CHAP. 7

Question 1

HOW CAN A FIRM BE ORGANIZED

Answer 1

1.A single proprietorship
2.An ordinary partnership
3.The limited partnership (general and limited)
4.A corporation (private and public)
5.A state-owned enterprise (Crown corporations)
6.Non-profit organizations

Question 2

WHATS A MULTINATIONAL ENTREPRISE (MNE)

Answer 2

Firms that have operations in more than one country

common for limited partnerships and very common for larger corporations

Question 3

WHAT IS THE FINANCIAL CAPITAL

Answer 3

The money a firm raises for carrying on its business

2 TYPES : Equity and debt

Question 4

WHAT IS EQUITY

Answer 4

A corporation acquires funds from its owners in return for stocks, shares, or equities, which are basically ownership certificates.

Dividendes: Profits that are paid out to shareholders

Question 5

WHAT IS DEBT

Answer 5

-The firm’s creditors are not owners.
–A loan with a loan agreement or IOU.
–Firms can borrow from financial institutions
.–Firms can borrow from non-bank lenders using debt instruments or bonds.
–Firms are obligated to pay the principal and interest.

Question 6

2 KEY ASSUMPTIONS ABOUT FIRMS

Answer 6

1.Firms are assumed to be profit-maximizers.
2.Each firm is assumed to be a single, consistent, decision-making unit.

Question 7

4 TYPES OF INPUT FOR PRODUCTION

Answer 7

1.Inputs that are outputs from some other firm are called intermediate products
2.Inputs provided directly by nature (raw material)
3.Inputs that are the services of labour
4.Inputs that are the services of physical capital (machines, building, office space, etc)

Question 8

WHAT IS THE PRODUCTION FUNCTION

Answer 8

• Shows the maximum output that can be produced by a combination of inputs.
• Describes the technological relationship between the inputs that a firm uses and the output that it produces.
• Flow concept

Q= f(L, K)
Q: quantity produced
f: technology
L: labor
K: capital

Question 9

WHAT ARE EXPLICIT COSTS

Answer 9

• involve a purchase of goods or services by the firm.
• include the hiring of workers, the rental of equipment, interest payments on debt, and the purchase of intermediate inputs.
• include depreciation – a cost that arises because of the wearing out of physical capital – which does not involve a market transaction.

Question 10

WHAT ARE ACCOUNTING PROFITS

Answer 10

Accounting profits = Revenues – Explicit Costs

Question 11

WHAT IS ECONOMIC PROFIT

Answer 11

The difference between the revenues received from the sale of output and the opportunity cost of the inputs used to make the output.

Economic profit = Revenues - (Explicit costs + Implicit costs)
Economic profit = Accounting profits – Implicit costs
IF THE ECONOMIC SURPLUS IS NEGATIVE = ECONOMIC LOSSES

Question 12

WHAT ARE IMPLICIT COSTS

Answer 12

The costs of items for which there is no market transaction but for which there is still an opportunity cost for the firm.
- Include the opportunity cost of the owner’s time and the opportunity cost of the owner’s capital.

Question 13

WHAT IS A FIRMS ECONOMIC PROFIT

Answer 13

The difference between the total revenue (TR) each firm derives from the sale of its output and the total cost (TC) of producing that output

π = TR - TC

Question 14

WHAT IS THE SHORT RUN

Answer 14

A time period in which the quantity of some inputs, called fixed factors, cannot be changed.

Question 15

FIXED FACTOR VS VARIABLE FACTOR

Answer 15

FIXED: Usually an element of capital but it might be land, the services of management, or even the supply of skilled labour.
VARIABLE: Inputs that are not fixed and can be varied in the short run

Question 16

WHAT IS THE LONG RUN

Answer 16

The length of time over which all of the firm’s factors of production can be varied, but its technology is fixed.

The very long run is the length of time over which all the firm’s factors of production and its technology can be varied.

Question 17

WHAT ARE THE TOTAL AND AVERAGE PRODUCTS

Answer 17

–Total product (TP) is the total amount produced during a given period of time.
–Average product (AP) is the total product divided by the number of units of the variable factor used to produce it.

AP = TP/L
L: LABOR

Question 18

WHAT IS THE MARGINAL PRODUCT

Answer 18

The change in total output that results from using one more unit of a variable factor.

MP = ΔTP/ΔL

Question 19

WHAT IS THE LAW OF DEMINISHING RETURNS

Answer 19

*To increase output in the short run, more and more of the variable factor is combined with a given amount of the fixed factor.
*Each successive unit of the variable factor has less and less of the fixed factor to work with.
*Eventually equal increases in work effort begin to add less and less to total output.

Question 20

WHAT IS MARGINAL COST

Answer 20

The increase in total cost resulting from increasing output by one unit.

MC = ΔTC/ΔQ

Question 21

TFC

Answer 21

Is constant

Question 22

MC

Answer 22

MC curve intersects the ATC and AVC curves at their minimums

Question 23

MC AND AVC HAVE U-SHAPED CURVES BECAUSE

Answer 23

*Key idea: Each additional worker adds the same amount to total cost but a different amount to total output.
*Eventually diminishing APof the variable factor implies an eventually rising AVC

AVC is at its minimum when AP reaches its maximum.

*Eventually diminishing MPof the variable factor implies eventually rising MC

MC reaches its minimum when MP reaches its maximum.

Question 24

WHAT IS THE CAPACITY OF A FIRM

Answer 24

The level of output that corresponds to the minimum short-run average total cost

Capacity is the largest output that can be produced without encountering rising average costs per unit.

Question 25

WHEN DOES A FIRM HAVE EXCESS CAPACITY

Answer 25

When they are producing at an output less than the point of minimum average total cost

Question 26

DIFFERENT SHIFTS IN SHORT-RUN COST CURVES

Answer 26

*An increase in the price of a variable factor shifts ATC and MC upward.
*An increase in the price of a fixed factor increases the firm’s total fixed costs, but its variable costs are unchanged.
*The ATC curve shifts upward but the MC curve does not change.