A Business Selling Used Cars - Essay Example

? Principles of Microeconomics Word Count: 3000 d: July 24, Q1. Larry, Moe and Curly decided to start a business selling used cars together.Discuss the advantages and disadvantages of operating the business as a partnership and a corporation. Ans: When deciding to operate as a partnership Moe, Curly and Larry will have several advantages as well as disadvantages. Partnerships are comparatively easy and convenient to develop. Moreover, this type of organization increases the ability to raise larger sums of capital. Additionally, the profits generated by the business are directly earned by the partners after deduction of taxes. Various distinctive skills brought by the partners can be availed which assist in advancing the progressions of the business. Further, the numerous responsibilities of the business can be efficiently carried out by distributing them among partners. (Hobday I.) Apart from numerous benefits there are some disadvantages faced by the partners. In this type of organization the partners do not possess limited liability and are therefore liable for to repay debts owed by the business. Most importantly, the profits generated are to be shared among the partners, leading to minimized profits per partner. Additionally, disagreements are likely to occur in the business due to the existence of different decisions taken by all partners. Significantly, the life of partnership depends upon the life of its owners. This means that the retirement or death of any one of the partners results in the partnership being ended. The type of management is decentralized of this business which is ensures that the business is not maintained after it is sold off. (Alfred M., 1920) Corporation has numerous pros and cons. The most vital advantage of it is the limited liability enjoyed by the stockholders as the stockholders are a separate legal unit from the corporation which protects them from the liabilities and debts of the business. Additionally, the life of the corporation is independent of the life of its owners. Consequently, the business will keep on working even if any of its owners die or are retired. Moreover, in this type of business the retirement and insurance plans are easy to establish. In addition to this, it is very easy to raise large sums of capital for this type of business by selling stocks. This business involves centralized management which ensures that the business is maintained even after it is sold off. Further, the ownership of this type of organization is convenient and easy to either sell or transfer by selling or transferring stocks. (Alfred M., 1920) On the contrary, the significant disadvantage of corporation is the probability of taxes being charged twice. This means that the profits generated in a corporation are firstly taxed as income of the corporation and then secondly as income of the shareholder. The formation of corporation is very expensive and complex as several legal formalities are involved in the establishment of a corporation. (Alfred M., 1920) b. The three figure that with Moe's management experience, Larry's salesmanship and Curly's vast fortune, they have the makings for a successful business. Moe and Larry would run the day to day operations and manage the business, while Curly would supply the capital and stay out of management. Further, Curly wants to limit his personal liability to the amount he will invest in the company and does not really care what the tax consequences are. Based on these facts, which form of organization would be best for these guys and why? Ans: The best type of business organization for these guys can be limited partnership. This is due to the fact that Curly wishes to enjoy limited liability therefore, being limited partner he can invest large sums of capital into the business and thus protecting himself from paying debts of the business. While the other two partners, Moe and Larry being ordinary partners will invest in the business but will be liable to repay any debts owed by the business. Along with this they will be accountable for managing the day to day operations of the business. (Alfred M., 1920) Q2: As the CEO of Mudcat Corporation, you are concerned about the possibility of a hostile takeover of your corporation by a corporate raider. What steps or defensive measures might you put in place to defend Mudcat Corporation (and your position as CEO) against such a bid? Ans: In order to repel a takeover by the corporate raider and to protect the position of CEO the significant takeover defensive action that can be taken is referred to as a white knight. According to this strategy the shareholders of the company can agree on merging with a planned company that is profitable and can add value as well as increase the market capitalization of company. This merger will be helpful in discouraging the raider along with benefiting the company (Beckert W., 2010). Q3. Consider a firm which uses one fixed input and one variable input. (1 point) a. Explain how this firm's TC, TVC and TFC curves will be affected by a government tax on the fixed input. Ans: The government tax implied on the fixed input will result in the TFC increasing. As a result the curve of the TFC will shift upwards. As the TC is equal to the TFC plus TVC, therefore, the increment in the TFC will also increase the TC bringing an upward shift in the TC curve. However, there will be no effect on the TVC and it will remain the same as before. Eventually, it can be deduced that the profit of the firm will decline relatively (Beckert W., 2010). b. Explain how this firm's TC, TVC and TFC curves will be affected by a government tax on the variable input. Ans: The government tax levied on the variable input such as labour and material will greatly affect the TVC