And what price should we charge marginal revenue is

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Unformatted text preview: are produced. 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 phrase. 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 bond. 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 formed. 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 MC produce those units of a good MC MR MR for which marginal revenue is greater than marginal cost. $ MC MR A firm will produce and sell units of a good if marginal revenue...
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