costs that are incurred but not shown / reported as a separate expense so it does not appear in the financial statements.

b.Yes,they contribute to the opportunity cost of production.In fact they are the opportunity costs.Ex:There are 2 choices of production whether to use a labour intensive method (or) to use technology extensive method of production. Each method has different advantages and disadvantages.

c.No,generally we do not count it because technically speaking it is not incurred.In my opinion, I feel that Opportunity cost cannot be counted because you have already chosen that particular option instead of the other option based on your situation / mood / common sense. So,now you cannot consider thinking /measuring the impact of choosing another option because it is only one of the choice that you have to choose.

d.Ex: 1.Opting for a Post-Graduate program instead of doing a job..By opting for a Post-Grad program,I would the loose the opportunity to earn by doing a job and also pay fees to the program.If I had not enrolled in the program I would also have the benefit of earning interest on my savings.

2.Opting to go for a movie instead of sitting at home

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