Question

1. Distinguish between explicit and implicit costs, giving 3 examples of each using the production of higher education.

2. Which of the following are short-run and which are long-run adjustments?

1. Freddie’s Frozen Custard builds 5 new restaurants.
2. Pioneer Balloon Corporation hires 200 more production workers.
3. Gaddert Farms increases the amount of fertilizer used on their corn crop.
4. Boeing closes its manufacturing facility in Wichita, sells the plant and moves to Oklahoma City.

3. Answer all three parts:

1. Why can the distinction between fixed costs and variable costs be made in the short run?

2. Classify the following as fixed or variable costs:
   • advertising expenditures
   • fuel
   • interest on company-issued bonds
   • shipping charges
   • payments for raw materials
   • real estate taxes
   • executive salaries
   • insurance premiums
   • wage payments
   • depreciation and obsolescence charge
   • sales taxes
   • rental payments on leased office machinery.

3. What happens to all costs of production in the long-run?

Answer 1

Answer 1:

Explicit costs are those that are paid to someone for the goods or the services obtained. Like furniture purchased, Equipment purchased, Advertisement expenses paid to advertising agency.

Implicit cost are the cost of own goods or services, that are not paid but incurred. For example, if Mr. X owns land and uses it for making a higher education institution. This is implicit cost. Similarly if he works in the institute instead of working somewhere else this is implicit cost. Also if his wife works for the institute and not paid for her work this is also an implicit cost.

Answer 2:

b and c are short run adjustments, wheres a and d are long run adjustments because for hiring workers or for purchasing raw material needs lesser of investment and can vary from every month or even for a shorter period. But opening more restaurants and closing manufacturing facility needs large investment or generate large amount of funds and are done once in a long period of time and once done they reap benefits for long period.

Answer 3:

A.

Distinction between fixed and variable costs is made in the short run because in the short run heavy or fixed costs lke that of purchasing machinery can not be incurred again and again or a number of times but variable cost like that of purchasing raw material, hiring labor can incurr more that once or twice even in a short period of time So, these costs are classified as fixed and variable costs.

A.

Fuel, interest on company issued bonds, shipping charges, payment for raw materials, executive salaries, insurance premiums, wage payments, sales taxes, rental payment on leased office machinery are all variable costs.

Advertising expenditures, real estate taxes, depreciation or obsolescence charges are fixed costs.

A.

In the long run all costs of production becomes variable and can be incurred more than once.