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Economics of Strategy

Chapter 1: Basics of Microeconomic Principles
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What are the distinctions among fixed costs, sunk costs, variable costs and marginal costs?
Fixed costs, such as SG&A expenses, property taxes, remain constant as output increases; FC are invariant to output.

Variable costs, such as labor and sales commissions, increases as output increases; VC are variant to output

Sunk costs are costs that cannot be avoided; avoidable costs are its opposites; some sunk costs need not be fixed.

Marginal costs is the incremental cost for each additional unit of output
If the average cost curve is increasing, must the marginal cost curve lie above the average cost curve?
Yes, the marginal cost curve lies above the average cost curve because the margin is greater than the average.
Why are long-range average cost curves usually at or below short run-average cost curves?
It shows the lowest attainable average cost for any particular level of output when the firm can adjust its plant size optimally.

Extra:
Average cost functions include the annual costs of all relevant inputs (e.g. labor & materials) as well as the fixed costs (annualized) of the plant itself.
What is difference between economic profit and accounting profit?
In the study of strategy, we are interested in why firms make their decisions and which firms are better at seizing profit-enhancing opportunities.

Accounting costs are designed to serve outside constituents (e.g lenders, equity investors, etc) and as such analyze past costs.

Business decisions require the measurement of economic costs, which are based on the concept of opportunity costs.

Opportunity costs are the value of the best foregone opportunity.

Accounting profit = Sales revenue - Account cost

Econ. profit = Sales revenue - Economic cost = Accou profit - (Economic cost - Accounting cost)
Explain why we might expect the price elasticity of demand for nursing home care to be more negative than the price elasticity of demand for heart surgery?
There are many more nurses than there are heart surgeons.
Why is marginal revenue less than total revenue?
Total revenue is price x quantity. Marginal revenue is the incremental revenue received for an incremental unit of output.
Why does the elasticity of demand affect a firm's optimal price?
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Explain why long-run prices in a perfectly competitive market tend toward the minimum average cost of production?
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