ECON B-251 EXAM 3 QUESTIONS WITH CORRECT ANSWERS

The Firm's Goal CORRECT ANSWER - To maximize profit - If the firm fails to do this it is either eliminated or bought out Explicit Cost CORRECT ANSWER Costs paid directly in money Implicit Costs CORRECT ANSWER 1. Uses its own capital. •Economic depreciation is the change in the market value of capital over a given period. •Interest forgone is the return on the funds used to acquire the capital. 2. Uses its owners' time or financial resources. Normal Profit CORRECT ANSWER The return to entrepreneurship is profit and the return that an entrepreneur can expect to receive on the average Economic Profit CORRECT ANSWER total revenue minus total cost, To maximize profit, a firm must make five decisions: CORRECT ANSWER What goods and services to produce and in what quantities 2. How to produce—the production technology to use 3. How to organize and compensate its managers and workers 4. How to market and price its products 5. What to produce itself and what to buy from other firms Firm's Constraints CORRECT ANSWER Technology, Information, and Market Commands System CORRECT ANSWER A Managerial hierarchy - Commands pass downwards through the hierarchy (feedback) passes upward - Use when it's easy to monitor (perfect information) Incentive System CORRECT ANSWER Market-like mechanisms to induce workers to perform in ways that maximize the firm's profit. - Use when it's hard to monitor (imperfect information Perfect (full) information CORRECT ANSWER Occurs when all relevant information is known and assumed in all perfectly competitive markets. Imperfect Information CORRECT ANSWER Happens when all relevant information is not known. Symmetric Information CORRECT ANSWER Occurs when both the seller and the buyer are well informed about the goods and services and prices in the market.