ECO 5705 Week 1 Brendan ONeal

ECO 5705 Week 1 Brendan ONeal - Brendan ONeal ECO 5705 Week...

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Brendan O’Neal ECO 5705 Week 1 Exercises Chapter 1 1. In the period leading up to the war in Iraq the oil companies’ profits significantly increased with significant opposition from the public and many politicians. Politicians’ reactions were largely punitive and harsh because of the overwhelming consensus that the profits were not deserved by the oil companies. Through the different theories of profit we are able to see the pros and cons of these earnings in this period of time. In regards to the risk-bearing theory of profit, the oil companies are entitled to the higher rate of profit that they earned due to the risk involved in the business; this may be true due to the political tension in the geographic location and the risks that are inherent in a location that is experiencing political unrest. There may be an argument on the converse that there has always been unrest in the Middle East and the relationship that the region has with the US is tumultuous, at best; with this being said, there may be no difference in the war-time risk that is taken by the companies, thus the profits were disproportionately high and should be taxed at a higher rate. The dynamic equilibrium theory of profit would state that the oil prices fluctuate in response to the politics of the region, and the rates of the return are stable in the long run because our economic system does not allow instantaneous response to fluctuating market conditions. The monopoly theory of profit makes it obvious that we only have a certain number of choices (where many are linked) are limited, so consumers are forced to purchase the high priced energy source from these few corporate giants that provide the product. The innovation theory of profit is almost a moot point in this situation as oil and its derivatives are not innovative or new. It is only limited and provided by certain companies that have the resources to deliver the goods in a refined and consumable form. It is also understood that the managerial efficiency theory of profit is minimally applied due to the gross amount of profit that was earned that correlated with the price increase. In conclusion to this part of the exercise, the best-applied theory may be the risk-
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This note was uploaded on 01/30/2011 for the course ECO 5705 taught by Professor Kest during the Spring '10 term at Hodges University.

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ECO 5705 Week 1 Brendan ONeal - Brendan ONeal ECO 5705 Week...

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