Micro Prelim 2 Review - Micro Prelim 2 Review Theory of the...

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Micro Prelim 2 Review Theory of the Firm The Firm – an entity that employs factors of production (resources) to produce goods and services to be sold to consumers, other firms, or the government. Reason for – it is formed when benefits can be obtained from individuals working as a team Objectives – the objective is to maximize profit guided by managerial monitoring (coordinates the team and reduces shirking) and residual claimant schemes (getting a piece of the profits) Questions owners must answer – how much to produce, at what price, and how much labor and/or resources are necessary Types Examples Advantages Disadvantages Proprietorship Restaurants Local Barber Shops Easy to form and dissolve All decision making resides with one person Profits are taxed once Unlimited liability Succession Less able to raise capital Partnership Some medical offices Some advertising agencies Easy to form Facilitates profit focus Accommodates specialization Profits are taxed once Unlimited liability* Decision making more complex Limited ability to raise capital Complex succession/dissolution Corporation Wal-Mart Intel Limited liability Ease of succession Able to raise capital Separation of ownership and control Profits taxed twice Financing Corporate Activity Borrow funds – being lent money from a bank and paying it pack with interest over time Issue bonds (debt) – a debt obligation to pay the principal at maturity and pay periodic fixed sums until that date. Issue stock – stock is a claim on the assets of a corporation and gives the purchaser a share of the ownership
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Role of Chains Production and Costs Cost Concepts Opportunity costs – the most highly valued alternative forfeited for a choice Explicit costs – the cost that is incurred when an actual payment is made Implicit costs – represents the value of resources for which no monetary payment is made Sunk costs – costs that have occurred and cannot be recovered Profit Accounting profit – Revenue less explicit costs Economic profit – Revenue less explicit and implicit costs Normal profit – zero economic profit. This is the level of profit necessary to continue Production and Short Costs Short run – a period of time in which some inputs in the production process are fixed Long run – a period of time in which all inputs in the production process can be varied Equations TC = TFC + TVC ATC = AFC + AVC (just divide by output to get any average) MC = Δ TC / Δ Q output Production in the Short Run Marginal Physical Product (MPP) – the change in output that results from changing the variable input by one unit and holding all other inputs fixed. MPP = Δ Q / Δ L
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Micro Prelim 2 Review - Micro Prelim 2 Review Theory of the...

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