Question.1
Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant.
a. Define opportunity cost.
b. What is your aunt’s opportunity cost of running a hardware store for a year? If your aunt thought she could sell $510,000 worth of merchandise in a year, should she open the store? Explain.
Question.2
If Boeing produces 9 jets per month, its long-run total cost is $9.0 million per month. If it produces 10 jets per month, its long-run total cost is $9.5 million per month. Does Boeing exhibit economies or diseconomies of scale?
a. Define economies of scale.
b. Does Boeing exhibit economies or diseconomies of scale? Explain.
Answer.1
a. Opportunity cost refers to the value of the next best alternative forgone when making a decision. It represents the benefits or value that could have been gained from choosing a different course of action.
b. To calculate your aunt's opportunity cost of running a hardware store for a year, we add the cost of renting the location and buying stock ($500,000) to the income she would have earned as an accountant ($50,000). Therefore, her opportunity cost would be $550,000 per year.
If your aunt estimates that she can sell $510,000 worth of merchandise in a year, it would not be advisable for her to open the store. This is because her estimated sales revenue of $510,000 is lower than her opportunity cost of $550,000. Hence, opening the store would result in a net loss for her.
Answer.2
Based on the information provided, we can determine whether Boeing exhibits economies or diseconomies of scale by comparing the change in long-run total cost with the change in production.
When Boeing produces 9 jets per month, the long-run total cost is $9.0 million per month. But when Boeing produces 10 jets per month, the long-run total cost increases to $9.5 million per month.
In this case, the increase in production from 9 jets to 10 jets results in an increase in the long-run total cost. Therefore, Boeing exhibits diseconomies of scale as it experiences an increase in cost as production increases.
Question 1:
a. Opportunity cost: Opportunity cost refers to the cost of choosing one option over another. It is the value of the best alternative that is forgone when a decision is made.
b. To calculate your aunt's opportunity cost of running a hardware store for a year, we need to consider the monetary value of her job as an accountant that she would be quitting. This is $50,000 per year.
So, her opportunity cost for running a hardware store for a year would be the sum of the rental costs ($500,000) and the forgone salary ($50,000). Therefore, the total opportunity cost would be $550,000.
If your aunt believes she could sell $510,000 worth of merchandise in a year, she would be incurring a higher opportunity cost ($550,000) than the potential revenue ($510,000). In this case, it may not make financial sense for her to open the store, as the opportunity cost exceeds the potential gain.
Question 2:
To determine if Boeing exhibits economies or diseconomies of scale, we need to compare the changes in the long-run total cost (LRTC) with the changes in the production quantity.
When Boeing produces 9 jets per month, the LRTC is $9.0 million per month. When it produces 10 jets per month, the LRTC is $9.5 million per month.
Here, we can see that the long-run total cost increased from $9.0 million to $9.5 million as the production quantity increased from 9 to 10 jets. This means that the average cost per unit increased, indicating diseconomies of scale.
Diseconomies of scale occur when the cost of producing additional units increases as the scale of production increases. In this case, with the production of 10 jets per month, Boeing is experiencing higher costs compared to producing 9 jets, suggesting inefficiency in managing resources or operations at that level.