ECONOMICS

ECO415

INDIVIDUAL ASSIGNMENT 2
COST AND PRODUCTION

GROUP: MIFHA (202021)

SUBMIT FOR:
DR. AZHANA BINTI OTHMAN

PREPARED BY: Nornadiah Nuraini Bt Md. Noor (2020662832)

QUESTION 1:

Puan Hidayah, the owner of the “Kedai Buku Pintar” bookstore receives all accounting profits earned by
her firm and a $28,000-a-year salary she pays herself. She has a standing salary offer of $35,000 a year
if she agrees to work for a large corporation. If she had invested her capital outside her own company,
she estimates that would have returned $22,000 a year. Last year, her accounting profit was $50,000.

What was her economic profit?

Answer :

Opportunity cost
Offering salary : 35,000
:
Current salary (28,000)
Total opportunity cost 7,000 (loses)

ECONOMIC PROFIT
Total Revenue-Explicit cost- Implicit
cost
= 50,000-7,000-22,000
=21,000

The Economic Profit is : 21,000

QUESTION 2:

In his spare time, Zizan makes chain mail using metal rings he buys from a hardware store, a C-clamp,
and a pair of pliers. He sells the final product at local crafts fairs and at bikers' annual convention in Kuala
Lumpur. Being interviewed once by a local newspaper, he said literally the following: "The materials cost
me $30, and the rest is just my labor, which is free. One vest sells for about $150, which gives me net
profit of $120 for three nights of work."

a. Is he talking about economic profit or accounting profit? Explain the difference between the two.
(4 mark).

Answer (a):

From my view point, Zizan only take explicit cost in account, means that he totally refer to
accounting profit. But, if he want to estimate the economic profit, he need to subtract the
opportunity cost first.

b. Discuss Zizan’s statement from economic perspective (taking the opportunity cost into accoun).
(4 mark)

Answer (b):

He assumed his job was free, which is incorrect from an economist’s point of view. The timing has
been determined by another discretionary approach to investing its energy. For example, his next
best elective use at the moment is to find a part -time job then at that point the value is equivalent
to the cash he will earn. But if he prefers to do nothing then the value of his time is equal to the
utility he gets from doing nothing. However, by taking advantage of his time by making chain
letters, he miss another opportunity and in turn incurs certain opportunity costs. To determine a
reasonable option, these costs should also be considered.
QUESTION 3:

Your firm has discovered a cheap and efficient technology of turning used plastic bottles and bags into
various products. You limit your attention to the following two production opportunities: you can produce
plastic utensils or helmets for Boilermakers' fans. In the first case your estimated annual revenue is
$25,000, while the production will cost you $8,000. However, in your second option, you expect to sell
2000 helmets every year at $10 each, and the average total cost of every helmet will be $2.

a) Which production opportunity will you choose and why? (5 marks)

Answer (a):

If produce plastic utensils.

Total Revenue - Explicit Costs

= $25,000 - $8,000

= $17,000

Accounting profit : $17,000

If produce helmets.
Total Revenue – Total Cost

= P x Q - ATC x Q

= (P - ATC) x Q

= ($10 - $2) x $2000

= $16,000

Accounting profit : $16,000

Base on calculating of accounting profit, I will choose to produce plastic utensil due to I will get
the higher profit.

b) True or False? The concept of economies of scale cannot be applied to the short run. (3 marks)

Answer (b):

It’s true. Because the concept of economies of scale can handle the effect of proportional
increases in all inputs. Due to the short run some inputs are fixed, an increasing rate in all inputs
becomes impossible. Therefore the return to scale is not applicable.