Questions tagged [cost]

The tag has no usage guidance.

Filter by
Sorted by
Tagged with
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
  • 283
13 votes
7 answers
7k 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
  • 139
10 votes
4 answers
2k views

Should Costs of Travel to Buy Goods be Regarded as Transaction Costs?

Within the approach of New Institutional Economics associated with Oliver Williamson and others, emphasis is placed on transaction costs as a key factor in explaining why different forms of economic ...
Adam Bailey's user avatar
  • 8,369
10 votes
3 answers
3k views

Why is the derivative used to represent marginal cost instead of the difference?

Marginal cost is defined as "the change in the total cost that arises when the quantity produced is incremented by one unit." And given a total cost function $C(q)$ that's differentiable, the marginal ...
Quinn Culver's user avatar
8 votes
5 answers
1k views

Why don't Burgers cost 5 cents?

In this blog post, economist Bob Murphy raises a puzzle involving the principle that in a competitive market, the price equals the marginal cost: There’s a general principle from intro to ...
Keshav Srinivasan's user avatar
8 votes
2 answers
44k views

How to derive firm's cost function from production function?

I recently learned how to solve the following type of problem using the method of Lagrangian multipliers: Given a consumer with utility function $u(x,y)$, wealth $w$, prices $p =(p_x,p_y)$, budget ...
Stan Shunpike's user avatar
8 votes
2 answers
7k views

Understanding the shape of a Marginal Cost Curve

My class IB has just discussed allocative efficiency and hence consumer and producer supply. They explained the concepts with a diagram like this: It all made perfect sense to me until it was ...
Andy's user avatar
  • 205
8 votes
2 answers
209 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, ...
Yngve Høiseth's user avatar
8 votes
1 answer
391 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
  • 6,805
6 votes
1 answer
623 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 ...
pc724's user avatar
  • 73
6 votes
3 answers
2k views

Why is railway electrification in North America far less common than in Europe?

Why is railway electrification in North America far less common than in Europe? I suspect that the answer has something to do with the economics of electrification. In Europe, railway ...
gerrit's user avatar
  • 1,754
5 votes
1 answer
5k 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 ...
Will 's user avatar
  • 207
4 votes
2 answers
8k views

Proving AC is minimized when MC=AC

I am trying to prove that AC is mininimized when AC=MC This is how far I am: FOC: Showing what I want to prove SOC: This has to be positive in order to ensure that AC is minimized, but how can i ...
FrankFrankFrank's user avatar
4 votes
2 answers
702 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 ...
mudcake's user avatar
  • 51
4 votes
1 answer
2k views

Shadow Price vs Marginal Cost

Is there a difference between the two? If so can you intuitively explain it? I see internet resources saying these are equivalent, but I thought I remember someone telling me once shadow price was ...
econ121's user avatar
  • 41
4 votes
1 answer
15k views

Why does marginal cost (derivative of total cost) differ from variable cost at each level?

Why does the marginal cost equation (as the derivative of total cost equation) make predictions of variable costs that are very different from costs calculated using the Total Cost equation? Marginal ...
Bryan Gentry's user avatar
3 votes
3 answers
2k views

Deriving and explaining the weighted cost of capital

The Wikipedia article for the "weighted cost of capital" (WACC) defines the WACC as "the rate that a company is expected to pay on average to all its security holders to finance its ...
jmbejara's user avatar
  • 9,355
3 votes
4 answers
296 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 ...
NicholasJohn16's user avatar
3 votes
2 answers
8k views

Why is the short run average cost curve not a tangent to the long run average cost curve at the lowest point on the short run average cost curve?

The diagram from the Varian textbook shows that the SRAC curve is tangent to the LRAC curve at a point which is not the bottom of the SRAC curve. It would be really helpful if someone could explain ...
user2229066's user avatar
3 votes
1 answer
157 views

Homothetic Production Technologies

Can someone suggest a good resource on homothetic technologies and what properties they imply about cost function, profit function, input demands, output supply etc? Also is it possible to have ...
Sher Afghan's user avatar
3 votes
2 answers
2k views

Optimize by MR = MC vs TR = TC

I know that I should optimize production by solving $MR = MC$ with respect to $Q$. But if $TR > TC$, I am making a profit. Why is not enough to just solve $TR = TC$ with respect to $Q$?
Jamgreen's user avatar
  • 303
3 votes
0 answers
40 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 ...
Meco's user avatar
  • 31
3 votes
0 answers
156 views

What is the difference between the discrete choice method and the generalised cost method in transport planning?

I have been using the generalised cost method in an agent based model. The generalised cost method enables each individual agent to make a decision on what mode of transport it will take given a range ...
LearningSlowly's user avatar
2 votes
1 answer
23k views

How do I calculate quantity to minimize long-run average total cost?

I have a formula for the long-run total cost curve, $$TC(Q) = 6000Q + 40Q^2 + Q^3$$ and I'm trying to find the quantity that minimizes the long-run average total cost. I assume I'm trying to find ...
Doug Smith's user avatar
2 votes
2 answers
2k views

How to derive cubic cost function from a problem of constrained optimization?

