Econ 101 Exam 3

Firm's Goal

is to maximize profit

Dell uses outsourcing, that is, Dell buys the components of the computers it produces from other firms. This is an example of -firm coordination -a partnership - a command system -market coordination

market coordination

explicit costs

money is actually paid

implicit costs

no money is actually paid, but an opportunity is nonetheless foregone

If an industry were perfectly competitive, the four-firm concentration ratio would be close to ________ and the Herfindahl-Hirschman index would be close to ________.

0; 100

Performed more efficiently by a firm than by markets

1. Firms find a lower or eliminate transaction costs 2. Economies of Scale 3. economies of scope 4. econ. of team production.

market and industry correspondence

1. Markets are often narrower than industries 2. most firms make several products 3. firms switch from one market to another depending on profit opportunities

Three possibilities for a firm's economic profit

1. positive economic profit (greater than 0) 2. Normal Profit (equal to 0) 3. Economic loss (less than 0)

3. Oligopoly

A few firms in the industry. Product type is the same.

Resources Supplied by the Firm's Owner

A firm's owner might supply both entrepreneurship and labor

accouting profit

Profit equals total revenues minus total cost (Including the depreciation)

The herfindahl-hirschman index

Adds up the sum of the squares of the largest firms in the market HHI<1500 = Highly Comp. 1500<HHI<2,500 = Moderately Comp. HHI>2500 = Uncompetive

Firm

An institution that hires factors of production and organizes those factors to produce and sell goods and services.

Market Coordination

By adjusting prices ad making decisions of buyers and sellers of factors of production and components consistent.

geographical scope of the market

Concentration measures take a national view of the market. Many goods are sold in a national market, but some are sold in a regional market and some in a global one.

Firm Coordination

Firms hire labor, capital, and land, and by using a mixture of command systems and incentive systems organize and coordinate their activities to produce goods and services

Which of the following statements does NOT correctly characterize normal profit? - It is part of a firm's opportunity cost -It is equal to a firm's total revenue minus its opportunity cost - It is the average return for supplying entrepreneurial ability -None of these because all the statements correctly characterize normal profit.

It is the average return for supplying entrepreneurial ability

2. Monopolistic Competition

Many firms in the industry. Product type is similar but slightly different.

1. Perfect Competition

Many firms in the industry. Product type is the same.

The return that an entrepreneur can expect to earn on average is called -profit -normal profit -economic profit -accounting profit

Normal profit

4. Monopoly

Only one firm in the industry. Product type is the same.

Owner's Labor Services

Owner of a firm might supply labor but not take a wage. Opportunity cost of owner's labor is the wage income forgone by not taking the best alternative job

Bud opened a flower shop. He rented a building for $9,000 a year. To buy equipment for the store, he withdrew $10,000 from his savings account, which earned an annual interest rate of 3 percent. During the first year of operation, Bud paid $4,000 for utilities and $12,000 to his suppliers. The store's total annual revenue was $55,000. The market value of the store's equipment at the end of the year was $8,000. If Bud had not started this business, he would have continued to work as an employee at another flower shop for $30,000 a year. What was Bud's opportunity cost of running his business?

Solution: $9000+$10300+4000+12000+30000= $67,300

Heidi quit her job as a chef making $40,000 per year to start her own restaurant. The first year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the waitresses and hostess and $20,000 per year to buy food. What is Heidi's economic profit for the year?

Solution: Rev $100,000 - Exp ($50,000 + $20,000 + OC $40,000) = -$10,000

Heidi quit her job as a chef making $40,000 per year to start her own restaurant. The first year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the waitresses and hostess and $20,000 per year to buy food. What is Heidi's profit as measured by an accountant for the year?

Solution: Rev $100,000 - Exp ($50,000 + $20,000) = $30,000

Wanda takes $3,000 from her savings account that pays 5 percent interest per year and uses the funds to purchase a computer for $3,000 for her business. At the end of the year the computer is worth $2,000. Wanda pays an implicit rental rate of ________ a year.

Solution: 3000x5%=150 3000+150=3150 3150-2000=1150 $1150

barriers to entry and firm turnover

Some markets are highly concentrated but entry is easy and the turnover of firms is large. Also, a market with only a few firms might be competitive because of potential entry.

Resources Bought in the Market

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

resources owned by a firm

The cost of using capital owned by the firm is an opportunity cost of production because the firm could sell the capital that it owns and rent capital from another (aka implicit rent rate)

The Four-Firm concentration ratio

The four-firm concentration ratio equals the percentage of the value of sales accounted for by the four largest firms in the industry. Low concentration = high degree competition High concentration = absence of competition

forgone interest

The funds used to buy capital could have been used for some other purpose, and in their next best use, they would have earned interest

Accounting cash surplus

The result from total revenue minus total expense

opportunity cost

alternative foregone

normal profit

the cost of entrepreneurship and is an opportunity cost of production the profit except to receive on average.

economic depreciation

the fall in the market value of a firm's capital over a given period

opportunity cost of production

the value of the best alternative use of the resources that a firm uses in production

economic profit

to predict firm's decisions and the goal of these decisions is to maximize economic profit. Is equal to total revenue minus total cost (as for opportunity cost)