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economic costs

1. Give a brief summary of economic costs (i.e. how are they different from accounting costs). In the short-run, why might a firm still operate even when there is a loss.

2. Read the following short article:

Vargas, L. (2001). ââ?¬Å"Maquiladoras: Impact on Texas Border Cities,ââ?¬Â? in The Border Economy, Federal Reserve Bank of Dallas. Retrieved on February 18, 2011 from: http://www.dallasfed.org/research/border/tbe_vargas.html

How does this article apply the marginal decision rule to the problem of choosing the mix of factors or production (capital intensive vs. labor intensive methods of production)? How do maquiladoras benefit the U.S. economy?

3. The type of firm also plays a crucial role in how the firm makes a profit. Describe the characteristics of a perfectly competitive firm in your own words. What will happen to the profits of a perfectly competitive firm in the long run?

4. Compare the profit for the perfectly competitive firm to a monopoly in the long run. Why is it different?

Solution Preview

Give a brief summary of economic costs (i.e. how are they different from accounting costs). In the short-run, why might a firm still operate even when there is a loss?

The economic cost depends on both the cost incurred as well as the opportunity costs. This is the sum of the option selected and value of the best possible benefit the best alternative would have provided if selected. Consider the cost of making plastic doll. The cost would include the cost of die, the designing and creation of clothes, the cost of plastic, packing, and other incidental expenses incurred. The opportunity cost of making the doll also includes the profit that the firm would have earned, had the factory been used for making the best possible alternative, or plastic medical equipment.

A firm still operates even when there is a loss because the operation contributes to the fixed cost of the firm. Usually, when the price is such that it is lower than the total cost but higher than the variable cost the firm operates so that the operation contributes to the fixed costs. This happens only in the short-run.

2. Read the following short article:
Vargas, ...

Solution Summary

This answer offers cogent arguments relating to economic costs

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