Question

True or false and why?

1. Firms should make, rather than buy, an input to avoid paying a profit margin to independent firms.

2. If a firm earns positive accounting profits, it has no incentive to exit its business.

3. Diminishing returns to labour imply decreasing returns to scale.

Answer 1

(A) FALSE:

The make decision is always demands an investment in plant, machineries and equipment. The investments can be categorized in to fixed cost and variable cost. The buy decision is associated with only variable cost. Expressing all factors in to money terms carries out a thorough and comparative analysis.

The make or buy decision refers to the problem encountered by an organization when deciding whether a product or service should be purchased from outside sources or manufactured internally. The majority of the make or buy decisions are made on the basis of price.

(B) TRUE :

You figure accounting profit by subtracting costs from revenues. If a business makes zero economic profit, it is only bringing in enough revenue to cover its costs. This business will not lose money, but it will not make money for the people who are engaged in the business.

thus if If a firm earns positive accounting profits, it has no incentive to exit its business.

(C) TRUE :

Diminishing returns to labour imply decreasing returns to scale. This occurs when an increase in all inputs (labour/capital) leads to a less than proportional increase in output.