2.2: Profit maximising behaviour and 2.3: Cost minimisation Flashcards
(25 cards)
What other factors may managers focus on maximising rather than profits? (3)
Revenue max/growth
Dividend max
ST profit max (for bonuses)
2 implications of non-profit maximising objectives?
Investors may stop investing
Firm may shut down
Define marginal revenue and marginal cost?
MR = change in revenue resulting from a 1 unit increase in output MC = change in cost resulting from producing one additional unit of output
At what point is π(q) maximised?
at q*, where slope of C(q)=slope of R(q)
ie. MC=MR
see graph in notes
Algebraically, how do you check you have MAXimised profit?
Find the 2nd derivative, check it is less than 0 tf found max point not min
Difference between economic and accounting cost?
The Economic cost is the monetary value of all resources employed in the course of business. It also refers to the opportunity cost of the inputs used in the enterprise. … Accounting costs, on the other hand, are based on explicit costs incurred by the business (out-of-pocket expenses, deprecation etc.)
What type of variables are output, input and profit typically?
Flow
What is an isoprofit line?
A line showing all production plans that give the same level of profit (draw diagram in notes)
In short term profit maximisation analysis, explain the basis points? (2)
Assume output and input prices are constant
Assume two inputs, with one of them being fixed (SR)
Draw diagram for ST profit max showing optimal x1*?
Now (see notes)
Shows that slopes of PF and isoquant are equal at profit max point
What is p.MP1?
Marginal Revenue Product of x1:
The rate at which revenue changes when the amount of input x1 used changes
If MRP of input x1 is greater than the cost of input x1, what does this mean?
Firm can increase profit by increasing input x1 (and vice versa)
See
All of the SR profit max analysis
SR profit max: What happens if the price of the output increases? (2+2)
From isoprofit line:
1) Decease in steepness of isoprofit line slope
2) increase in vertical intercept of slope
Results:
1) Increase in firms output (UWS supply curve)
2) Increase in level of firm’s variable input (x1) (demand for x1 shifts outward)
See
Page 2 of micro topic 2, right at the bottom (remuneration rate bit)
Explain long-term profit maximisation for firms?
In LR, no fixed costs tf both x1 and x2 are variable
Tf max problem is:
π=py-w1x1-w2x2
and the condition for SR π maximisation must be applied across all inputs:
pMP1=w1 and pMP2=w2
Define opportunity cost?
What could be obtained by using a resource/input in its best alternative use
Labour costs of accountants vs economists?
Same; use hrly wage
Capital costs of accountants vs economists?
Accountants use historical price of capital and apply depreciation rule to calculate current costs
Economists use cost of capital as the price someone else would pay for it (eg. rental costs)
Entrepreneurial services costs of accountants vs economists?
A: believe firm owner is entitled to all profits
E: consider opportunity costs of time and funds that owners devote to the running of their firms
See
costs: assumptions and notations 2.3
When does the minimum cost of producing an output q0 occur?
At the tangency between the isoquant and the isocost
See notes
Solving cost minimisation using lagrangean!!!
How do you get demand functions for inputs when cost minimising?
By calculating for a given level of output
