eco550 week 4 discussion 1 and 2 3
ECO550 Week 4 Discussion 1 and 2
Name
Course
University
5/3/2014
Question 1
"Production Economics" Please respond to the following:
From the scenario for Katrina’s Candies, determine the relevant costs for the expansion decision, and distinguish between the short run and the long run costs. Recommend the key decision-making criteria that Katrina’s Candies should use for expansion decisions in the short run and in the long run. Provide rationale for your response. Given that Katrina’s candies is under the process of deciding for expansion and for that it is necessary that the company should do its cost analysis. The costs that the company must consider at this stage include explicit costs of production of candies. Explicit costs are costs in the form of employee wages, benefits given to them and performance bonuses that are all paid in cash (Grant, 2004). Hence, explicit costs involve outlay of cash by the company. It’s not that the company will not have to pay any implicit cost which basically is the cost associated with hiring of more workers when they cannot positively affect the production process. However, the company will be incurring more explicit costs then implicit costs. Other costs that the company must consider before expanding include fixed and variable costs that make up the total cost of production for a company. Fixed costs are costs that cannot be avoided by the company. Even if the company stops production, it will still be incurring costs like rent of the place or the electricity bill of the factory which will be incurred no matter what happens. Such costs cannot be eliminated but can be reduced by means of increase in production. With an increase in production, the fixed cost gets divided on per unit produced. Variable costs on the other hand can be increased or decreased accordingly. The company must also take into consideration short run and long run costs of expanding and realize that in the long run, expansion will be
Name
Course
University
5/3/2014
Question 1
"Production Economics" Please respond to the following:
From the scenario for Katrina’s Candies, determine the relevant costs for the expansion decision, and distinguish between the short run and the long run costs. Recommend the key decision-making criteria that Katrina’s Candies should use for expansion decisions in the short run and in the long run. Provide rationale for your response. Given that Katrina’s candies is under the process of deciding for expansion and for that it is necessary that the company should do its cost analysis. The costs that the company must consider at this stage include explicit costs of production of candies. Explicit costs are costs in the form of employee wages, benefits given to them and performance bonuses that are all paid in cash (Grant, 2004). Hence, explicit costs involve outlay of cash by the company. It’s not that the company will not have to pay any implicit cost which basically is the cost associated with hiring of more workers when they cannot positively affect the production process. However, the company will be incurring more explicit costs then implicit costs. Other costs that the company must consider before expanding include fixed and variable costs that make up the total cost of production for a company. Fixed costs are costs that cannot be avoided by the company. Even if the company stops production, it will still be incurring costs like rent of the place or the electricity bill of the factory which will be incurred no matter what happens. Such costs cannot be eliminated but can be reduced by means of increase in production. With an increase in production, the fixed cost gets divided on per unit produced. Variable costs on the other hand can be increased or decreased accordingly. The company must also take into consideration short run and long run costs of expanding and realize that in the long run, expansion will be