Unformatted text preview: Firm 1 now has
only 11 customers and firm 2 has 15. A Pattern Develops
If you look at what has been happening in
parts (a) through (c) of the exhibit, you will Defining Terms
a. sole proprietorship
d. partnership Reviewing Facts and
2. Under what condition
will individuals form a
3. The owners of which
types of business organizations face unlimited
liability? notice a pattern. The two firms located on
the opposite ends of the road initially, but
then the competition for customers moved
them closer toward each other. The competition for customers continues. In the end, it
is likely that the two firms will be located
next to each other, as shown in part (d). At
this point, firm 1 will have customers A–M
(13 customers) and firm 2 will have customers N–Z (13 customers)—exactly the
number of customers each firm started out
with in part (a).
What is our conclusion? Simply that similar firms have an incentive to locate near
each other. What drives them to this position? The competition for customers. In the Real World?
Does our theory hold up in the real world?
Often, you will notice gas stations located near
each other (perhaps, four at an intersection).
In many towns, car dealerships are located in
the same vicinity, often next to each other.
Also, in many towns you will find a certain
area of town where many restaurants locate,
right next to each other. If you look at major
financial firms, you will notice that many of
them are headquartered in New York City. In
fact, not only are they in the same city, but in
the same neighborhood of the same city (near
the lower end of Manhattan). 4. Which type of business
organization accounts for
the largest share of total
5. Why would a company
make a boss (monitor) a
residual claimant of the
firm? Critical Thinking
6. Do you think the initial
fee for all franchises
King, Play It Again
Sports, and so on) is the
same? Why or why not? 7. Do you agree or disagree
with Milton Friedman’s
position on the ethical
and social responsibility
of business? Explain your
answer. Applying Economic
8. If the face value of a
bond is $10,000 and the
coupon rate is 5 percent,
what is the annual payment to the bondholder? Section 1 About Business Firms 171 07 (154-185) EMC Chap 07 11/17/05 5:14 PM Page 172 Focus Questions
What are fixed costs?
What are variable costs?
What do total costs equal?
How do we compute fixed cost, variable
cost, average total cost, and marginal cost? Costs Key Terms
average total cost
marginal cost Fixed and Variable Costs fixed cost
A cost, or expense, that
is the same no matter
how many units of a
good are produced.
A cost, or expense, that
changes with the number of units of a good
The sum of fixed costs
plus variable costs. All businesses have costs, but not all costs
are the same. For example, suppose Maria
Torres owns a business that produces a certain kind of toy. In her business, Torres
needs a plant, or fac...
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This document was uploaded on 01/16/2014.
- Winter '14