(a) Distinguish between the following pairs of cost concepts.
(i) Fixed cost and variable cost. (ii) Real cost and money cost
(iii) Implicit cost and explicit cost. [5 marks each]
(b) (I) What would you recommend to a firm whose average cost is greater than its price? [2 marks]
(ii) Give a reason for your answer In (b)(i) above. [3 marks]
Explanation
(a)(i) Fixed costs: Are expenses that remain unchanged whatever tho level of output e g money spent on the purchase of land rent payment. purchase of tools and machinery etc while variable costs are expenses that change With the level of output e g expenses on raw material, fuel. electricity maintenance of fired assets, etc
(ii) Real cost is the goods and forgone by employing the resources In their best or
most profitable alternative uses, while money cost is the amount of money spent to produce a particular good or service
(iii) Implicit costs are the costs of the resources supplied by the owners e.g owners of managerial skills, financial resources and owner-occupied buildings. while explicit costs are payments that are made for resources purchased from outside e.g. payment for labour services, fuel electricity. raw materials and transportation.
(b)(i) the firm should stay open in the short run if price is greater than AVC. The firm should shut down In the long run
(ii) Any further production will add to losses In the long run.