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Marginal Costing and Cost Volume Profit Analysis
Meaning Marginal Cost: The tenn Marginal Cost refers to the amount at any given volume of output by which the aggregate costs are charged if the volume of output is changed by one unit. Accordingly, it means that the added or additional cost of an extra unit of output. Marginal cost may also be defined as the "cost of producing one additional unit of product." Thus, the concept marginal cost indicates wherever there is a change in the volume of output, certainly there will be some change in the total cost. It is concerned with the changes in variable costs. Fixed cost is treated as a period cost and is transferred to Profit and
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Economic Concepts Worksheet
Concept Application of Concept from Personal Experience Reference to Concept in Reading
Marginal Analysis encompasses two key elements:
â€¢ Marginal Benefits
â€¢ Marginal Cost
Marginal analysis takes into account the costs and benefits associated with a choice. Determining if the costs outweigh the benefits (or vice-versa) assists in making decisions.
Marginal analysis was chosen because it is a diagnostic tool that can be used in effective decision making. In my previous job, I was employed by a biological laboratory. I worked on a specific bench testing whole blood for trace amounts of lead. I asked several times to move positions in order to obtain
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In economics, marginal revenue is the revenue that an additionally produced unit will create, if sold. When a company is in a competitive market, the price of the unit sold does not change, so marginal revenue is the price of a single unit. The relationship between marginal revenue and total revenue is calculated when marginal revenue is equal to the change in total revenue divided by the change in quantity, when the change in quantity is equal to a single unit. Mathematically marginal revenue is calculated using the product rule formula of MR = d(TR)/dQ where MR equals marginal revenue, TR equals total Revenue, and Q equals quantity
On the contrary, marginal cost is the cost incurred
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EGT1: Task 1.
When owning or managing a business it’s important to keep track of the marginal revenue. The most important factors in showing you if your business is a success are cost, revenue and profit. Revenue can high for a company, but if the costs are high as well a profit won’t show and they will most likely not be able to make it. It’s important for businesses to keep track of their profits and cost’s. The way businesses figure their profit maximization is by determining the price and the number of widgets made to get the highest profit they can for their business. There are two ways of figuring your highest profits, one of which is by Total Revenue/Total Cost method and the
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where it is no longer viable to lower the price to increase quantity is when Marginal Revenue equals zero.
Marginal cost is the expense created by manufacturing one more unit of a product. Total cost is fixed and variable costs associated with the manufacturing of a product. In many industries the fixed cost associated with making the product is often high. However when marginal costs are factored in the cost per unit is lower. This is because fixed cost can be spread out over each unit of production, lowering the cost on each unit produced. Like marginal revenue and total revenue, marginal cost and total cost operate on a curve. Initially as each additional unit is produced
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It is almost every company’s goal to maximize their profits in order to gain the best return they can on their investments. Maximizing profits helps to facilitate the longevity and survivability of a company because it provides the company the ability to expand their business, borrow money, attract investors, and hire more employees. Understanding when or if the company is profitable can be somewhat overwhelming at first, but by applying the principals of total revenue, total cost, marginal revenue, and marginal costs the process of determining profitability is simplified greatly.
In order to understand how the principles of economics affect the profitability of a
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MARGINAL COST: Marginal Cost is the additional cost of producing an additional unit of product. In simple, marginal cost is the extra cost of an extra unit of production. It is the total of all variable costs. It composed of all direct costs and variable costs. The CIMA, London, defines marginal cost “as the amount at any given volume of output by which aggregate costs are changed, if volume of output is increased or decreased by one unit”. In other words, it is the cost of one unit of product which would be avoided if that unit were not produced.
MARGINAL COSTING: It is
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MR=MC; P > MC/ATC (ATC not at minimum)
A monopolistically competitive company reaches the maximum-profit output at the point where marginal revenue (MR) is equal to marginal cost. Profit will be greater than marginal cost and average total cost. At this point, profits cannot be increased by changing the production level. Increases in production will cause a decline in profits, because it adds more to cost. Decreasing production will decrease revenue, since there will less inventory to sell. The profits shown in this graph cannot be maintained, since other firms will also produce similar products. This
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period of time. Variable cost changes as the output changes, and total cost is the sum of fixed cost and variable cost. Marginal productivity best describes the inputs and outputs in relation to cost. When marginal cost exceeds average cost, average cost must be rising. When marginal cost is less than average cost, average cost must be falling. This explanation of cost and how it relates to production allows the business to gauge the amount of product needed (or not needed) and the total the cost for completing the product.