The cubic total cost function usually take the form $TC(q)=a+bq+cq^{2}+dq^{3} \qquad a,b,d>0, c<0$ and $c^{2}<4bd$ I know that from a constraint maximization problem $min\quad wL+vK$ ...
Héctor Garrido's user avatar
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
2 votes
2 answers
95 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
  • 137
2 votes
2 answers
158 views

What would make a restaurant offer all-day breakfast?

Some restaurants particularly fast food ones offer breakfast food only during, well, breakfast hours. Other restaurants however offer breakfast food throughout their opening hours. Some restaurants ...
BCLC's user avatar
  • 360
2 votes
1 answer
48 views

Producer's cost for buying full solution vs. buying parts

This may be a very basic question. From a producer's standpoint, what are the theoretical or empirical results on the comparison of cost between buying assembled or full solutions from suppliers vs. ...
skyork's user avatar
  • 171
2 votes
2 answers
36 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)\...
Richard Hardy's user avatar
2 votes
2 answers
2k 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
  • 103
2 votes
1 answer
46 views

How to define best value?

I'm trying to define which hotel offers the best value. Let's say we have two hotels - A and B. For A, you pay $10 a night and the rating for the hotel is 9.8. For B, you pay $8 a night and the ...
law2255's user avatar
  • 21
2 votes
1 answer
39 views

Estimating the cost of an assett that needs to be replenished [closed]

I am working with hard drives. For simplicity, let's say all drives have the same capacity, 1TB and all cost $100. They typically last about 4 years, when they need to be replaced. They drop in ...
OneSolitaryNoob's user avatar
2 votes
0 answers
37 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 &...
Richard Hardy's user avatar
2 votes
0 answers
103 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 ...
Richard Hardy's user avatar
2 votes
0 answers
530 views

Short Run vs Long Run Cost Functions

Let $z_a$ and $z_b$ are two vectors of inputs. $z_a$ is variable in both long run and short run however $z_b$ is only variable in long run. Now let's suppose that the price of one of the inputs in ...
Sher Afghan's user avatar
1 vote
1 answer
16k views

Can one Calculate Fixed and Variable Cost From TC and Quantity Alone?

I have been asked a question and believe there is a mistake in the problem. I have been given a table of values, Quantity and corresponding Total cost. From those numbers I can easily calculate the ...
roccosaxman's user avatar
1 vote
2 answers
169 views

Is there a cost to running the NewYork Stock Exchange? Does it affect the price of stocks sold on the exchange?

Is there a cost to running the New York Stock Exchange? For example electricity costs, management costs, rents on the building(s). How do these costs (if any) affect the price of stocks sold on the ...
Dan Anderson's user avatar
1 vote
2 answers
124 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 ...
David J.'s user avatar
  • 149
1 vote
1 answer
328 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 ...
Christopher U's user avatar
1 vote
3 answers
712 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
  • 392
1 vote
2 answers
1k views

Proof that for increasing AC MC(Q)>AC(Q) at any Q>0? [closed]

I know the "common sense" proof, but how can we prove it algebraically?
Alice's user avatar
  • 37
1 vote
1 answer
245 views

How to Graph Short-Run Average Cost?

I've learnt to roughly draw graphs of various functions like isoquants of Cobb Douglas function, i.e., $k=√q/L$. Here first derivative is negative so it's downward sloping and second derivative is ...
Shoaib Ashraf's user avatar
1 vote
1 answer
174 views

Deducing the Total Cost function

$MC = (TC)'(q) = 3q^2 - 40q+220, \quad where \quad 1 \leq q \leq 20 $ The task is to deduce a function of $TC$, if for the production of the first item we need 291 monetary units, and to write out ...
uiuiui000's user avatar
1 vote
2 answers
44 views

Why do prices of consumer products seem to rise independent of their supply?

For example, in my country, the price of coconuts steadily rises, despite the fact that we still have plenty of coconuts. The same with vegetables. Is this caused primarily by an increase in the cost ...
HANZEL HARRY FERNANDEZ's user avatar
1 vote
1 answer
56 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 ...
vonPetrushev's user avatar
1 vote
1 answer
164 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
  • 11
1 vote
1 answer
891 views

Derivation long run cost function of three inputs with Leontief-like characteristics

Suppose that a firm produces a good using capital, skilled labor, and unskilled labor. Let $K$ denote the amount of capital,$L_1$ unskilled labor, $L_2$ skilled labor. The production function is $f(...
user278039's user avatar
1 vote
2 answers
98 views

The marginal cost function is meaningful only when the produced quantity is normalized

The cost function depends on the number of produced items. Let the value of the cost function C be in hundreds of thousands $ and the quantity is in 1,000,000 items, thus q = 1 indicates 1,000,000 ...
YoussefDir's user avatar
1 vote
1 answer
65 views

(tax with) costs to first order

1) What does it mean that something (in this context the taxation) has (or doesn't) costs to first order? So, below is an excerpt from Romer's Advanced Macro (p. 598) with such a statement that I've ...
Piotr Pieniążek's user avatar