Question

A: explain the difference between fixed and variable cost.

B: explain the difference between explicit and implicit cost.

C: in the long run in perfect competition economist say that profit =0 but would any firm be involved in that market in the first place?

Answer 1

A.

Since fixed cost does not change with the change in the output level.

the variable cost change with the change in the output level.

B.

An implicit cost can be defined as the opportunity cost equal to what a firm give up for using the factor of production which it already owns and thus does not pay rent for it.

An explicit cost is defined as the direct payment made to others for using the resources and running a business. For instance, wage, rent and material etc.

C.

In the long run in perfect competition economist say that profit =0 because the long-run profit-maximising condition is

P=ATC

Hence there is zero economic profit but ther is normal profit which keeps the firms in the industry even in the long-run.

Zero economic profit occurs when TR and TC are equal.

It means firm is able to cover full cost both variable cost and fixed cost. It means all factors of production gets their rent, profit, wage and interest.

Hence even in the long-run in case of zero economic profit firm will keep producing.