Question

Please help with these questions, thanks

1) Distinguish between explicit and implicit costs, and between normal and economic profits.

2) Explain why normal profit is an economic cost, but economic profit is not.

3) Explain the law of diminishing returns.

4) Explain the relationship between total, marginal, and average product.

5) Distinguish between fixed, variable and total costs.

6) Explain the difference between average and marginal costs.

Answer 1

1). Explicit cost are direct paid costs and implicit costs are unpaid costs like opportunity costs.
Economic profit = Revenue – (explicit and implicit costs)
Normal profit = Accounting profit - Economic profit
Accounting profit = Revenue – Explicit costs

2). Normal profit = Accounting profit - Economic profit
= Revenue - Explicit costs - Revenue +explicit costs + implicit costs
= Implicit costs
So, normal profit is an implicit costs which is added to costs and deducted from profit

3). According to law of diminishing returns is with the increase in input, the total output initially increases at increasing rate and reaches a constant rate but it will eventually increase at diminishing rate.

4). Total, marginal and average product initially increases but after law of diminishing returns, all of them start to decrease

5). Total cost = Fixed costs + variable costs
Fixed cost is a constant cost which does not vary with output
Variable costs varies with the level of output
Fixed cost decreases with the increase in output but variable and total cost increases with the increase in output

6). Marginal and average costs decreases with the output but starts to increase after reaching a minimum with the increase in output