Question

1. Explain the theory of a firm.

2. Describe the objective of the firm as presented in standard economics: profit maximisation.

3. Define opportunity cost, explicit and implicit cost.

4. Distinguish accounting and economic profit.

5. Differentiate cost minimisation and profit maximisation and compare and

contrast the complexity of the two problems.

6. Analyse the link between a firm’s production process and its total costs.

7. Distinguish the relationship between short-run and long-run costs.

8. Explain the meaning of competition.

9. Describe the profit maximisation behaviour of competitive firms.

10. Describe short-run production function, total product, average product, and marginal product and explain and illustrate how they are related to each other.

12. Explain the concepts of increasing, diminishing, and negative marginal returns and explain the law of diminishing marginal returns.

13. Describe total variable cost, total fixed cost, total cost, average variable cost, average fixed cost, average total cost, and marginal cost and explain and illustrate how they are related to each other.

14. Explain and illustrate how the product and cost curves are related to each other and to determine in what ranges on these curves marginal returns are increasing, diminishing, or negative.

15. Apply the marginal decision rule to explain how a firm chooses its mix of factors of production in the long run.

16. Define the long-run average cost curve and explain how it relates to economies and diseconomies or scale.

17. Explain the characteristics of perfect competition.

18. Identify output determination in the short run.

19. Discuss marginal revenue, price and demand for the firm.

20. Differentiate the economic and accounting concepts of profit and loss.

21. Identify the basic assumptions of the model of perfect competition and explain why they imply price-taking behaviour.

Answer 1

1. The theory of firms involves the production process of the firm and the associated costs incurred in the production. The theory of firms takes into account the concept of cost minimization or the profit maximization. There are different market structures namely

1. Perfect competition
2. Monopoly
3. Monopolistic competition
4. Oligopoly.

2. Under profit maximization the firm tends to maximize the profit and chooses the level of output as suggested by the profit maximization exercise. The firm solves or maximizes

Profit = P(Q)*Q – C(Q)

3.

Opportunity cost is the cost of the best alternative that could have been choosen. For example you devote time to your own business instead of this you could have work for some firm which pays you an income. This lost income is the opportunity cost.

Explicit cost involves the cost incurred in the production process like the wages paid to workers, rent of capital, cost of raw materials etc.

Implicit cost is same as the opportunity cost of using the factors of production it owns.

4. The accounting profit is one which does not include opportunity cost and the conomic profit is one which incudes opportunity cost.

*For solution to other parts please post as a new question. We are supposed to solve only these many problems.