Chapter 8 Flashcards
(23 cards)
What are the owners of a business considered in terms of income?
Residual income claimants
Owners receive returns after all other expenses are paid.
When is shirking least likely to occur?
When the earnings of workers are closely tied to their performance
This creates a direct incentive for workers to perform well.
What is the principal-agent problem?
Occurs when a purchaser lacks full information about the seller’s performance
It complicates the assessment of the seller’s effectiveness.
Approximately what fraction of all U.S. firms are corporations?
One-fourth
The majority are proprietorships.
What is a key difference between corporate and sole proprietorship business organizations?
Corporate owners face limited liability; proprietorship owners do not
This affects risk exposure for owners.
What are the three basic legal forms of business enterprise?
Proprietorships, partnerships, and corporations
Each form has unique legal and financial implications.
What does normal profit rate refer to?
Competitive rate of return
It is the minimum level of profit needed for a company to remain competitive.
What type of costs are associated with the use of resources owned by a firm?
Implicit costs
These are not directly paid out but represent opportunity costs.
What is an example of an implicit cost?
Opportunity cost of the equity capital invested by the owners
This cost is often omitted from accounting statements.
What is the normal rate of return on equity capital also known as?
The opportunity cost of capital
It reflects the returns expected from alternative investments.
What is the major difference between accounting profit and economic profit?
Accounting profit does not consider the opportunity cost of the firm’s equity capital
This generally leads to overstatement of economic profit.
What is the definition of economic profit?
Difference between a firm’s total revenues and total costs when all explicit and implicit costs are included
It reflects true profitability.
If most firms are earning a 5 percent rate of return on their assets, what is the economic profit rate for a business earning the same rate?
Zero
This indicates no economic profit above the normal return.
During the short-run production period, a firm can vary:
Only some of its factors of production
This contrasts with the long run where all factors can be adjusted.
What is the long run in economic terms?
A period sufficient to allow a firm to alter its plant size and capacity and all other factors of production
It is not defined by a specific time frame.
What does average fixed costs (AFC) equal?
Total fixed costs (TFC) divided by output (q)
This measures fixed costs per unit of output.
What is the marginal cost of producing the third unit of output based on given data?
$22
Calculated from changes in total variable cost.
Where do the minimum points of average variable cost and average total cost curves occur?
Where the marginal cost curve intersects those curves
This is critical for determining optimal output levels.
What is the marginal product of the third worker if two workers produce 22 units and three workers produce 30 units?
8 units
It measures the additional output generated by the third worker.
What would cause a firm’s cost curves to shift upward?
An increase in resource prices
This raises the overall cost of production.
At what output level would a firm’s per-unit cost of production be minimized according to Figure 21-1?
4
This is typically where average costs are lowest.
What is the firm’s approximate total cost when it produces two units based on Figure 21-1?
24
This indicates the total cost associated with producing that output level.
What is the firm’s total cost when it produces four units according to Figure 21-1?
60
This reflects the cost incurred for that production level.