Supply and demand are critical factors in economics. They determine price in a market. In an aggressive market, supply and demand, the price of an item or unit price
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the good will be low and so do the marginal utility. On the contrary, if the price you are willing to accept or is lower than you expect, the utility of the good will be high and so do the marginal utility. For example, you want to buy clothes from Zara, but for there are new brand, they will cost you a bit more money than you expect. And in this very situation, you will be a little upset to pay the bill, and the marginal utility will be low. However, if the clothes are in discount, then you will be happy to pay the money less than normal time. And this time, you will be happier because you not just get new clothes but also get discounts, and the marginal utility will be high.
As a result
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decisions are made at the margin. This means that most decisions are not all or nothing, but rather involve doing more on one thing and less of another.
When making the decision to return to school to attain a bachelor’s degree, the marginal benefits and the marginal cost of the decision has to be considered before the final decision could be made. The marginal benefits of returning to schools were the additional income that I would be able to receive from the higher degree, the satisfaction that I would receive from achieving a degree, and the ability to find a job that used more accounting skills. The marginal cost of the decision to return to schools were the decrease in income that I
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The variable cost of a product is usually only the direct materials required to build it. Direct labor is rarely completely variable, since a minimum number of people are required to crew a production line, irrespective of the number of units produced.
The Marginal Cost Calculation
ABC International has designed a product that contains $5.00 of variable expenses and $3.50 of allocated overhead expenses. ABC has sold all possible units at its normal price point of $10.00, and still has residual production capacity available. A customer offers to buy 6,000 units at the company's best price. To obtain the sale, the sales manager sets the price of $6.00, which will generate an incremental profit
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Cranston Coils Regression Case
The Cobb-Douglas cost function of Cranston Coils was found using output, capital, and labor data from their eighteen plants. The cost function, Q = (0.40692) K0.32477 L0.79466, was used to determine the short-run cost equations of total cost, average cost, average variable cost and marginal cost. Calculations using these equations gave rise to Cranston Coils cost structure, which predicts cash flow within the company. Cranston Coils’ cost function was also used to determine if a contract between Sleep Easy and Cranston Coils should be accepted. After determining marginal cost and revenue (see
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Production and Cost Analysis
Rasheeda Arthur, Sarah Fischer, Tera Ginnaty, Mike May,
Shannon McMillan, Tiffany Sawyer, Tiffany Weiland
ECO/365 Version 4
September 16, 2013
Production and Cost Analysis
Colander (2010) explains analyzing production and cost, and provides insight into how the abilities of market economies effect the organization of a society. In week two, Team C learned evaluating production and cost within a firm is a complex study involving several key focus points. The team learned it is essential to understand the relationship between inputs and the law of diminishing marginal productivity. Another key point discussed in week two focused
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product.” (McConnel, 2012) Total revenue is not the profit that is made from selling a product. Total revenue is the money that was made when the product was sold to a consumer. Once total revenue is obtained, profit is determined by deducting the total cost from the total revenue. The relationship can be described as follows, “total revenue is the change that occurs in marginal revenue when one or more units of goods or services are produced” (McConnel, 2012).
A change in quantity, whether this change is negative or positive, is when marginal revenue occurs. “Marginal Revenue is the change in total revenue that results from selling one or more unit of output.” (McConnell, 2012) An
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EGT1 Task 1 – Marginal Analysis
The profit calculation of total revenue and total costs is Profit (P) equals total revenue (TR) minus total costs (TC) and focuses on maximizing this difference. Profit will be maximized when the total revenue, or the amount they would receive by selling that particular widget exceeds the total cost, or the costs associated with making this widget by the greatest amount. The greatest difference between these two is considered the profit.The profit calculation of marginal revenue to marginal costs is different where the company will compare the marginal revenue (MR) they would receive from selling one more widget to the marginal cost (MC) of producing that
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Analysis of cost
The role of costs goes far beyond influencing production and profits. Costs affect input choices, investment decisions, and even the decision of whether to stay in business. Is it to hire a new worker or to pay overtime? To open a new factory of expand and old one? To invest in new machinery domestically or relocate production abroad? Bangladesh want to choose those methods of production that are most efficient and produce output at the lowest cost. Analysis of cost is devoted to a thorough. First we consider the full array of economic cost, including the central notion of marginal costs. Then we examine how business accountants measure cost in practice.
