ECON 1000 Chapter Notes - Chapter 10: Opportunity Cost, W. M. Keck Observatory

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The fi(cid:396)(cid:373)"s goal: a firm is an institution that hires factors of production and organizes them to produce and sell goods and services, a fi(cid:396)(cid:373)"s goal is to (cid:373)a(cid:454)i(cid:373)ize p(cid:396)ofit. If firms fails to maximize its profit, the firm is either eliminated or taken over by another firm that seeks to maximize profit. A fi(cid:396)(cid:373)"s oppo(cid:396)tu(cid:374)it(cid:455) (cid:272)ost of p(cid:396)odu(cid:272)tio(cid:374) is the (cid:448)alue of the (cid:271)est alternative use of the resources that a firm uses in production. A fi(cid:396)(cid:373)"s oppo(cid:396)tu(cid:374)it(cid:455) (cid:272)ost of p(cid:396)odu(cid:272)tio(cid:374) is the su(cid:373) of the (cid:272)ost of usi(cid:374)g (cid:396)esou(cid:396)(cid:272)es: bought in the market, owned by the firm, supplied (cid:271)(cid:455) the fi(cid:396)(cid:373)"s o(cid:449)(cid:374)e(cid:396) The amount spent by a firm on resources bought in the market is an opportunity cost of production because the firm could have bought different resources to produce some other good or service. If the firm owns capital (machinery) and uses it to produce its output, then the firm incurs an opportunity cost.

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You may be aware that there are three types of profit: accounting profit, economic profit, and normal profit. The difference between the total revenue and the sum of the explicit and implicit costs of an organization results in economic profit. It is commonly assumed that every firm's goal is to maximize its profit, and the economic theory of business is built on this underlying assumption. Address the following in detail: Describe the economic principles that company executives should consider when developing a strategy or strategies that will maximize profits while minimizing incentives for competitors to develop competing products. Explain why each of these economic principles is important to the company's strategy. Recommend and justify a strategy that you believe will maximize profits while minimizing incentives for increased competition.

crimsonhedgehog165

You may be aware that there are three types of profit: accounting profit, economic profit, and normal profit. The difference between the total revenue and the sum of the explicit and implicit costs of an organization results in economic profit. It is commonly assumed that every firm's goal is to maximize its profit, and the economic theory of business is built on this underlying assumption. Address the following in detail: Describe the economic principles that company executives should consider when developing a strategy or strategies that will maximize profits while minimizing incentives for competitors to develop competing products. Explain why each of these economic principles is important to the company's strategy. Recommend and justify a strategy that you believe will maximize profits while minimizing incentives for increased competition.

blackbat76

1-7 True or False

1) In the short run, a perfectly competitive firm can earn positive, zero, or negative profit depending on the market price of the firm's output.

2)In the model of the perfectly competitive firm, the firm's fixed costs are equal to its implicit costs of production.

3)Assume the market price is greater than average total cost at the perfectly competitive firm's profit-maximizing level of output. In this case, the firm is earning positive economic profits, which act as an incentive for new firms to enter the market.

4)Assume that at the current level of output, price equals marginal revenue, but is less than average total cost. So long as price is greater than average variable cost, the firm should continue to operate in the short run to minimize its losses.

5)The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time.

6)Barriers to entry serve to limit the number of firms that operate in a particular market and, as 11) such, reduce the amount of total profit earned in the market.

7)In the prisoner's dilemma game, each player's dominant strategy is also the Nash equilibrium.

14-17 Multiple Choice

14) Marginal revenue is equal to:
A) the change in P x Q due to a one unit change in output. B) the change in quantity divided by the change in price.

C) the change in price divided by the change in output. D) price, but only if the firm is a price searcher.

15) In order to maximize its profits, a price-taking firm should produce the level of output at which:

A) marginal revenue = marginal cost. B) total revenue = total cost.

C) variable revenue = variable cost. D) average revenue = average cost.

16) Assume that there is an improvement in the technology used by firms in a perfectly competitive industry that is initially in long-run equilibrium. In the short run this would cause:

A) cannot be determined with the information given. B) no change in the firm's economic profit.
C) a decrease in the firm's economic profit. D) an increase in the firm's economic profit.

17) Assume at the firm's profit-maximizing level of output P = AVC. In this case, the firm will be:

A) incurring an economic loss. B) earning a positive economic profit.

C) earning economic profit = 0. D) breaking even.

ECON 1000 Chapter Notes - Chapter 10: Opportunity Cost, W. M. Keck Observatory

ECON 1000 Full Course Notes

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