Managerial Economics Test 1

Define forms of explicit costs

1. monetary payments to owners of market-supplied resources. 2. Costs which incur cash outlay. 3. Payment for the factors of production. 4. Wages, Rent, Utilities, Cost of materials

What is the opportunity cost of using any resource?

What firm owners must give up to use the resource

_______________ profit best measures the performance of a firm because it considers all the costs to a firm of using resources.

accounting

What is total revenue minus accounting costs (explicit costs)

accounting profits

Examples of perfect competition

agricultural markets (wheat, eggs, Milk)...large number of relatively small firms..... undifferentiated product...no barriers to entry...and a price taking firm.

What are transaction costs?

costs of making a transaction other than the price of the good or service

What are characteristics of a market?

determine the economic environment in which the firm operats....number of firms competing with one another....whether products sold are differentiated or undifferentiated....whether entry into the market is easy or difficult

What type of costs are market-supplied resources?

explicit costs

monopolistic competition examples:

fast food restaurants, retail gas stations...large number of relatively small firms...differentiated products...no barriers to entry...price-setting firm

What cost is accounting profit equal to?

implicit costs

A market...

is any arrangement through which buyers and sellers exchange goods and services..and lowers the transaction costs of doing business.

In markets characterized by monopolistic competition, a ________ number of relatively small firms sell a ____________________________ product.

large, undifferentiated

What is price strictly determined by?

market forces of demand and supply

What are resources owned by others & hired,rented or leased

market supplied

The difference between accounting and economic profit is equal to the costs the firm incurs for using ______________________ resources.

owner supplied

A price taking firm cannot...

set price of its product.

A price setting firm can....

set the price of its product....has a degree of market power which means it has the ability to raise price without losing all sales

The value of a firm is ________________ the higher is the risk premium used to compute the firm's value.

smaller

What is total economic cost?

sum of opportunity costs of both market supplied resourcess and owner supplied resources.

Economic profits is...

the difference between total revenue and the opportunity cost of all the resources used in production.

The larger the risk...

the higher the risk premium and the lower the firm's value

The risk premium, r accounts for what?

the risk of not knowing future profits

When a firm earns zero economic profit, __________________________ equals total economic cost and ____________________ profit is positive.

total revenue , accounting

Markets reduce what type of costs?

transaction costs

Implicit costs are the opportunity cost of the owner's resources.

true

Define forms of implicit costs.

1. non monetary opportunity costs of using owner-supplied resources. 2. opportunity cost of owner's time spent managing or working for the firm. (forgone earnings) 3. opportunity cost of using land or capital owned by the firm. (foregone return).

A price-taking firm can exert no control over price because...

B. the firm's individual production is insignificant relative to production in the industry. C. many other firms produce a product that is nearly identical to its product.

definition of an oligopoly

automobiles, soft drinks, steel....few firms produce all or most of market output..either differentiated or undifferentiated...profits are interdependent....actions by any one firm will affect sales and profits of the other firms...price-setting

What are resources owned and used by the firm

owner-supplied

What is the value of a firm?

price for which it can be sold and equal to net preset value of expected future profit

Definition of a monopoly

public utilities (electricity water etc)...single firm...produces product with no close substitutes...protected by a barrier to entry....price-setting firm