Short – Run
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13 $30.00 $130.00
14 $20.00 $140.00
15 $10.00 $150.00
When using the marginal cost to marginal revenue to determine maximum profit you would use the formula MR=MC. So when the marginal revenue is equal to marginal cost your profit is at its maximum. You can see from the chart below that at 8 units your MR = MC.
B. Marginal revenue is the change in revenue for selling one more unit. The formula is ΔTR/ΔQ = MR. You can see from the chart below that selling one unit produces a revenue of $150 selling two units produce a revenue of $290. You subtract $150 from $290 and you come up with
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cost and earn monopoly profit, which might more than compensate for the foreign market losses.
Fig. illustrates how the price discrimination is possible by the monopolist in spatially separated markets. In protected domestic market, this monopolist faces downward sloping demand curve ARD The corresponding marginal revenue curve MRD is also downward sloping. However, die demand curve ARF of the concerned firm in the foreign market is horizontal straight line at the level of OPF price, as here; it is one among large number of competitors. In the foreign market, its marginal revenue curve MRF coincides with the demand curve ARF due to perfect competition there. On account of perfect
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There are mainly two techniques of product costing and income determinationAbsorption Costing: This is a total cost technique under which total cost (i.e., fixed cost as well as
variable cost) is charged as production cost. In other words, in absorption costing, all manufacturing
costs are absorbed in the cost of the products produced.
Marginal Costing: An alternative to absorption costing is marginal costing, also known as ‘variable
costing’ or direct costing. Under this technique, only variable costs are charged as product costs and
included in inventory valuation. Fixed manufacturing costs are not allotted to products but are
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long-run. Firms would change production levels in response to economic profits or losses, and the labor and capital cost would vary as well. In this case, it indicates that the equation (1) was developed on a basis of the average relationship between cost and output. Besides, there was a fixed cost of $4,914 in equation (1). Usually, a long-run cost function only contains variable costs. Hence, equation (1) shall be a short-run cost function.
4. What is the marginal cost of switching a cut?
The marginal cost of switching a cut is the derivative of equation (1) with respect to the numbers of cuts switched on the i'th day (Si).
Given equation (1), Ci = 4,914+ 0.42Si+2.44Di,
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$36 in additional revenue compared with $22 in marginal cost. However, when the employees work a total of 14 hours (7 hours apiece), the next two-hour increment produces only one more lawn mowed, which means only $18 in revenue. This is less than the cost of two additional hours, which is $22. So, he should stop after 14 hours.
Another way of putting this is that a firm should increase its output as long as the marginal cost of producing additional output is less than the price of output. In short, we stop increasing output when price equals marginal cost.
Suppose that two partners are just starting a business in the field of email management solutions for corporations. They
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returns on capital to further enhance productivity. Capital investment and college education or further training at the same time is the best investment option.
In a more objective decision making, the better investment should be identified based on their impact on the marginal product of labor. The investment with the higher impact should be chosen.
2. The rule for optimal input usage tells us that an input is used till the point MRP = MC of the input where MRP is marginal revenue product, MR is marginal revenue and MC is marginal cost. MRP can also be expressed as the product of MR and marginal product of the input.
The input here is the worker/trainee. The cost of this worker is
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How People Make Economic Decisions
Juan D. Agramonte
ECO/212 Principles of Economics
August 4, 2010
Instructor: Robert Waremburg
How People Make Economic Decisions
Marginal costs and benefits are two important concepts that govern economics. Marginal cost is important in determining the need to adjust the rate of production. Whereas, marginal benefits are considered as the gain that will be earned if the rate of production will be adjusted.
However, both marginal costs and benefits are not mere economic concepts; they are also prevalent in the practical activities of producers and consumers. They play an important role in the decision making of the people. Naturally
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Suggested Exercises’ Answers
(Please note that these questions are from “Problems and Applications” part of the chapters, which are at the very end of the chapters)
Q1. a. Profit is equal to (P – ATC) × Q. Therefore, profit is ($10 – $8) × 100 = $200.
b. For firms in perfect competition, marginal revenue and average revenue are equal. Since profit maximization also implies that marginal revenue is equal to marginal cost, marginal cost must be $10.
c. Average fixed cost is equal to AFC /Q which is $200/100 = $2. Since average variable cost is equal to average total cost minus average fixed cost, AVC = $8 - $2 = $6.
d. Since average total cost is less than marginal
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Problem Set 9 (75 points) 1. A student argues, "If a monopolist finds a way of producing a good at lower cost, he will not lower his price. Because he is a monopolist, he will keep the price and the quantity the same and just increase his profit." Do you agree? Use a graph to illustrate your answer. The argument is incorrect. As the graph shows, a reduction in marginal cost will cause a monopolist to reduce his price.
