Questions tagged [cost]

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Where does the optimal point of production occur in the graph of short-run cost curves?

When MC, ATC, AVC, and AFC are in the same diagram, where does the optimal point of production occur? I know production is optimal when MR=MC but the question doesn't give you the price of the good. ...
Luke Lee's user avatar
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Relationship between average cost and marginal cost

I cannot seem to reason why option B is a correct statement. From what I understood when AC = MC we're at a competitive equilibrium or break-even point and after that the more we move to the right the ...
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Cost of money in historical prose

When reading British prose, e.g. a novel by Daniel Defoe (1660-1731) or P. G. Wodehouse (1881-1975), I would like to understand the real cost of money there, which have been changed over time, of ...
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Why does marginal return decrease and marginal cost increase? [duplicate]

I somewhat understand why marginal returns decrease more so than I understand why marginal costs increases. If it costs you 5 dollars to make 1 unit of something, why would it cost you more to make ...
Anthony Fallone's user avatar
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1 answer
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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 ...
vonPetrushev's user avatar
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1 answer
156 views

Find Lerner Index 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(...
Lars's user avatar
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1 answer
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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 ...
Anthony Fallone's user avatar
2 votes
2 answers
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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)\...
Richard Hardy's user avatar
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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 ...
Richard Hardy's user avatar
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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 &...
Richard Hardy's user avatar
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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 ...
Richard Hardy's user avatar
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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 ...
Richard Hardy's user avatar
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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}, \...
Patricia's user avatar
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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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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 ...
Seyed Mahdi's user avatar
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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. ...
Joebevo's user avatar
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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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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 ...
user37865's user avatar
8 votes
1 answer
378 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) ...
VARulle's user avatar
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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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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?
reasonStore's user avatar
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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 ...
reasonStore's user avatar
1 vote
2 answers
115 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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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 ...
hrrrrrr5602's user avatar
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2 answers
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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 ...
Arthur 's user avatar
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 ...
mck's user avatar
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1 answer
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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?
Alumi's user avatar
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5 votes
1 answer
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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 ...
Will 's user avatar
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13 votes
7 answers
6k 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 ...
user28791's user avatar
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6 votes
1 answer
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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 ...
pc724's user avatar
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1 answer
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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 ...
Christopher U's user avatar
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1 answer
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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 ...
Magic's user avatar
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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 ...
Harsh Sharma's user avatar
1 vote
2 answers
31 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 ...
Barnaby Golden's user avatar
2 votes
2 answers
93 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, ...
Metrician's user avatar
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1 vote
3 answers
707 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. ...
Aqqqq's user avatar
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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 ...
Harsh Sharma's user avatar
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 ...
Robin's user avatar
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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 ...
Sara Salvante's user avatar
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1 answer
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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 ...
WooHyung Jeon's user avatar
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1 answer
49 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.)...
Hans-Peter Stricker's user avatar
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1 answer
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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 ...
Hiru's user avatar
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1 answer
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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 ...
Hiru's user avatar
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1 answer
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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 ...
pdid's user avatar
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2 answers
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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 ...
Shirish Kulhari's user avatar
1 vote
0 answers
233 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 ...
Student's user avatar
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4 votes
2 answers
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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 ...
mudcake's user avatar
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1 vote
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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 ...
Fusscreme's user avatar
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1 answer
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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 ...
wsx399's user avatar
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8 votes
2 answers
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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, ...
Yngve Høiseth's user avatar