Share
Explore BrainMass

This post addresses John's pizza shop and economic decisions

When measuring costs, it is important to keep in mind of one of the Ten Principles of Economics: The cost of something is what you give up to get it. The opportunity cost of an item refers to all those things that must be forgone to acquire that item. When economists speak of a firm's cost of production, they include all the opportunity costs of making its output of goods and services.

Economists are interested in studying how firms make production and pricing decisions. Because these decisions are based on both explicit and implicit costs, economists include both when measuring a firm's costs.

If John operates a pizza restaurant in a shop he owns in New York. Similar shops nearby rent for $2000 per month. John is considering selling his shop and renting a similar shop in the countryside for $1000 per month. Eventually, he decides not to make the move. He reasons,I would like to have a restaurant in the countryside, but I pay no rent for my restaurant now, and I don't want to see my costs rise by $1000 per month. Is John's reasoning valid in an economic sense?

Solution Preview

There are several other things that he needs to take into consideration. Basically, when we talk about implicit costs we're talking about the costs that we give up to remain where we are, or to choose the alternative. We know that John operates a pizza shop that he owns, which means that it is likely he no longer has a mortgage payment. If he were paying a monthly mortgage, we'd have a different ...

Solution Summary

This solution discusses if John's reasoning is valid in an economic sense based on the scenario as follows:

If John operates a pizza restaurant in a shop he owns in New York. Similar shops nearby rent for $2000 per month. John is considering selling his shop and renting a similar shop in the countryside for $1000 per month. Eventually, he decides not to make the move. He reasons,I would like to have a restaurant in the countryside, but I pay no rent for my restaurant now, and I don't want to see my costs rise by $1000 per month. Is John's reasoning valid in an economic sense?

$2.19