QUESTION NINE Define, compare and contrast the following concepts (a) Sunk cost
ID: 1254334 • Letter: Q
Question
QUESTION NINEDefine, compare and contrast the following concepts
(a) Sunk cost versus opportunity cost
(b) Economies of scale versus economies of scope
(c) Marginal revenue product versus marginal cost
(d) Economic profit versus business profit
Explanation / Answer
a) sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered. Opportunity costs are the costs of the next best alternative foregone by choosing a particular option. Unlike sunk costs, opportunity costs are not borne until a decision is made, but once the decision is made, the opportunity cost becomes a type of sunk cost, in the since that the decision to forego the next best alternative has already been made b) economies of scale refers to reductions in average cost (cost per unit) associated with increasing the scale of production for a single type of product. Economies of scope refer to the reductions in average cost by producing different types of products. When there are economies of scale or scope, a firm can benefit by expanding production, either increasing the amount of a single good being produced, or by diversifying production to make additional products. c) marginal product refers to the additional revenue gained from utilizing one additional unit of an input. Marginal cost refers to the additional cost incurred by producing an additional unit. The two are related in that producing an additional unit of output incurs cost of the additional inputs required, but this additional input brings in additional revenue. When marginal revenue is equal to marginal cost, the firm is operating at an equilibrium level of output since it will cost more to produce another unit than they would earn from that unit (Marginal cost > marginal revenue) and reducing production would decrease revenue by more than the savings in cost ( marginal revenue > marginal cost). d) Business profit is also known as the accounting profit, which includes only the actual costs incurred for employing land, labor and capital in production. Economic profit on the other hand includes these costs as well as the opportunity costs associated with the entrepreneur's decision to enter the market.