# Analyzing the Explicit and Implicit Costs

1.

It is estimated that over 100,000 students will apply to the top 30 M.B.A. programs in the United States this year.

a. Using the concept of net present value and opportunity cost, explain when it is rational for an individual to pursue an M.B.A. degree.

b. What would you expect to happen to the number of applicants if the starting salaries of managers with M.B.A. degrees remained constant but salaries of managers without such degrees increased by 20 percent? Why?

2.

Jamie is considering leaving her current job, which pays $75,000 per year, to start a new company that manufactures a line of special pens for personal digital assistants. Based on market research, she can sell about 50,000 units during the first year at a price of $4 per unit. With annual overhead costs and operating expenses amounting to $145,000, Jamie expects a profit margin of 20 percent. This margin is 5 percent larger than that of her largest competitor, Apps, Inc.

a. If Jamie decides to embark on her new venture, what will her accounting costs be during the first year of operation? Her implicit costs? Her opportunity costs?

b. Suppose that Jamie's estimated selling price is lower than originally projected during the first year. How much revenue would she need in order to earn positive accounting profits? Positive economic profits?

7.

You are the manager of a firm that receives revenues of $40,000 per year from product X and $90,000 per year from product Y. The own price elasticity of demand for product X is -1.5, and the cross-price elasticity of demand between product Y and X is 1.8. How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent?

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#### Solution Preview

1.

It is estimated that over 100,000 students will apply to the top 30 M.B.A. programs in the United States this year.

a. Using the concept of net present value and opportunity cost, explain when it is rational for an individual to pursue an M.B.A. degree.

Benefits of attending MBA program

1. Higher expected salary

2. Value of prestige associated and work environment

Costs of attending MBA program

1. Cost of books, tuition and other fees

2. Opportunity Costs (We can make some money by working somewhere if we choose not to go for MBA)

Net present value of MBA program would be equal to present value of benefits minus the present value of opportunity costs involved. It is advisable to join any MBA program if net present value if greater than zero.

b. What would you expect to happen to the number of ...

#### Solution Summary

There are 3 problems. Solutions provide answers to the given problems with suitable explanations and workings.

Analyze explicit and implicit costs.

1. What is the difference between explicit and implicit costs? Which of the costs is most closely associated with opportunity costs and why?

2. State and explain the law of diminishing returns. How does this law apply to a typical day at work or at school? (Or, if you could imagine, taking an on line microeconomics course).

3 Explain the relationship between AP and MP. Apply a real world example of your own to how this might work.

4. Explain the relationship between MP and TP. Apply a real world example of your own explaining how this might work.

5. Suppose that 1 worker generates 8 units of output, 2 workers generate 20, 3 workers generate 35, 4 workers generate 45, and 5 workers generate 42 units out output.

a. Calculate the MP and the AP for each worker. At what point do diminishing returns set in? How would we know this had occurred?

6. Why does the ATC curve always lie above the AVC curve? Why does the two curves move closer together, but never seem to meet each other?

7. Why is the AFC always declining while the TFC never does so? How can that be?

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