2. Economist Harvey Leibenstein argued that the loss of economic efficiency in industries that are not perfectly competitive has been understated. He argued that when competition is weak, firms are under less pressure to adopt the best techniques or to hold down their costs
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prices in the long run; the macroeconomics of open economy and short-run economic fluctuations. From the point of view of economic origin, Adam Smith described the “invisible hand” metaphor in the 1700s, when everyone is acting in accordance with their own interests, then an invisible hand guide people to promote the public welfare unknowingly. This paper will link the economics knowledge to our daily life from three aspects: opportunity cost, marginal utility and inflation.
Firstly, the term of opportunity cost in economic is used in allocate resources reasonable and implement the greatest benefits. The opportunity cost of an item is what you give up to obtain that item. The item that you
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stands is $42.00 per case of toothpaste. CPI has marginal cost of MC=.006Q, we now must specify the amount the company needs to produce. To capitalize on our profits the marginal cost must be equivalent to the marginal profits. We know that we have $42.00 = .006Q. The Q (quantity) is 7000 (42/.006). So currently CPI produces 7000 cases of toothpaste to maximize revenues. If we choose to raise prices exclusively in the toothpaste market, CPI could potentially lose consumer demand to other market competitors. The current conditions are considered to be perfect because no one company or consumers for that matter can influences prices the market does that. In perfect competition there are
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CASE 9 QUESTIONS
BOSTON TRANSPLANT CENTER
Marginal Cost Pricing Analysis
1. What is the marginal cost estimate of the Phase 4 hospital services, assuming that 60 percent of the designated costs are fixed and the remaining costs are variable? 2. Create the relevant underlying cost structure (cost behavior) equation. What is the relevant range for this structure? How does the structure change if the contract is expected to bring more than 30 additional transplant patients? 3. What fixed cost proportion is implied if the price for Phase 4 hospital services is set at $90,000? 4. Now assume that the fixed cost proportion is only 50 percent. What price must be set to cover variable costs
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Submitted by :
Submitted by :
ECN 502 – Problem set 2
ECN 502 – Problem set 2
C(Q) = 100 + 20Q + 15Q2 + 10Q3
a) Fixed cost of producing 10 units of output FC= $100
b) Variabe cost of producing 10 Units is:
VC = 20(10)+ 15(10)2 + 10(10)3
= 200 + 1500 + 10000
c) Total Cost of producing 10 Units = VC + FC
= 11700+ 100
d) Average FC of producing 10 units = FC/ 10
= 100/10 = 10
e) Average VC of producing 10 units = VC/ 10
= 11700/10 = 1170
f) Average TC of producing 10 units = TC/ 10
= 11800/10 = 1180
g) Marginal cost
MC(Q) = 20 + 30Q + 30Q2
MC(10)= 20 + 300 + 3000
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marginal benefits a key point in my decision making, were their incentives that might have made my decision different?
The principles of economics influence your decision-making, interaction with others, and the economy as a whole. The first lesson when discussing decision making is reviewing the saying â€œNothing in life comes easy.â€ In order to get something we want, we will have to give up something else. (Mankinw,Â 2007). The second principle is the cost of something is what you give up to get it. Making decisions involves exchanging one desire for the chance at another desire. Because many of us have to face trade-offs every now and again, making choices
involve evaluating the
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For the purpose this paper I will need to answer several questions beginning with defining and discussing perfect competition and long-run equilibrium. How the proliferation of global trade and competition contribute to markets moving away from market-possessing power to perfect competition. Finally, I will discuss when marginal social benefits equal marginal social cost and why this occurs.
Perfect competition is defined as, “a market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run”. (McEachern, 2010) Perfect competition is very rare in the many different markets. One market stands out in this
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price you will most likely go for this deal. Most of society looks for the incentives before they buy.
