Questions for Review 1. Give an example of an opportunity cost that an accountant might not count as a cost. Why would the accountant ignore this cost?

Opportunity cost is where money does not change hands does not count as a cost. An example of this is the owner's opportunity cost for an alternate employment, since money does not change hands. The accountant would ignore this cost as no cash flow has occurred to cause an effect in the balance sheet.

2. Draw a production function that exhibits diminishing marginal product of labour. Draw the associated total-cost curve. (In both cases, be sure to label the axes.) Explain the shapes of the two curves you have drawn.
We know that the average product of labour is the total product of labour divided by the number of units of labour employed. At low production levels the average cost tends to increases as additional labour is added. The primary reason for the increase is specialization and division of labour. At the point the AP reaches its maximum value AP equals the marginal product. Beyond this point the AP falls.
Average Product,
Marginal Product Average product

Marginal Product

Labour Input

3. Define total cost, average total cost, and marginal cost. How are they related?
Total Cost: describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity
Average cost: or unit cost