discuss opportunity cost-explicit and implicit costs, Managerial Economics

Discuss and analyze following statement:

When Burton Cummings graduated with honors from the Canadian Trucking Academy, his father gave him a $350,000 tractor-trailer rig. Recently, Burton was boasting to some fellow truckers that his revenues were typically $25,000 per month, while his operating costs (fuel, maintenance, and depreciation) amounted to only $18,000 per month. Tractor-trailer rigs identical to Burton's rig rent for $15,000 per month. If Burton were driving trucks for one of the competing trucking firms, he would earn $5,000 per month. Burton is proud of the fact that he is generating a net cash flow of $7,000 ($25,000 - $18,000) per month, since he would be earning only $5,000 per month if he were working for a trucking firm.

a. Compute both Burton Cumming's explicit costs per month and his implicit costs per month.

b. Compute the opportunity cost of the resources used by Burton Cummings each month.

c. What advice would you give Burton Cummings? Explain your advice in terms of opportunity costs.

Definitions according to my textbook:

1. Opportunity cost - What a firm's owners give up to use resources to produce goods or services.

2. Explicit costs - monetary opportunity costs of using market-supplied resources.

3. Implicit costs - nonmonetary opportunity costs of using owner-supplied resources.

4. I have provided an example of a discussion post (single-spaced; no title page, etc.) to be used as reference when completing the assignment above:

Economic Theory Simplifies Complexity

Practical solutions to challenging real-world problems are seldom found in cookbook formulas, superficial rules of thumb, or simple guidelines and anecdotes. Profitable solutions generally require that people understand how the real world functions, which is often far too complex to comprehend without making the simplifying assumptions used in theories. Theory allows people to gain insights into complicated problems using simplifying assumptions to make sense out of confusion, to turn complexity into relative simplicity. By abstracting away from the irrelevant, managers can use the economic way of thinking about business problems to make predictions and explanations that are valid in the real world, even though the theory may ignore many of the actual characteristics of the real world (Thomas & Maurice, 2011).

Posted Date: 3/12/2013 2:10:08 AM | Location : United States

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