Profit Maximization

Question 1

Competitive Market

Answer 1

Economists call a market where the individual producers take the prices as outside their control

Question 2

Profits

Answer 2

Revenues minus Cost

Question 3

What should we include in expression for Cost?

Answer 3

Be sure to include all of the factors of production used by the firm, valued at their market price

Question 4

Rental Rate

Answer 4

the rate at which you can rent a machine for the given time period.

Question 5

Proprietorship

Answer 5

is a firm that is owned by a single individual

Question 6

Partnership

Answer 6

is owned by two or more individuals

Question 7

Corporation

Answer 7

is usually owned by several individuals as well, but under the law has an existence separate from that of its owners

Question 8

present value of the firm

Answer 8

It would be how much someone would be willing to pay to purchase the firm.

Question 9

How do corporations display ownership?

Answer 9

The corporation issues stock certificates to represent ownership of shares in the corporation

Question 10

What do the owners of a firm want?

Answer 10

The owners of the firm will generally want the firm to choose production plans that maximize the stock market value of the firm, since that will make the value of the shares they hold as large as possible

Question 11

First best choice when firms are buying?

Answer 11

Managers prefer to buy goods and services on a competitive market, if they are available

Question 12

Second best choice when firms are buying?

Answer 12

The second-best choice is dealing with an internal monopolist

Question 13

Worst choice when firms are buying?

Answer 13

In terms of price and quality of service, is dealing with an external monopolist.

Question 14

Benefit of Outsourcing

Answer 14

Such specialization often allows these companies to provide higher quality and less expensive services to the organizations that use their services.

Question 15

Fixed factor

Answer 15

We refer to a factor of production that is in a fixed amount for the firm

Question 16

Variable factor

Answer 16

A factor can be used in different amounts

Question 17

What is the short run defined as?

Answer 17

Defined as that period of time in which there are some fixed factors—factors that can only be used in fixed amounts.

Question 18

What is the long run defined as?

Answer 18

The firm is free to vary all of the factors of production: all factors are variable factors

Question 19

What are fixed factors?

Answer 19

Fixed factors are factors of production that must be paid for even if the firm decides to produce zero output

Question 20

What is a quasi-fixed factor ?

Answer 20

They are factors of production that must be used in a fixed amount, independent of the output of the firm, as long as the output is positive.

Question 21

What is the difference between fixed and quasi-fixed factor?

Answer 21

The distinction between fixed factors and quasi-fixed factors is sometimes useful in analyzing the economic behavior of the firm.

Question 22

What is the logic of profit maximization?

Answer 22

The logic of profit maximization implies that the supply function of a competitive firm must be an increasing function of the price of output and that each factor demand function must be a decreasing function of its price.

Question 23

If the firm is maximizing profits, then ……………

Answer 23

If the firm is maximizing profits, then the value of the marginal product of each factor that it is free to vary must equal its factor price

Question 24

What does The price of a share represent?

Answer 24

the present value of the stream of dividends that people expect to receive from the corporation.

Question 25

What do the owners of a firm want?

Answer 25

The owners of the firm will generally want the firm to choose production plans that maximize the stock market value of the firm, since that will make the value of the shares they hold as large as possible

Question 26

What does the total stock market value of a firm represent?

Answer 26

The total stock market value of a firm represents the present value of the stream of profits that the firm is expected to generate

Question 27

What does the price of a share represent?

Answer 27

It represents the present value of the stream of dividends that people expect to receive from the corporation.

Question 28

If the firm is maximizing profits, then ……………

Answer 28

the value of the marginal product of each factor that it is free to vary must equal its factor price