The third way people make economic decisions is at the margin. The marginal cost is what is lost or not obtained through making a particular decision. Marginal benefits are what is gained from making that same decision. This decision is made weighing the pros and cons. According to Investopedia (n.d.) the marginal benefit indicates, in dollar terms, what the consumer is willing to pay to acquire one more unit of the good. (Consumer Choice, para. 2).
I can remember buying shoes at one of those outlet stores. I had a budget of one hundred fifty dollars. I wanted to get some really good
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, profit maximization, homogeneous products, and perfect factor mobility (Colander, 2010).
In a competitive market price is determined the quantity of product, marginal revenue, and the marginal cost. If the marginal revenue is higher than the marginal cost then the firm can set the price based on those numbers. If the marginal cost outweighs the marginal revenue, then the firm begins to lose money. The firm is looking for the right number that will maximize profits by having a higher revenue than cost. The firm maximizes profits based on output by determining the balance between marginal cost and marginal revenue. If the firm’s marginal revenue is higher than the marginal cost the firm
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considering the present value and future value, all the decisions made by organization apparently seems to be profitable but it will actually give them loss.
6. To use marginal analysis
Marginal Analysis is the process of identifying the benefits and costs of different alternatives by examining the incremental effect on total revenue and total cost caused by a very small (just one unit) change in the output or input of each alternative. Marginal analysis supports decision-making based on marginal changes to resources.
Marginal analysis helps to use scare resources to maximize the benefit of output produced. Cardinal approach and ordinal approach use marginal analysis.
* In cardinal approach
* In ordinal approach
MRS = Price Ratio
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digitally or listening to it with a realistic synthetic voice.
In addition, Will know that he has free access to books no longer under copyright protection, and he figures he can pay a royalty fee of $5 per title for copyrighted books that will greatly expand his catalog. So far, he has limited himself to English-language books but is working on a language translation option as well.
The purpose of this paper is to create a business proposal to improve the existing goods and services for Will Bury’s new product. In this paper the subject to discuss is profit-maximizing and increasing revenue. Marginal cost, marginal revenue, credit markets, and the unemployment rate are briefly covered
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A Firm in a perfectly competitive market invents a new method of production that lowers its marginal cost. What happens to its output? What happens to the price of charges? A profit-maximizing firm compares the marginal revenue received from output sold with the marginal cost of producing it. If marginal revenue equals marginal cost, then the firm produces the profit-maximizing output quantity. If marginal revenue is less than marginal cost, then it can boost profit by increasing production. If marginal revenue is greater than marginal cost, then it can boost profit by decreasing production.
A. The firm has an employee who threatens to tell all other firms in the industry about how to
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Marginal costing and Absorption costing: the concept of marginal and absorption costing and its practical applications on business decisions. Cost Volume Profit Analysis: Relationship, impact on pricing, practical decision making strategies through CVP analysis Standard Costing and Variance analysis: concept and objectives of standard costing, advantages and limitations, variance analysis (Material, labour, overheads and sales variance), practical applications Budgeting and budgetary control mechanism Activity based costing, Responsibility Accounting Target costing
Objective of this course is to help student understand:
The essence of management accounting-effective use
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they act to achieve their goals. Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs” (Hubbard, & O'Brien, 2010). Economic incentives are motives human beings act upon. This generally can mean people take the cheapest route that benefits them the most. Human beings have to answer the question, “Is there enough incentive or motive to make this decision?” Optimal decisions are made at the margin. These decisions are all or nothing. Within one of these decisions can be marginal benefit and marginal cost.
An optimal decision that I made to compare marginal benefit versus marginal cost would be when I decided
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Annals of the University of Petroşani, Economics, 9(3), 2009, 103-106
USING COST-VOLUME-PROFIT ANALYSIS IN DECISION MAKING
GABRIELA BUŞAN, IONELA-CLAUDIA DINA *
ABSTRACT: The cost-volume-profit study the manner how evolve the total revenues, the total costs and operating profit, as changes occur in volume production, sale price, the unit variable cost and / or fixed costs of a product. Managers use this analysis to answer different questions like: How will incomes and costs be affected if we still sell 1.000 units? But if you expand or reduce selling prices? If we expand our business in foreign markets? KEY WORDS: cost-volume-profit, marginal contribution, break-even, the
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entrepreneur when economic profits are at zero to keep him/her engaged in the business
d. the average profitability of an industry over the preceding 10 years
–––––3. Economic profits are calculated by subtracting
a. explicit costs from total revenue b. implicit costs from total revenue
c. implicit costs from normal profits d. explicit and implicit costs from total revenue
_____4. Marginal cost
a. intersects both AVC and ATC at their minimum points
b. is defined as the difference between total cost and total variable costs
c. rises for a time, but then begins to decline when the point of diminishing returns is reached
d. declines so long as output increases
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the printed word for text materials and creates a file with the option of reading it digitally or listening to it with a realistic synthetic voice. In addition, Will Bury know that he has free access to books no longer under copyright protection, and he figures he can pay a royalty fee of $5 per title for copyrighted books that greatly will expand his catalog. So far, he has limited himself to English-language books but is working on a language translation option as well.
