microbook_3e-page88 - x nearly the same as the interest...

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Profit-Maximization (economic) profit = total revenue – total (economic) cost total revenue amount received from the sale of the product (price times number of goods sold) total (economic) cost the total of: 1. out of pocket costs (ex. prices paid to each input) 2. opportunity costs: a. normal rate of return on capital and b. opportunity cost of each factor of production – ex. if an employee in my firm could earn $30,000 if he/she worked for another firm, then I’d have to pay him/her at least $30,000, otherwise he/she would leave. (In reality, you might work in your parents’ firm and not be paid. In such a case, the accounting profit of their firm would be higher than the economic profit of their firm). normal rate of return on capital – rate of return that is just sufficient to keep owners and investors satisfied (ex. stock dividends or interest on bonds)
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Unformatted text preview: x nearly the same as the interest rate on risk-free government bonds for relatively risk-free firms x higher for relatively more risky firms Production Process optimal method of production minimizes cost production technology – relationship betw/n inputs & outputs x labor-intensive technology relies heavily on labor instead of capital x capital-intensive technology relies heavily on capital instead of labor production function – units of total product as func. of units of inputs average product – average amount produced by each unit of a variable factor of production (input) marginal product – additional output produced by adding one more unit of a variable factor of production (input), ceteris paribus used labor of units total product total labor of product avg. used labor of units product total labor of product marg. ' ' Page 88...
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