Chapter 6

# Chapter 6 - Chapter 6 1 What is minimum efficient scale A...

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Chapter 6: 1. What is minimum efficient scale ? A) the point in the production cycle where the firm has the lowest cash flow needs. B) the smallest scale that the firm needs to achieve profitability. C) the minimum level of production that achieves the lowest long-run average cost per unit of the product available for sale D) the level of production such that once it is reached, an increase in inputs will result in a reduction in average cost E) the point in production where diminishing returns to labor set in Answer: C 2. “Do not confuse profitability with cash flow .” Explain. Answer: Accounting profit is defined as the difference between accounting revenue and expenses. Sometimes revenues are recorded before cash payments are received, as in the case where sales are for credit). Similarly, accounting expenses do not necessarily correspond to cash flows. For example, depreciation is a non-cash expense. For a small business, cash flow is critical. 3. If you were to invest \$1000 for 20 years at 10 percent per year, your future nominal payoff would be \$1000 x 1.1 20 = \$6,727.50. Suppose inflation is 6 percent a year. What is the real value of the payoff? Answer: The general formula for converting nominal cash flows at a future period t to real cash flow is: Real Cash Flow = nominal cash flow/(1+inflation rate) t . The real payoff is \$2,097.67 (\$6,727.50/1.06 20 ). 4.

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Chapter 6 - Chapter 6 1 What is minimum efficient scale A...

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