(a) What actions are under the firm’s control? In order to reach its profit-maximizing goal, the firm must answer: Supernormal profit: positive economic profit, generated when accounting profit exceeds normal profit.Ī firm may generate positive accounting profit even as it generates negative economic profit.Normal profit: the profit that the firm would accrue if its assets were used in the next best alternative.Total costs include both explicit costs and the implicit costs of not generating the profit available in the next best alternative. Economic profit: revenues less total costs.Accounting profit: revenues less explicit costs.The demand for labor is a derived demand, since the firm hires labor, buys capital, and purchases inputs with the derivative goal of maximizing profits. (c) The constraints restricting the firm’s actions are (b) The firm’s goal is to maximize its profits (Assumption 3.1). The neoclassical microeconomic framework asserts that
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