This Study Resource Was: Taxes

Assessment 5
1. Differentiate implicit and explicit cost by citing examples.
Explicit costs are costs or fees incurred by a company that are easily quantifiable and
identifiable. Explicit costs are all expenses incurred as part of a company's standard operating costs.
The implicit cost of a company's existing resources is represented by the economic value.
Implicit costs are frequently resources contributed by an owner of the company or paid out of
pocket costs, such as a building used for business operations rather than generating rental profit.
Furthermore, implicit cost can allow for the devaluation of assets or products, materials, and
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equipment required for business operations.
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As noted, the explicit costs of a company include all monetary payments that the company
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makes – all outgoing cash flow – in the ordinary course of operating its business.
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Common explicit business costs include the following:
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• Salaries, wages, bonuses, commissions, and any other form of compensation dispensed to
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company employees.
• The cost of benefits provided to employees, such as insurance.
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• Material costs – refers to any materials that a company must purchase to produce the
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products and/or services that it sells.

• Marketing and advertising costs.
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Rent or mortgage payments on company facilities.

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• Utilities, such as electricity and internet service.

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• The costs of purchasing or leasing, and maintaining, equipment that a company requires in
order to operate, such as manufacturing machines or vehicles.
• Taxes, insurance, legal fees, etc.
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• Depreciation (depreciation is an exception to the definition of explicit costs as being
monetary payments made; while depreciation does not involve a payment of money, it does
have an identifiable, quantifiable value and represents an ordinary operating expense of a
business)
Implicit costs also include loss of interest income on funds and the depreciation of project
cost machinery. They may also be intangible costs that are difficult to account for, such as when an
owner devotes time to company upkeep rather than using those hours elsewhere. The majority of
the time, implicit costs are not documented for accounting purposes.
When a company hires a new employee, there are implicit costs associated with that
employee's training. If a manager devotes eight hours of an existing employee's day to training this
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new team member, the implicit costs are the annual salary of the existing employee multiplied by
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eight. This is due to the possibility that the time could be apportioned to the employee's current
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role.
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Another example of an implicit cost is when a business owner decides not to take a salary in
the early stages of operations in order to reduce costs and increase revenue. They offer their
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expertise to the company in exchange for a salary, that becomes an implicit cost..
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2. Explain how isoquant curves and isocost lines determine the producer's equilibrium using
graphs.
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The isoquant curve depicts the input-output combinations that can be used to produce a
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specific output. Isocost lines depict the cost mixture of different inputs, such as capital and labor,
that result in the same amount of output. A combination of these graphs enables us to decide how
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variables must be used to produce maximum output while incurring the fewest costs.
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The isoquant and iso-cost line could be used to calculate the producer's equilibrium. An
isoquant allows a producer to obtain the factor combos that result in the highest output. The iso-
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cost line, but at the other hand, provides the proportion of the prices of productive resources to the
amount that a distributor is willing to spend. To achieve equilibrium, a producer must find a
combination that allows him to produce the most output while spending the least amount of money
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3. Explain the Law of Diminishing Returns and Returns to Scale.
Diminishing returns, also known as the trickledown effect or the concept of decreasing
marginal productivity, is an economic law that states that if one input in the manufacturing of a
commodity is doubled while all the other inputs remain constant, a point will eventually be reached
where additions of the input result in successively lower, or diminishing, increases in output.
In the classic example of the law, a farmer with a given acreage of land will discover that
employing a certain number of laborers will result in the highest output per worker. If he hired
more workers, the land-labor combination is less efficient because the proportional increase in
overall output will be less than the labor force expansion. As a result, output per worker would fall.
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This rule applies to any manufacturing process unless the manufacturing tactic changes.
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In economics, returns to scale refer to the quantitative change in output of a firm or industry
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caused by a proportionate increase in all inputs. The production process is said to exhibit increasing
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returns to scale if indeed the volume of output level by a greater proportion—for example, if output
increases by 2.5 times in response to a doubling of all inputs. Such economies of scale may occur
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as a result of increased efficiency as the firm expands from small- to large-scale operations.
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Decreasing returns to scale occur when the manufacturing process was less efficient as production
scales up, such as when a company has to become as well large to feel fulfilled as a single unit.
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4. Differentiate short-run and long-run production.
A short run is a term commonly used in economics – specifically microeconomic theory –

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to describe a conceptualized period of time. A short run does not refer to literal time as much as it
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to a planning period during which each or more production input data are deemed fixed in quantity
while the other manufacturing inputs vary. When we say input, we mean costs or factors that have a
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direct impact on how a company operates and its output.
In the short run, one factor of production, such as capital, is fixed. This means that if a
company wants to increase output, it can hire more people but not increase capital in the short run
(it takes time to expand.) In the long run, all of the major productive factors are variable.
Firms have more options for how to generate their goods in the longer term where there are
no fixed inputs. As a consequence, long run costs are typically lower than short run costs.
Input factors are used in both short-run and long-run production. At least one of variables in
short-term manufacturing is fixed. In long-term production, none of the factors are factors. Long-
term production, on the other hand, makes use of variables that can fluctuate or change.
5. Complete the worksheet below.
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Units of Fixed Variabl Total Cost Average Average Total Marginal
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Productio Cost e Variable Cost Cost
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Cost Cost
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0 2000 *** 1. 2000 *** *** ***
20 2000 4000 2. 6000 3. 200 4. 300 5. 200

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40 2000 6000 6. 8000 7. 150 8. 200 9. 100

60 2000 9000 10. 11000 11. 150 12. 183.33 13. 150
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80 2000 11000 14. 13000 15. 137.50 16. 162.50 17. 100
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100 2000 14000 18. 16000 19. 140 20. 160 21. 150
120 2000 18000 22. 20000 23. 150 24. 166.67 25. 200
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6. Use the table above and transform into a graph. Show the marginal cost, average total
cost, and average variable cost.
Marginal Cost Average Total Cost Average Variable Cost
300
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250
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200
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COSTS
150
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100
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50
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0
0 20 40 60 80 100 120
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UNITS OF PRODUCTION
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Assessment 5

1. Differentiate implicit and explicit cost by citing examples.

products and/or services that it sells.

Rent or mortgage payments on company facilities.

• Utilities, such as electricity and internet service.

3. Explain the Law of Diminishing Returns and Returns to Scale.

4. Differentiate short-run and long-run production.

A short run is a term commonly used in economics – specifically microeconomic theory –

direct impact on how a company operates and its output.

5. Complete the worksheet below.

20 2000 4000 2. 6000 3. 200 4. 300 5. 200

40 2000 6000 6. 8000 7. 150 8. 200 9. 100

Marginal Cost Average Total Cost Average Variable Cost

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