Questions tagged [cost]

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33 views

How to properly annualize cost of initial investment

Let say you manage a supermarket chain and want to estimate profitability of a store over time, not only by using revenue and cost for a given unit of time - but also to include the initial investment ...
1 vote
1 answer
71 views

Marginal costs from Cobb Douglas regression

I'm currently following a Master's in Finance, and we have to calculate the Lerner Index. To do that, we are given the following Cobb- Douglas regression, where the alphas have to sum up to 1: $$\ln(...
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0 votes
1 answer
154 views

Why does marginal cost increase?

In my economics class, we are learning about the Law of Increasing Marginal Cost, but searching for that online doesn’t generate any results. I’m confused about why marginal cost increases rather than ...
2 votes
2 answers
27 views

Effect of tax on required return on debt (and equity)

Debt financing has a tax advantage over equity financing, as the borrower gets reimbursed the tax on interest payments and other debt-servicing costs. Thus $$ R_{\text{WACC}}=\frac{E}{E+D}R_E+(1-T_C)\...
1 vote
0 answers
22 views

Does this example involving WACC make sense?

I have encountered the following example in the context of cost of capital: A firm is considering investing into a project that has the same risk profile as the rest of the firm's projects. It may ...
2 votes
0 answers
22 views

Cost of debt: How to adjust YTM for the possibility of bankruptcy?

When calculating the weighted average cost of capital (WACC), it may be tempting to use the debt yield (yield to maturity, YTM) as the cost of debt. However, Berk & DeMarzo note in Chapter 12 of &...
2 votes
0 answers
66 views

WACC: forward looking vs. backward looking

I have learned from the thread "Cost of debt, taxes and WACC" that WACC is forward looking in that it disregards the interest rate on debt already taken by the firm but rather use debt's ...
0 votes
1 answer
50 views

Cost of debt, taxes and WACC

I am studying the cost of debt. Without loss of generality, suppose the debt consists of bonds. On the one hand, some textbooks (e.g. Hillier et al. "Fundamentals of Corporate Finance: 4th ...
0 votes
1 answer
13 views

Different types of cost functions (curves)

I see three types of cost functions: $C(q) = 4q$ where $q$ is the quantity $C(w_1, w_2 ,q) = w_1w_2q$ where $w_1, w_2$ are the rental rates and $q$ is the quantity of the product $C(\mathbf{w}, \...
1 vote
0 answers
96 views

Find cost function for given production function

I have the following production function $$f(x_1,x_2,x_3,x_4)=max\{\min\{x_1, x_2), x_3+2x_4\}\}\ge q$$ And I want to find the cost function. What I think (1) $P_1+P_2 <P_3$ and $P_3/P_4<1/2$ ...
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0 answers
15 views

Link between supply elasticity and marginal costs

I have two substitute materials (A and B) to produce a product, and I want to know the relationship between their marginal costs and the elasticity of supply of the product. Graphically I notice that ...
0 votes
1 answer
196 views

Calculating cost-minimizing inputs with 3 inputs in production function [closed]

How can I determine the cost-minimizing input bundle with a standard Cobb-Douglas production function with three inputs. despite its simple process, the algebra becomes very hard as you go through the ...
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0 answers
36 views

A basic cost-benefit analysis between two scenarios

I've got a basic question regarding cost-benefit analysis of two potential scenarios: Scenario A A firm has a monthly revenue of I dollars with no associated cost, such that its net profit P1 = I. ...
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0 votes
1 answer
89 views

Quasi fixed costs - two technologies

If a firm has the choice of using two production technologies to produce the same output: A, featuring a quasi-fixed cost of 50 (i.e. 50 for all q > 0, 0 when q = 0), then a variable cost of 5q B, ...
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0 votes
2 answers
324 views

Mathematically show that MC cross AC can only occur on upward sloping part of MC curve

Question as in title, does anyone know how to show it? with mean value theorem? I can prove that AC is minimised at MC=AC but I'm not sure how to show MC can only cross AC at upward-sloping point of ...
8 votes
1 answer
312 views

Is there a formal definition of opportunity costs, economic costs, and/or economic profits?

