Question

(a) Distinguish between economic cost and accounting cost. Illustrate with examples.

Clearly state and carefully explain the condition for cost minimizing use of labor and capital in a production process where labor and capital are variable inputs.

Graphically illustrate (manually drawn graph) and explain why the stated condition in (b) is true.

Show that the cost minimization condition in (b) is the same as that of profit maximization in the short-run.

Answer 1

Economic cost is a broader concept than accounting cost. Economic cost includes all the cost that at market price and all the input that may not be generally considered they should be considered as implicit cost.

accounting cost unlike economic cost does not take into account the value of input at market price rather take the accounting book cost into consideration.