------------------------------------------------- JAN 10 Section B Question 4 (b) Evaluate the argument that managers controlling large companies might follow policies which do not necessarily maximise the profits of the owners. 25 marks Kn Economic theory standardly assumes maximising behaviour on the part of economic agents. Consumers are assumed to maximise utility from consumption subject to their limited income, for example, while workers maximise income subject to the constraint of wanting leisure time. It is assumed that firms pursue profit maximisation, although a number of other maximising behaviours are possible in reality such as revenue maximisation or maximising the volume of sales, and these are sometimes thought likely to be pursued by the managers of large firms. It is also possible that managers do not adopt maximising behaviour at all, perhaps “satisficing” in response to shareholder discipline or that the policy of the firm is the result of complex interactions between various stakeholders.
How does Adam Smith's concept of the invisible hand explain why markets move toward equilibrium? Do market participants need to know about the invisible hand for it to function? Explain your answer. Answer: Adam Smith’s concept of the invisible hand explains why markets move toward equilibrium because it allows consumers to freely choose what to buy and producers to choose freely what to sell and ultimately how to product it. It is important for market participants to know how the invisible hand functions so they can all benefit by understanding how self-interest regulates the markets supply and demand.
ECON 1312 Homework Assignment # 2 Chapter 4 1. Why do we need a units-free measure of the responsiveness of the quantity demanded of a good or service to a change in its price? Answer: To measure or to compare the demand of the two unrelated goods or services. 2. Define the price elasticity of demand and show how it is calculated.
Caledonia Products Integrative Problem Fin/370 Caledonia Products Integrative Problem 1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the projectwhen analyzing whether to undertake the project? Caledonia should focus on free cash flow rather than accounting profits because the free cash flow is what the organization receives, which can then be reinvested. Through thoroughly analyzing the free cash flow, Caledonia would be able to determine the actual benefit or the cost involved. The organization should primarily focus on the incremental cash flow because the incremental cash flow holds a marginal benefit from the project.
As it determines the price of the product, and the price based on absorption costing does ensure that all costs are covered. Absorption can provide management with accurate information concerning product cost. The variable method is beneficial by providing an output that is closer to the cash flow of the company that may be short on cash flow. Variable costing aids in the analysis of cost-volume – profit by separating the variable and fixed in the income statement is another benefit. Which method would lead to the best decision when a competitor is submitting a lower bid for your product?
Running head: OPPORTUNITY COST, THE VALUE OF THE BEST 1 ALTERNATIVE FORGONE IN MAKING ANY CHOICE Opportunity Cost, the Value of the Best Alternative Forgone in Making any Choice Authors Note This paper was prepared for Microeconomics OPPORTUNITY COST, THE VALUE OF THE BEST 2 ALTERNATIVE FORGONE IN MAKING ANY CHOICE Abstract This paper explores the economic principles of cost opportunity. “Scarcity of resources is one of the more basic concepts of economics. Scarcity necessitates trade-offs, and trade-offs result in an opportunity cost. While the cost of a good or service often is thought of in monetary terms, the opportunity cost of a decision is based on what must be given up (the next best alternative) as a result of the decision. Any decision that involves a choice between two or more options has an opportunity cost.” Alternate decisions based on wants and needs are valued in a way to “every choice that has an opportunity cost and opportunity costs affect the choices people make.
When the government prevents prices from adjusting naturally to supply and demand, efficiency is improved in the economy. ANSWER: F TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 7 RANDOM: Y [cxviii]. A market economy cannot possibly produce a socially desirable outcome because individuals are motivated by their own selfish interests. ANSWER: F TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 7 RANDOM: Y [cxix]. While the invisible hand cannot guarantee efficiency, it is better at guaranteeing equity.
The theory is that jobs are lost when we are tempted by cheap foreign goods. The true effect of protectionism is it reduces consumer choice, raises prices of protected foreign products and domestic goods. This lowers worldwide production and may save some jobs in a specific industry within America but this comes at an expense of the total welfare of the country. Free trade would provide lower prices, higher-quality goods, economic growth, and competition. This policy eliminates competition and competition is needed for a balanced economy.
It can be measured or approximated rather, using GNP, Per capita income (PCI), income distribution measures, using the concepts of consumer’s surplus and producer’s surplus, etc. Estimation of welfare using GNP or PCI is considered, here, to be inefficient, because one cannot say welfare has improved when there is an increase in GNP or PCI. This is because the increase or change may be appropriated be some parties while others may even lose from their initial standard of living (i.e. the income gap between the rich and the poor may become wider while there is an increase in GNP or PCI, which will not reflect welfare improvement at the individual level). The other alternative is to approximate welfare using income distribution measures, such as poverty line, as a variable.
“Free Trade is not Fair Trade”. Discuss. Free Trade is the unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties and quotas (Investopedia, 2012). Fair Trade is a trade in conformity with a fair-trade agreement and a movement whose goal is to help producers in developing countries to get a fair price for their products so as to reduce poverty, provide for the ethical treatment of workers and farmers, and promote environmentally sustainable practices (Merriam-Webster, 2013). It can be argued that free trade is not fair trade.