block 5

Question 1

what is a sole trader business

Answer 1

business owned by a single individual

• they get the revenue of the business and is responsible for any losses it makes

Question 2

what is a partnership business

Answer 2

business jointly owned by 2 or more people, sharing the profits and being jointly responsible for any losses

• have unlimited liability

Question 3

what is a company business organisation

Answer 3

an organisation legally allowed to produce and trade

• has a legal existence distinct from that of its owners
• ownership divided among shareholders
• run by a board of directors who submit an annual report to the shareholders

Question 4

how do shareholders earn a return

Answer 4

1. company makes regular dividend payments, paying out to shareholders that part of the profits that the firm does not wish to reinvest in the business
2. they may make capital gains

Question 5

what is a principal-agent problem

Answer 5

difficulties of a principal or owner in monitoring an agent to whom decisions have been delegated

• separation of ownership and control in companies leads to this
• agents are tempted to act in their own interests rather than those of their principals

Question 6

what is the definitions of and formula for
1. total product
2. average product
3. marginal product

Answer 6

1. the total amount produced during a given period of time by all the inputs that the firms is using at that time
2. total product per unit of the variable input (e.g. labour): formulas for average product of labour = Q/L
3. the change in total product resulting from the use of one more/less unit of the variable input = (change in quantity)/ ( change in input)

Question 7

should a firm making losses quit at once

Answer 7

uncertain:
firms should if theyre making losses in the long run (cannot cover its costs, which is all variable costs)

in the short run, when the firm is making losses, it may not shutdown if it can cover its variable costs. by doing so, it can minimise its losses by producing rather than not producing
- produce if profit > AVC
- shut down if profit < AVC

Question 8

why does the SMC intersect the SAVC and SATC

Answer 8

• where marginal cost is less than the average cost, the average cost curve is falling.
• where the marginal cost is more than the average cost, the average cost curve is rising
  thus the marginal curve must cross the average cost curve at the point where the average cost curve changes direction

this applies to average variable cost as well as average total cost