[Edited to remove a mistake in a definition and some typos.] According to various econ textbooks (e.g. this one), there is a fundamental distinction between economic profit and accounting profit: (i) ...
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3 votes
0 answers
31 views

What is normal capacity?

The average variable cost will generally fall as output increases from zero to the normal capacity output due to the occurrence of increasing returns. But beyond the normal capacity output average ...
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0 votes
3 answers
145 views

Why min AC = min SRAC at the minima of AC curve?

At the lowest point of long run average cost curve AC, the SAC is also at its minimum and that is not the case with any other SAC curve bounded by the envelope. Why is that?
0 votes
0 answers
114 views

Why does LRAC not connect the minima of SRAC curves? [duplicate]

Can anyone please provide an intuitive explanation and proper mathematical reason for non-intersection of SRAC and LRAC at the minimas of SRAC? I am seeing conflicting [1] [2] answers on the site ...
1 vote
2 answers
82 views

external benefit confusion

I'm a little confused by the following question and answer provided by MRU: Fruit farmers pay beekeepers for their honeybees’ pollination services. Honeybees provide an external benefit to fruit ...
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1 answer
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Relation between marginal cost and output elasticities

Does anyone know of any results that show the link between marginal cost and the output elasticities analytically? I am looking at production and cost theory books but can't find any results that ...
0 votes
2 answers
108 views

Sunk costs - Book value and Market value

i try to understand the concept of sunk cost and how we compute sunk costs when there is a difference between book and market value. For example, if the book value of assets is ...
18 votes
2 answers
5k views

Supermarket selling seasonal items below cost?

In a British supermarket, I saw the prices of Christmas chocolate gift boxes being cut dramatically (£1.50 to £0.15, and £7.50 to £0.22). I don't quite understand this behaviour, where the chocolate ...
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0 votes
1 answer
90 views

How to calculate the minimun of Average Fixed Cost knowing the Average Fixed Cost [closed]

Given the Average Fixed Cost, how does one calculate its minimum?
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4 votes
1 answer
3k views

Is it true that if marginal cost is constant, then average variable cost is also constant and equals marginal cost?

I'm inclined to think yes because marginal cost only depends on variable cost (fixed costs don't matter), but I'm not 100% certain. Basically, my thought process is that marginal cost of producing one ...
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13 votes
7 answers
5k views

Does a store suffering increased theft generally cause higher prices?

If a store suffers an increase in theft, will it generally lead to higher prices at that store? My answer is that prices should have already been set to maximize the trade off between profit-per-sale ...
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6 votes
1 answer
616 views

Fixed cost of a firm

Suppose that a firm has a total cost function given by: $TC(q) = \frac{5}{q+1} + 5 + 5q + q^2$. What is the fixed cost? I seem to be able to come up with two "answers", which cannot be correct. My ...
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1 vote
1 answer
76 views

Will a shift in the average total cost curve mean that the marginal cost curve will also shift up?

I understand the basic concept of marginal cost and average total cost. I am currently learning about costs curve for an oligopoly I read online that the marginal cost is not determined by fixed ...
0 votes
1 answer
373 views

Deriving long-run cost functions from production function

Suppose that I have a production function $(aK + bL)^3$ in a perfect competition where a and b are constants. I am confused on how to obtain the long-run cost function from this production function ...
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2 votes
1 answer
2k views

Fixed costs in the long run

Can anyone please help me understand how fixed costs in the long run are zero? In Microeconomics by J. M. Perloff, the author gives the example of a factory's rent and says that if we are talking ...
1 vote
2 answers
30 views

Are there any economic theories around the concept of companies focusing on that which is easier to calcuate?

A lot of the organisations I have worked for have focused on that which is easy to calculate. For example, direct cost savings are often easy to calculate, but analysing the wider implications of a ...
2 votes
2 answers
83 views

Does a private company that is 100% financed by a bank loan have a WACC equal to the interest rate?

When estimating a company's Cost of Debt for a Weighted Average Cost of Capital (WACC) calculation we normally look into its bond yield. But for a private company with 100% debt capital structure, ...
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1 vote
3 answers
645 views

Is it possible that the minimum point of a short run cost curve does not touch the long run cost curve?

