Week 3- Extent decisions and investment decisions Flashcards
What is an extent decision?
these are “how much” decisions eg. how much labour should you hire
what is an investment decision?
an extent decision but with a particular focus on capital. Involves a decision that is over time
what does marginal analysis tell you?
the direction of change but not by how much
what is the definition of marginal cost?
the cost to make and sell one additional unit of output
what is the formula for MC
MC= TCq+1 - TCq
what is the formula for variable cost?
VC= MC*Q
what is the formula for TC
TC= FC+VC and TC= FC+MC*Q
What is the definition of average cost?
the total cost of production divided by the number of units produced
What is the formula for AC
AC=TC/Q
Describe the trend of the marginal cost curve
Initially, as output increases, marginal costs fall. Eventually, as output continues to increase marginal costs increase which leads to diminishing marginal returns
What is the relationship between the marginal cost curve and the average cost curve?
If marginal cost is above the average cost then it will pull the average cost up. If marginal revenue is below the average cost then it will pull AC down
What is the average cost going to look like if output is low?
Average costs will be high if output is low because AC= TC/Q
what is marginal revenue (MR)?
the additional revenue from producing and selling one more unit.
If the benefits of selling another unit (MR) are greater than the costs (MC)…….
then sell another unit
Do you produce more or less when MR>MC ?
Produce more
Do you produce more or less when MR
Produce less
What is the relationship between MR and MC when profits are being maximised?
MR=MC
What is the trend of the MR curve?
as output increases, MR falls. This is because businesses have to lower their price to lure in customers
Why does Average REVENUE fall as output increases?
To increase demand you can to lower prices to lure in more customers
What does the point on the demand curve where MC meets MR signify?
Profits are being maximised
How is average cost different to marginal cost?
It includes the fixed cost component. Remember AC=TC/Q
How should you implement an extent decesion?
Make small changes to gather information about the marginal effectiveness of each medium. if they don’t work then scale them back
Learn Break even formula
Week 3 notes
what is a low discount rate?
when someone has a willingness to invest in projects with a low rate of return
what is the definition of Net Present Value (NPV)?
Helps determine whether you would be willing to invest in a project that pays off well in the future
what is the definition of Net Present Value (NPV)?
Helps determine whether you would be willing to invest in a project that pays offs in the future
what is the formula for NPV
Example: -500+ 600/1.05 +600/1.05squared= 615.65
Does the discount rate increase or decrease if you are less patient?
increases
If the project is profitable the NPV must be above or below Zero?
above
projects with a negative NPV may show an accounting profit but never a…
Economic profit
Explain what hold up is?
This is when two businesses are making a deal and one of the business is required to make a sunk investment for the benefit of the two parties. Once they have sunk this cost the other business can renegotiate the terms of the contract and demand a lower price which negatively impacts the other business
What are the solutions to post-investment hold up?
Vertical integration, signing a formal contract to sue the other business if they break the conditions.
what are the disadvantages of a contract to prevent hold up?
it is costly to write and enforce
