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Managerial Economics exam - Term Paper Example

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The basic difference between business profits and economic profits is of implicit costs. Business profit is the difference between revenue and explicit costs incurred by a firm…
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Managerial Economics exam paper
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Download file to see previous pages The salary that the owner of a business can earn and the interest that the owner can earn on the invested capital are examples of implicit costs. The following equations can be used to calculated business and economic profits.
c) Since project B has a higher standard deviation of $15000 than project A, we can conclude that project B is riskier. However, project B provides a better return of $70000 as compared to the expected return of project A of $60300. Project A has lesser risk since its standard deviation is lesser than that of project B.
Higher standard deviation of project B indicates that there are high chances that the return will either be higher than the expected return or lower than the expected return. If the customer is a risk-averse one, he will prefer project A since it provides a lower return but has lesser risk attached to it. A risk-taking customer would go for project B since project B provides a better return although there is higher risk attached to it.
Implicit cost is the cost of the opportunity that a firm loses when it employs its resources in earning profits. The salary that one can earn by investing his time elsewhere or the interest that one can earn on the capital employed in business are some examples of implicit costs (Begg 1997).
According to the Consumer Demand Theory, the quantity demanded of a product increases with a decrease in its price and quantity demanded decreases if price is increased. There is a direct relationship between demand and income. If income of consumers increases, quantity demanded also increases and if income decreases, quantity demanded also decreases. Change in tastes also influence the quantity demanded of a product (Sloman 1997). For example, if people get more inclined towards buying smartphones than other cellphones, the smartphones demand will surge due o the change in tastes and preferences of the ...Download file to see next pagesRead More
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