Unit 4 Assignment                                                                                            

Please answer the following questions.   Submit as a Microsoft Word® document to the Dropbox when completed.

1. Identify whether each of the following is an explicit cost or an implicit cost:

a) Payments for rented manufacturing equipment

Explicit cost – since the firm will spend money it would be classified as an explicit cost.

b) A firm’s use of a warehouse that it owns and could rent to another firm

Implicit cost – since there is no cost at the present moment.

c) Wages paid to the firm’s workers

Explicit cost - since the firm will spend money it would be classified as an explicit cost.
d) The wages the firm’s owner could earn if he worked for another company
Implicit cost – Although a monetary value could be assumed, the firm did not actually spend money on potential outside wages for the firm owner.
2.   Consider the following information in the table for Pat’s Pizza Restaurant and answer the questions below.
Marginal Product of Capital 4,000
Marginal Produce of Labor 100
Wage Rate $10
Rental Price of Pizza Ovens $500

a. Is the owner of Pat’s Pizza Restaurant minimizing cost?
MPL/MPK = 100/4000 = 1/40
Price ratio = w/r = 10/500 =1/50.  
1 / 40 does not = 1 / 50 so Pat’s Pizza Restaurant is not minimizing costs.

b. Should he rent more ovens and hire fewer workers or rent fewer ovens and hire more workers?   Explain.

Pat’s Pizza restaurant produces more pizzas per dollar from the last oven than from the last worker. This shows that he has too many workers and not enough ovens. Therefore, to minimize cost, Pat should use more ovens and hire fewer workers. (Hubbard 390)
3. Consider a firm’s production decision in both the short-run and long-run.   Explain what type of input costs might be fixed in the short-run and which might be variable in the long-run.   Provide one example of each....

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