The purpose is to create a business proposal to improve the existing goods and services for Will Bury’s new product. In this paper the subject to discuss is profit-maximizing and increasing revenue. Marginal cost
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have an effect on the quantity supplied.
Despite the relatively large number stores, N-B-Tween does have some control over price because of its differentiation. On the other hand, pricing can be limited due to the number of competitors in the industry. If the shop changes its price for jeans, this will lead to changes in revenues and costs. The change in the shop’s profit is equal to the change in revenue minus the change in cost. The change in profit is marginal revenue minus marginal cost. Therefore, the shop will be earning a profit.
The shop’s decisions as to what output level to produce are typically marginal decisions, either to stock a few more or less
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production agents for these weaker helmets will receive high marginal benefits than marginal costs due to the use of heaper production materials. However, the do not take into account the effect f the cost to society in the form of head injures and deaths resulting from the use of these helmets.
The marginal benefit for the weaker helmets will be higher than the marginal costs hence the market will be allocating inefficient. The lower production cost and higher profits will create a false market supply which does not supply an incentive for better production methods. The market becomes inefficient due to the different marginal costs brought about by use of production materials of different
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done exactly this, his ability to maximize the profit begins. This happens if he produces up to the output where marginal revenue equals marginal cost. Getting this done Mr. Will Bury will need to incorporate his $200,000 yearly salary (opportunity cost) with the addition of benefits when calculating total cost. “Marginal cost (MC) is the extra or additional cost of producing one more unit of output” (McConnell & Brue, 2009, p. 163). In mathematical terms, the marginal cost is expressed as the derivative of the total cost with respect to quantity (McConnell & Brue, 2009). Mr. Will Bury must remember marginal cost can change with volume therefore at each level of production the
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friend that the additional utility she would get from the second pair of sneakers is the same as the additional utility she would get from the fifth sweater. Lakshani’s marginal utility per pair of sneakers is equal to her marginal utility per sweater. The cost of sneakers is $50 and the cost of sweaters $20 (Sneakers= $50 *2 = $100 & Sweaters= $20* 5= $100 which = $200) sneakers are 2.5 times as expensive as sweaters, the marginal utility per dollar that she spends on sweaters is 2.5 times greater than her marginal utility per dollar that she spends on sneakers. Lakshani’s of utility improves if she spent more money on sweaters and less on sneakers. The bundle Lakshani is considering is optimal
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utility she would get from the second pair of sneakers is the same as the additional utility she would get from the fifth sweater. Lakshani’s marginal utility per pair of sneakers is equal to her marginal utility per sweater. The cost of sneakers is $50 and the cost of sweaters $20 (Sneakers= $50 *2 = $100 & Sweaters= $20* 5= $100 which = $200) sneakers are 2.5 times as expensive as sweaters, the marginal utility per dollar that she spends on sweaters is 2.5 times greater than her marginal utility per dollar that she spends on sneakers. Lakshani’s of utility improves if she spent more money on sweaters and less on sneakers. The bundle Lakshani is considering is optimal.
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Dr. Mohammed Alwosabi
Econ 140 – Ch.2
Notes on Chapter 2 PRODUCTION POSSIBILITIES FRONTIER
This chapter reinforces the central themes of Chapter one by laying out the core economic model, the PPF, and using it to illustrate the concepts of scarcity, tradeoff and opportunity cost. It explains, with a model, the concepts of marginal cost and marginal benefit, introduces efficiency, and explains how we can expand production by accumulating capital and improving technology. The economic problem of allocating resources (making choices) in a situation of scarcity can be illustrated by explaining the concept of the production possibilities frontier (PPF). Production Possibilities Frontier