Managerial Economics: Chapter 5: Assessment 5

MANAGERIAL
ECONOMICS
Chapter 5: Assessment 5
Submitted by:
Cadaing, Alyanna Marie E.

Camaligan, Pearl Anne Marjorie C.
Causing, Frances C.
Cayetano, Lorraine Alison D.
Cuento, Nikkie D.
Group 2
ASSESSMENT 5
1. Differentiate implicit and explicit cost by citing examples.
Explicit cost are the out-of-the-pockets costs that a business incurs. Examples of explicit
costs are payment for employee wages, salaries, bills, and rent, among others. These are also
the costs which are stated on the businesses balance sheet. On the other hand, implicit costs are
costs which occur, but are not seen. In other words, these are the costs that are not directly linked
to an expenditure. Hence, it is not recorded for accounting purposes. Implicit cost represents an
opportunity cost of resources already owned by the company and used in business. To simply
put it, implicit costs come from the use of an asset, rather than renting or buying it from outside
sources. An example of implicit cost would be giving employees a one day off. It is an implicit cost
because even though there is no observable increase in costs, it leads to a drop of the firm's sales
and income because there is a stop in production. To summarize, explicit costs are monetary
costs that has measurable costs to a firm while implicit costs are opportunity costs from
undertaking an action in the firm.
2. Explain how isoquant curves and iso-cost lines determine the producer's equilibrium using
graphs.
ISOQUANT CURVE It shows all ISOCOST LINE -It show all combinations of
combinations of factors that produce a certain factors that cost the same amount.
output.
A combination of these graphs will help us figure out how inputs can be used to generate the
maximum output with the least expensive costs.
In the figure shown above, the least costly for the producer, with the iso-cost of P400,000 the
maximum output a firm can manage would be a TPP of 4,000, where isoquant curve TPP=
4,000 is tangent to the Iso-cost line. Thus, the point where the capital is 30 and the labour is 30
in the isoquant curve TPP= 4,000 is the producer’s equilibrium.
Source: Pettinger, T. (n.d.). Isoquant and isocosts. Economics Help. Retrieved May 22, 2021,
from https://www.economicshelp.org/blog/glossary/isoquant-and-isocosts/
3. Explain the Law of Diminishing Returns and Returns to Scale.
The law of diminishing returns states that beyond the optimal level of capacity, every
additional unit of production factor will result in a smaller increase in output while keeping the
other production factors constant. If a firm increases its inputs of one factor of production while
holding inputs of the other factors fixed, eventually the firm will experience diminishing marginal
returns from the variable factor. On the other hand, returns to scale are the change in output
achieved by a firm as a result of a proportionate change in all inputs. There are three types of
returns to scale: constant returns to scale (CRS), increasing returns to scale (IRS), and
decreasing returns to scale (DRS). Decreasing returns to scale occur if the production process
becomes less efficient as production expanded, as when a firm becomes too large to be managed
effectively as a single unit. The law of diminishing returns is a short run concept which occurs
when at least one factor of production is fixed, while in the long run, firms may experience
increasing, decreasing, or constant return to scale depending on how output is responding to
those changing inputs.
4. Differentiate short-run and long-run production.
The main difference between short-run and long-run production is the number of inputs
that are fixed and varied. In the short-run production, a firm can vary the quantity of certain
resources but there should be at least one resource that has a fixed quantity. An example of this
is a firm's production equipment and the resources that can be changed - also called variable
inputs - are number of laborers, labor hours, and raw materials. From the variable inputs given,
within a short amount of time, these can be adjusted compared to the difficulty of changing the
quantity of production equipment. On the other hand, long-run production means that a firm can
make vary the quantity of all the resources involved in production. It enables a firm to adjust all
inputs in response to the changes in the market. Examples of the changes in long-run production
include the purchase of costly production equipment and building additional factories for the
maximization of profits.
5. Complete the worksheet below.
Units of Fixed Variable Average Average Marginal

Production Cost Cost Total Cost Variable Total Cost Cost
Cost
0 2000 --- 2000 --- --- ---
20 2000 4000 6000 200 300 200
40 2000 6000 8000 150 200 100
60 2000 9000 11000 150 183.33 150
80 2000 11000 13000 137.5 162.5 100
100 2000 14000 16000 140 160 150
120 2000 18000 20000 150 166.67 200
6. Use the table above and transform into a graph. Show the marginal cost, average total cost,
and average variable cost.

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MANAGERIAL

Cadaing, Alyanna Marie E.

1. Differentiate implicit and explicit cost by citing examples.

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

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

5. Complete the worksheet below.

Units of Fixed Variable Average Average Marginal

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