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Test 2 material

Test 2 material - 1 What is a firm a Firm is an artificial...

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1. What is a firm? a. Firm is an artificial construct for converting low-value imputs into ideally high value outputs 2. Scale economies a. If you double all imputs, you get more that double the output b. As you produce more, the (cost/unit) falls c. No scale economies, then make everything more d. Specialization and division of labor 3. M A P S a. Movement technology i. If are speeds are low, cities will be commercial ii. Average commute time has been constant b. Agriculture Productivity i. Higher levels c. Scale economies & agglomeration economies i. Scale economies are firm 4. Types of Firms a. Sole Proprietorships i. Single owner (large in number, but not large in terms of outputs) ii. Advantages 1. You are the boss, good incentives, tax advantages, what you work for is what you get iii. Disadvantages 1. Unlimited liabilitiy, limited access to funds for expansion, death of company b. Partnership i. Again in many, but not large in economy 1. Medical firms, law firms ii. Advantages 1. Similar but there begins to be an incentive to shrink your activities (not work, infinite life? Hard) iii. Disadvantages 1. unlimited liability c. Corporations i. Few in number, but very large in economy ii. Large as percentage of total output iii. Advantages 1. Limited liability (worst thing is value falls to zero), cant come after personal assets, infinite life, more funds, accumulate assets to expand (stock and bonds)
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10-11-07 1. Principle Agent difficulty a. Accounts for bonuses, stock options, etc… attempts to get managers to raise stock value (what firms want to do) 2. Goal of Firm a. Maximize pie (profit) b. Pie = TR-TC c. Total revenue (P*Q) – Total cost (subtle) 3. Assertion a. Seeking pie is a good thing; getting pie is a matter of equity 4. All 5. Explicit costs a. Contractual obligations 6. Implicit costs a. No contractual obligation b. Not seen by accounting agents c. Pie is overstated 7. Sole Proprietorship a. Implicit costs is the costs of your time b. Owners time is not counted as a cost i. Pie is overstated ii. Example 1. 2 employees $80,000/year Materials $20,000/year Energy $10,000/year Rent $40,000/year = $150,000 TR= $200,000 8. Does firm make a profit? a.
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Test 2 material - 1 What is a firm a Firm is an artificial...

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