2.2: Profit maximising behaviour and 2.3: Cost minimisation

Question 1

What other factors may managers focus on maximising rather than profits? (3)

Answer 1

Revenue max/growth
Dividend max
ST profit max (for bonuses)

Question 2

2 implications of non-profit maximising objectives?

Answer 2

Investors may stop investing

Firm may shut down

Question 3

Define marginal revenue and marginal cost?

Answer 3

MR = change in revenue resulting from a 1 unit increase in output
MC = change in cost resulting from producing one additional unit of output

Question 4

At what point is π(q) maximised?

Answer 4

at q*, where slope of C(q)=slope of R(q)

ie. MC=MR
see graph in notes

Question 5

Algebraically, how do you check you have MAXimised profit?

Answer 5

Find the 2nd derivative, check it is less than 0 tf found max point not min

Question 6

Difference between economic and accounting cost?

Answer 6

The Economic cost is the monetary value of all resources employed in the course of business. It also refers to the opportunity cost of the inputs used in the enterprise. … Accounting costs, on the other hand, are based on explicit costs incurred by the business (out-of-pocket expenses, deprecation etc.)

Question 7

What type of variables are output, input and profit typically?

Answer 7

Flow

Question 8

What is an isoprofit line?

Answer 8

A line showing all production plans that give the same level of profit (draw diagram in notes)

Question 9

In short term profit maximisation analysis, explain the basis points? (2)

Answer 9

Assume output and input prices are constant

Assume two inputs, with one of them being fixed (SR)

Question 10

Draw diagram for ST profit max showing optimal x1*?

Answer 10

Now (see notes)

Shows that slopes of PF and isoquant are equal at profit max point

Question 11

What is p.MP1?

Answer 11

Marginal Revenue Product of x1:

The rate at which revenue changes when the amount of input x1 used changes

Question 12

If MRP of input x1 is greater than the cost of input x1, what does this mean?

Answer 12

Firm can increase profit by increasing input x1 (and vice versa)

Question 13

See

Answer 13

All of the SR profit max analysis

Question 14

SR profit max: What happens if the price of the output increases? (2+2)

Answer 14

From isoprofit line:
1) Decease in steepness of isoprofit line slope
2) increase in vertical intercept of slope
Results:
1) Increase in firms output (UWS supply curve)
2) Increase in level of firm’s variable input (x1) (demand for x1 shifts outward)

Question 15

See

Answer 15

Page 2 of micro topic 2, right at the bottom (remuneration rate bit)

Question 16

Explain long-term profit maximisation for firms?

Answer 16

In LR, no fixed costs tf both x1 and x2 are variable
Tf max problem is:
π=py-w1x1-w2x2
and the condition for SR π maximisation must be applied across all inputs:
pMP1=w1 and pMP2=w2

Question 17

Define opportunity cost?

Answer 17

What could be obtained by using a resource/input in its best alternative use

Question 18

Labour costs of accountants vs economists?

Answer 18

Same; use hrly wage

Question 19

Capital costs of accountants vs economists?

Answer 19

Accountants use historical price of capital and apply depreciation rule to calculate current costs

Economists use cost of capital as the price someone else would pay for it (eg. rental costs)

Question 20

Entrepreneurial services costs of accountants vs economists?

Answer 20

A: believe firm owner is entitled to all profits
E: consider opportunity costs of time and funds that owners devote to the running of their firms

Question 21

See

Answer 21

costs: assumptions and notations 2.3

Question 22

When does the minimum cost of producing an output q0 occur?

Answer 22

At the tangency between the isoquant and the isocost

Question 23

See notes

Answer 23

Solving cost minimisation using lagrangean!!!

Question 24

How do you get demand functions for inputs when cost minimising?

Answer 24

By calculating for a given level of output

Question 25

Define remuneration rate?

Answer 25

The payment/compensation paid to the employment of workers (or the hiring of capital)