Activity No.

5
1. Differentiate implicit and explicit costs by citing examples.
As discussed during our discussion in the Introduction of Economics, the explicit
cost is a cost that has measurable cost to a firm. The explicit costs revolve around the
actual expenditures. On the other hand, the implicit cost is the cost of self-produced
resources.
As accounting students, explicit costs are the expenses we usually encounter on
the trial balance. An example of explicit cost is an electric bill (utility expense), advertising
in the newspaper (advertising expense), and rent of the factory used in production (rent
expense).
On the contrary, the implicit cost is what we know as the opportunity cost. It is the
value of the foregone opportunity. It is hard to anticipate and does not require an outflow
of cash. An example of implicit costs is the capital invested and payment to employees
who were taking a day off.

2. Explain how isoquant curves and isocost lines determine the producer's
equilibrium using graphs.

The graph above shows the isoquant curve. It represents combinations of input
in the same level of output.

The second graph represents the isocost line. It represents a different

combination of inputs that the same budget can purchase.
These two graphs are vital in determining the producer’s equilibrium. In its general
sense, the producer’s equilibrium will be determined by finding the point of tangency
(point where they meet) of the isocost line and cure. The two graphs are important in
determining the point of tangency because the isocost line and curve quantify
combinations that can possibly become show the point where the producer can produce
his maximum production.
In the Graphical illustration of Producer’s equilibrium below, the producer’s
equilibrium will be able to achieve when we employ 25 units of capital and 15 units of
labor. Moreover, there should be a table representing the isocost curve.
3. Explain the Law of Diminishing Returns and Returns to Scale.

Law of Diminishing Marginal Returns

The Law of Diminishing Return States that every successive unit of variable input
combined with fixed units increases the Total Output (TP) but declines at some point.
Before we begin its process, let us start first with the terminologies.
Total Output – is the total physical product produced
Marginal Product – mean s the increase in an output adding another unit. An example
is adding a new worker.
Average Product (AP) – is the output produce per unit.

The table above shows the three levels of production. In stage 1 (represented by
color red), we can see that: TP is increasing, AP and MP are still increasing, AP>MP, and
the value of MP is positive. In stage 2 (represented by color green), we can see that: TP
is increasing, AP and MP are decreasing, AP>MP, and MP is still in positive. As
mentioned earlier, the TP will increase and then eventually will decline. In stage 3
(represented by color blue), TP starts to decrease, AP and MP are decreasing, AP>MP,
and MP is not in its positive rate.
 Moreover, the table shows different boundaries (represented by color yellow) to
represent the distinguishment of the stages, the first boundary shows AP is at its
maximum and AP=MP while the second boundary shows that TP is at its maximum and
MP=0. The graph below represents the curve of Law of Diminshing Marginal return.

Scale of Return
The scale of returns to scale during the long-run analysis of cost. It refers to the
rate of output changes if all inputs are in the same factor. This can always be found in the
lowest point of the short-run average total cost. The long-run analysis is the period by
which all factors or resources can be used as a variable.
This economic phenomenon happens when the level of the firm increases, causing
to the specialization of workers.
The scale of return has a U-shaped slope. It has three types: increasing returns to
scale or economies of scale, the constant return to scale, and decreasing return to scale.
Increasing returns to scale or economies of scale happens when there is an
increase in the scale of production. This increase will lead to a lower average cost causing
ATC to slope downward.
The constant return to scale happens when there is an increase in production
while the average cost remains constant.
Decreasing return to scale or diseconomies of scale happens when there is
an increase in the scale of production, but it leads to higher average costs.
4. Differentiate short-run and long-run production.
There is a big huge difference when it comes to short-run and long-run production
of costs of production. Short-run production is planning by which we consider resources
as variable and fixed. As mentioned earlier, long-run analysis is the period by which all
factors or resources can be used as a variable.
Comparatively, the formula for computing the variable needed in both types of
production is the same. However, their graph differs because the short-run (1st graph) has
fixed resources which means in the graph it has fixed slope.
 The short-run analysis mainly focus on its fixed cost (cost the will not change) and
variable cost (cost that change as output change). The long-run analysis focuses on the
variability of costs and its possibilities: scale of return.
5-6. Computation and Graph.

Average
Total Fixed Variable Average Marginal
Total Cost Variable
Product Cost Cost Total Cost Cost
Cost
0 2000 *** 1. 2000 *** *** ***

20 2000 4000 2. 6000 3. 200 4. 300 5. 200

40 2000 6000 6. 8000 7. 150 8. 200 9. 100

10. 11,000 11. 150 12. 183.33

60 2000 9000 13. 150
14. 13,000 15. 137.5 16. 162.5
80 2000 11000 17. 100
18. 16,000 19. 140 20. 160
100 2000 14000 21. 150
22. 20,000 23. 150 24. 150 25. 200
120 2000 18000

350

300

250

200

150

100

50

0
1 2 3 4 5 6

Average Variable Cost Average Total Cost Marginal Cost

 Activity No. 6
1.

