Instructions
1. What are implicit costs, and how do they affect a firm’s economic profit?
2. After quitting her previous job, Erin started a small business, creating personalized ceramic mugs and selling them via Amazon domestically and internationally. What should happen for Erin to earn a positive economic profit? To answer this question, you should focus on comparing the revenue from the sale of her mugs with all the explicit costs of production (such as cost of raw material, wages, rent, etc.) as well as what she would have to give up/sacrifice to start and run this business (i.e., implicit costs). Be specific and provide examples of all the types of expenses that she might face, including costs associated with borrowed funds.
3. As customer demand kept rising, Erin hired four workers in the last two months. When considering whether to hire the fifth worker, how can she utilize the concept of diminishing returns to labor? In other words, under what circumstances should she hire a fifth worker? Why?
4. Explain what will happen to Erin’s production costs if supply chain interruptions (like most companies experienced during the pandemic) limit the availability and increase the prices of the primary raw materials she uses.
5. To increase workers’ productivity, Erin is considering increasing her workers’ wages and/or providing additional benefits to each worker, which will increase her total variable cost. Under what conditions would this leave Erin’s average variable cost unaffected or even lower?