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Variable costs are expenses that vary according
to the number of units produced.
Total costs Fixed costs Variable costs
Marginal cost is the additional cost of producing an additional unit of a good. Section 3
Firms must answer two essential questions:
How much should we produce? and What
price should we charge?
Marginal revenue is the change in total revenue that results from selling an additional
unit of output.
A firm’s goal is to maximize profit, which
means producing a quantity of output at
which marginal revenue equals marginal cost. 184 Chapter 7 Business Operations To reinforce your knowledge of the key terms in
this chapter, fill in the following blanks on a separate piece of paper with the appropriate word or
1. In a sole proprietorship and partnership, owners have ______ liability, whereas in a corporation, owners have ______ liability.
2. The stockholders of the firm choose the
3. Total cost equals ______ plus variable cost.
4. The additional cost of producing an additional
unit of a good is called ______.
5. The ______ states that if additional units of a
resource are added to a resource that is fixed in
supply, eventually the additional output produced will decrease.
6. Another term for average total cost is ______.
7. The entity that offers a franchise is called the
8. Ten percent of the face value of a bond is paid
out regularly, so 10 percent is the ______ of the
9. A(n) ______ for a firm is anything to which the
firm has a legal claim.
10. The tax that a person pays on his or her income
is called the ______ tax. Understanding the Main Ideas
Write answers to the following questions to review
the main ideas in this chapter.
1. List and explain two major differences between
a corporation and a partnership.
2. To what taxes are we referring when we say that
corporations are taxed twice?
3. Suppose a bond has a $10,000 face value and a
coupon rate of 8 percent. What is the dollar
amount of each annual coupon payment?
4. Specify the condition under which a firm will be
5. In setting 1, Mayang works for herself. She gets
to keep or sell everything she produces. In setting 2, Mayang works with five individuals.
Here, she gets to keep one-fifth of everything
she produces and of everything that everyone 07 (154-185) EMC Chap 07 6. 7.
8. 9. 10. 11/17/05 5:15 PM Page 185 else produces. In which setting is Mayang more
Working with Graphs
likely to shirk? Explain your answer.
In Exhibit 7-8, Q quantity of the good, MC
What is the relationship between a bondholder
marginal cost, and MR marginal revenue. Which
and the firm that issued the bond? What is the
relationship between a stockholder and the firm part or parts (a–c) illustrate the following?
that issued the stock?
In general, what is the difference
E X H I B I T 7-8
between fixed and variable costs?
Explain why a firm continues to
produce those units of a good
for which marginal revenue is
greater than marginal cost.
A firm will produce and sell
units of a good if marginal revenue...
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- Winter '14