Pure Monopolistic
Characteristics Monopoly Oligopoly
Competition Competition
Number of 1. A very large 6. One 11. Many 16. Few
Firms number

Type of 2. Standardized 7. Unique-no 12. 17. Standardized

Products close substitutes Differentiated or differentiated

Price Setting 3. None 8. Considerable 13. Some, but 18. Limited by

and Control within narrow mutual
limits interdependence;
considerable with
illusion
Entry of Firm 4. Very easy. No 9. Blocked 14. relatively 19. Significant
obstacles easy Obstacles

Local 5. Agriculture 10. Local utilities 15. Retail trade 20. Automobile
Examples and shoes. and steel.

2. How does the purely competitive firm maximize its profit? Explain using graphical
illustration.
Beforehand, we have to understand that profit maximization stays where MC=MR. This
applies to any type of competition even though they have different rules.
Profit maximization in a purely competitive firm is relatively easy to understand. The
characteristics of a purely competitive firm are: it has many buyers and sellers which leads to
perfect information, identical products, and no barrier to entry/exit.

The basic rule in a perfectly competitive firm is that the price between the market and the
firm is equal. Moreover, the quantity that the firm will produce is at the part where MC intersects
the price. For a better understanding, Marginal Revenue = Demand = Price in the perfect
competition.
 When it comes to profit and loss, these are the rules which will make the concept easier
to explain and understand:

When does the firm shut down?

In the short run, the firm will produce until P<ATC only.

In the long run, these are the possibilities:

3. How does a monopolist firm maximize its profit? Explain using graphical illustration.
A monopolist firm has only one seller and barriers. Its barrier is the economies of scale,
which produces natural monopoly and actions of the firm and government. In order to maintain its
uniqueness in the market, the firm's action ranges from patent and copyright to high advertising
expenditures for high sunk costs. On the other hand, the actions of the government usually focus
on franchises and licensing.
In monopolist firm, these are the rule in getting economic profit and loss:

In a monopolist, we also experience the dead weight loss. Dead-weight loss in the space
remaining from the consumer surplus up until the marginal revenue. Here, we can see the dead-
weight loss a monopolis firm:
 In monopolist firms, we also experience price discrimination. Price discrimination is when
the firm charge more price to the customer that is inelastic with the product. It goes under the
conditions: of not being a price–taker, sort customer, and not feasible for sale.
Moreover, we do experience dumping in this type of market. Predatory dumping,
specifically, mentions the concept of lowering the price to drive out a domestic competitor and
increasing it when domestic competitors are destroyed.
This type of market gives rise to two more concepts: x-inefficiency and rent-seeking
behavior. X-inefficiency states that there is a firm who does not gain incentive in the least cost
production. On the other hand, rent-seeking behavior states that some firms gain monopoly power
by taking it as a cost. However, this behavior does not benefit the economy and drives the
resources away.

4. When should a monopolistically competitive firm exit the market? Explain using
graphical illustration.
For a better understanding, we have to understand monopolistic competitive firms first.
Monopolistic competition has many buyers and sellers, is differentiated, and is easy to enter/exit.
It is similar to perfect competition by having many buyers and sellers and having no barriers.
Moreover, it is similar to a monopoly by being a sole producer and by downward sloping demand
curve. An example of its graph in short-run is this:
 For a monopolistic competitive firm to exit, they need to suffer losses. To suffer losses,
ATC should be higher than the price. Its graph works similarly to that of a monopolistic firm.
However, the entrance of different firms makes only its demand curve steeper. To illustrate:
5. Explain the three models of Oligopoly.
Kinked-Demand Theory has a kinked demand curve. The characteristic of
a kinked-demand curve is noncollusive.
This theory assumes that firms prices are settled on a price of P1 and
quantity Q1.
(a) At price D1 - demand curve is elastic above P1
- demand inelastic below P1
(b) Raising the price above P1 - it will cause an elastic demand
- it results in lost sales and falling Total
Revenue
(c) Cutting the price below P1 - it will cause a price reduction
- demand is relatively inelastic
(d) The Kink - demand is relatively elastic
- we need this in an oligoply

Through kinked-demand theories, there are two types of price strategies: Match
price changes and ignore price changes

Collusion is an attempt to suppress competition while on the other hand, the

cartel is a group of the market who concurrently raise the market price or decrease
market output. This will lead us to our third oligopoly model which is cartel and collusion.
The goals of these two are: to consider circumstances that will retain cartels, determine
the policy to prevent cartels, and consider how cartels will stay together. This is an
example of a type of collusion:
 Price-leadership model motivates oligopolists to coordinate prices without
engaging in outright collusion (secret meetings). This concept mainly focuses on the
largest or most efficient industry firm and then begin to race prices based on them.