[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Table 6.4
DEBORAH’S COSTS IF SHE WORKS 20 HOURS
DOING WEB CONSULTING
Fixed Costs Variable Costs Total
Sunk costs
Software $125.00 $125.00
Laptop lease $ 60.00 $ 60.00
Opportunity costs
Forgone earnings $100.00 $100.00
Total $185.00 $100.00 $285.00
Revenue $400.00
Profit $115.00
$400 − $285 = $115. So she would be better off working the entire 20 hours she has
available for her new business and quitting her tutoring job completely. Note that since
Deborah has $185 in sunk costs, she is better off consulting for 10 hours than
closing up her business entirely. If she works 10 hours doing Web consulting, her
revenues are $200, more than enough to cover her variable costs of $50.
Wrap-Up
COST CONCEPTS
Fixed costs:
Costs that do not depend on output, such as office space
Variable costs:
Costs that depend on output, such as labor costs
Total costs:
Total costs of producing output = fixed costs + variable
costs
Marginal costs:
Extra cost of producing an extra unit
Average costs:
Total costs divided by output
Average variable costs: Total variable costs divided by output
Short-Run and Long-Run
Cost Curves
Up to this point, we have referred to the distinction between inputs that are fixed (their
cost does not vary with quantity produced) and inputs that are variable (their cost
does depend on quantity produced). We have sidestepped the fact that inputs, and
SHORT-RUN AND LONG-RUN COST CURVES ∂ 141