In the answer to this question, the answerer said "the minimum point of a short run cost curve will be above the long run cost curve". Is it true? If so, how would it be so? I thought that if e.g. ...
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0 votes
1 answer
159 views

Why is the opportunity cost 0 in this case?

My book says that the opportunity cost of purchase of a specialized equipment that has no alternative use is zero and hence such an expenditure is a sunk cost. However, while calculating the user cost ...
2 votes
2 answers
1k views

Why is the price of capital ‘r’ ? (From Cost function)

according to the Cost formula in microeconomics class, Total Fixed Cost is represented as “rK” (K as in unchanging, fixed K) now my economics teacher tells me this ‘r’ is the interest rate at which ...
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0 votes
1 answer
511 views

Interpeting equivalent annual cash flows

So i have this question: RainMan Inc. is in the business of producing rain upon request. They must decide between two investment projects; a new airplane for seeding rain clouds or a new weather ...
0 votes
1 answer
20 views

Trade cost on Endowment model

I think in real endowment model, if there's trade cost as 't', then the MRS should be really small or large to make a consumer trade his endowment goods. Is there any model include this trade cost or ...
0 votes
1 answer
48 views

Costs of transportation

I assume that it makes sense to ask for the energy costs of transportation of different goods per weight and volumetric mass density, depending on the means of transportation (truck, train, ship, etc.)...
0 votes
1 answer
71 views

Marginal Cost Calculation issue

I calculated the Marginal cost for the below question. But it seems the results are wrong After coming up with an innovative idea for a new product, you paid 4000 to an industrial designer to draw ...
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0 votes
1 answer
72 views

fixed an marginal cost calculation issue

I'm trying to solve a question that is quite difficult for me. I did part of the question but, bit difficult to decide the exact answer for the below question. After coming up with an innovative ...
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0 votes
1 answer
632 views

Can implicit costs be negative?

I think that conventionally implicit costs are positive but if for example we consider a negative interest rate as an implicit cost, the implicit cost would be negative. Is this true? Can implicit ...
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0 votes
2 answers
510 views

In perfect competition, why is there economic loss if marginal cost > marginal revenue?

Here's a graph for reference: In the left graph, I read from a book (CFA L1 notes) that At any output above the quantity where $MR = MC$, the firm will be generating losses on its marginal ...
1 vote
0 answers
209 views

Vertical Marginal Cost curves

When would a marginal cost curve be vertical? I understand this happens when the marginal cost jumps, from say 0 to 100, but in such a case, I think there should be a discontinuity rather than a ...
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4 votes
1 answer
523 views

Decision over "max" production function:

I've been presented with the following problem: $$y=3(x_3)^{\frac13}(\max\{x_1,8x_2\})^{\frac13}$$ And the objective is to both maximize profit and minimize cost. First of all, if the problems are ...
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1 vote
0 answers
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Excessive entry without fixed costs

Mankiw & Whinston (1986) show that the market may contain too many firms. The intuition is that if a firm charges a suboptimal high price, a rival has a demand curve that is "too high" and can ...
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0 votes
1 answer
5k views

EOQ - how to calculate holding cost

This is very simple, however, I have the following setup Suppose that the company ABC has a product that shows a constant annual demand rate of 3600 items. One item costs £3. Ordering cost is £20 per ...
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8 votes
2 answers
201 views

Why don't public transport networks have more routes to each terminal in order to reduce the number of transfers?

When using public transport, we often need to transfer to a different route during of the journey. These transfers have costs – I can think of the following, but there may be more. If we're reading, ...
0 votes
2 answers
247 views

How does the EBQ formular come out?

I figured out how the economic order quantity (EOQ) formula comes out. I know it is quite similar with economic batch quantity (EBQ), sometimes termed economic production quantity (EPQ). I just don't ...
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3 votes
4 answers
285 views

How to track costs and calculate price?

I run a large Massively Multiplayer Online (MMO) gaming community and one of the services we’ve try to provide to our members is crafting. One of the challenges of this has been determining the price ...
0 votes
1 answer
923 views

Does Average Total Cost (ATC) include implicit opportunity costs?

Does the average total cost include opportunity costs? If so, are these opportunity costs considered fixed costs or variable costs? How are they calculated.
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