Microeconomics Study Set 47

Business

Quiz 8 :
Costs and the Supply of Goods

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Quiz 8 :
Costs and the Supply of Goods

The owners of a firm are the claimants of residual income that is the difference between revenue and cost. The income of the owners can increase only if either the costs are reduced or the revenues are increased. The property right of the owners to this residual income gives a strong incentive to them to run their business in the best possible manner so that they are able to value their output at the highest price and at the same time keep the cost of production least. They are constantly striving towards using their resources most efficiently. In order to produce efficiently and keep the costs low, the owners should either do the production by contracting persons or through team work. The owner should see to it that the workers work efficiently and do not escape the work schedule, achieve the targets and perform their best. The owner should give them incentives and also supervise their activities. The owner should be able to motivate his workers and managers to give their hundred percent if he wants to keep the costs low and the prices high. If there are lapses in the management of activities and the workforce it will increase the costs and also keep the output low. At times the owners are not able to monitor their employees and hence keep the productivity of the workers low. It is important to keep the moral of the workers high so that they work with zeal and enthusiasm, increasing the productivity and keeping the costs low. They should work in favour of the firms goals to be achieved.

a) The given statement does not have a sound economic logic. It is because the amount of $400 paid for the course is like a sunk cost. So it does not matter whether one attends the lectures or not because the sunk costs are the past costs that have been already incurred and are not relevant. b) There is an opportunity cost in owning a house in the form of the rent that will be forgone. Therefore, the statement is not based on sound economic thinking. c) The reductions in the stock prices are like sunk cost and so are irrelevant to the decision whether to sell at this time or not. d) Even if the education is provided free of cost, there is always an opportunity cost. Therefore, it also cannot be considered as a sound economic thinking.

No, the accounting statement of the bicycle firm will not reflect the opportunity cost. It is because accounting statement only shows the explicit costs, that is, the cost which is flowing out of the firm's business to pay for the raw material required to produce a bicycle. Whereas, the opportunity costs are the costs which are paid for the missed opportunity and often are implicit. That is in their payment no money flows out of the firm's business but are important for economic decision making. Therefore, it is opportunity cost and not the accounting statement which is important in decision making.

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