Micro Theory Guide #2

# Micro Theory Guide #2 - Micro Theory Exam #2 Redmond...

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Micro Theory – Exam #2 Matthew Redmond Chapter 7 – The Firm and Its Goals What do firms do? What do firms produce? Choose what product to sell. How should the firm produce its output? A given commodity can be produced in many ways. How much should the firm sell, and at what price? How should the firm promote its product? How does the firm expose itself Transaction Costs: The costs of conducting an economic exchange between two parties. Firm: Consists of (1) workers, paid fixed wages, (2) managers, make decisions and monitor workers, and (3) owners who fund the firm’s investments. Economic Profit The firm’s goal is to maximize its “economic profit” Total Revenue: The sum of the payments that the firm receives from the sale of its output. Total Economic Cost: The firm’s total expenditures on the inputs used to produce output, where expenditures are measured in terms of opportunity cost. Economic Profit: Total revenue minus total economic cost. Economic Profit = Total Revenue – Total Economic Cost Opportunity Cost of Labor: The value of labor in its best alternative use. Imputed Cost: The opportunity cost incurred when the owner of a factor employs the factor in on use rather than its best alternative use. In order to measure economic profit, total economic cost must be calculated as the sum of the opportunity cost of all of the outputs Sunk Expenditure: A factor expenditure that, once made, cannot be recovered. User Cost of Capital Depreciation: The fall in the value of an asset over a defined period of time. User Cost of Capital: The opportunity cost that an owner incurs as a consequence of owning and using an asset. User Cost of Capital = Economic Depreciation + Forgone Interest

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Total Revenue Curve Firm-Specific Demand Curve: A curve showing the quantity of a single firm’s output demanded for any price charged by that particular firm. Total Revenue Curve: A curve showing the relationship between a firm’s output level and the resulting amount of revenue. The firm-specific demand curve contains all of the information the firm needs to calculate its total revenue Total Economic Cost Curve Total Economic Cost Curve: A curve showing the relationship between a firm’s output level and the resulting level of total economic cost. When we specify that cost depends solely on the level of output, we are holding these things constant: 1. Factor Prices: For any given combination of inputs, a change in the price of one or more of the inputs changes the expenditure necessary to pay for the inputs. 2. Technological Possibilities: The expenditure necessary to produce a given output level depends on how much of the different outputs the firm needs. 3.
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## Micro Theory Guide #2 - Micro Theory Exam #2 Redmond...

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