based on the amount of output produced by the firm. Thus, the TC of the firm will increase as the TC is equal to the TVC plus TFC. Most importantly, the TC will not increase according to the rate of tax but in accordance with the output of the firm which is dependent on the equilibrium point of output i.e. MC=MR. as MC will be affected the firm will attempt to decrease the amount of output produced in order to avoid facing losses. Consequently, the profits of the firm will decline. On the other hand, there will be no effect on the TFC (Beckert W., 2010). Q4. Can a firm's average variable costs be falling if they are less than the firm's marginal costs? Explain. Ans: If the average costs of a firm are less than its marginal costs then it does not mean that they are falling. This is because the marginal costs rise as the firm decides to produce extra units of output. The increase in the extra output of the firm ultimately leads to increase in the average costs of the firm due to the existence of law of diminishing returns as well as the diseconomies of scale. As a result, the average costs begin to rise along with the production of extra output (Beckert W., 2010). Q5: Explain why a firm must consider variable costs, rather than fixed costs, when deciding whether to produce. Ans 5: It is very important for a firm to consider variable costs before deciding whether to produce or not. This is because the variable costs vary according to the output of production or any activity while the fixed the costs do not vary according to the number of units produced and thus remain constant. Therefore, the firm need to recognize the variable costs in order to ensure that its costs are not exceeded than the limit it can bear profitably (Beckert W., 2010). Q6. Explain the circumstances under which a firm will produce output while incurring a short-run loss, and the circumstances under which it will shut down while incurring a short-run loss. Ans: A firm will keep on producing despite incurring a short-run loss in the circumstances when it is able to cover at least its variable costs even if its fixed costs are not covered. On the contrary, it would decide to cease its production altogether if the variable costs are not covered even if the fixed costs are covered. This is because it is essential for the firm to cover the variable costs as they depend upon the production while the fixed cost would exist even if the firm closes down (Menger C. 2007). Q7. Explain why a firm would maximize profits by producing output up to the point at which MR = MC. Ans: The point where the marginal revenues are equal to the marginal costs is referred to as the most profitable level of output. This cost-effective point is termed as the profit maximising stage of output or the equilibrium point. In the circumstances where the marginal revenue exceeds the marginal costs extra units would be produced by the firm in order to increase the profits. On the other hand, if the marginal costs would exceed the marginal revenue then the firm would attempt to minimize the production output as it would be suffering huge losses on these units of output. Therefore, in order to achieve desirable profits and make the firm accomplish success, the firm would try to approach the equilibrium point (Menger C. 2007). Q8. Explain the externality argument for government regulation of the environment. Describe a policy the government could adopt that would reduce pollution, but not require estimation of the optimal pollution tax. Ans: The governments of all the countries are very concerned about the societal affairs of their countries. The increased pollution produced by the industries is one such example of negative externalities. Governments can prevent these industries from producing a lot of pollution by the issuance of permits on which the government specifies the limit of pollution which the industries can produce. The industries attempting to cross the limit of producing pollution are liable to pay huge fines to the government. (Hobday I.) Q1. How is a "market" defined? Distinguish between an industry and a market. (1 point) Ans: The term market can be defined as a place where the buyers and sellers interact with each other. Both the terms, namely, market and industry are quite different from each other. Industry refers to the group of firms working worldwide in the same nature of business. These numerous firms produce several products which are then brought to a place to be sold to the consumers and the place where these products are sold is the market. (Alfred M., 1920) Q2. Suppose a market becomes more competitive over time. What happens to the elasticity of demand for a particular firm's good as its market becomes more competitive? Ans: When a particular product of a firm is highly demanded by the consumers in the market, the firm earns increased profits which encourage other firms to produce this highly demanded product. The consumers are on the other hand provided with a number of brands of the same product which enables them to choose whichever is suitable for them in accordance with the price and quality. Eventually, the demand for the product becomes absolutely elastic. Therefore, a slight change in the price of the product by the firm will cause a huge change in the demand of the product. (Hobday I.) Q3. Why the demand curves of monopolists and the monopolistically competitive firm’s downward sloping while the demand curves of competitive firms are horizontal? Ans: The firms in the monopolistic competition supply less output at higher prices as every firm represents smaller proportion of the whole market compared to the competitive firms. Furthermore, it produces distinctive products that allow the producers to charge higher prices as their products are unique and highly demanded. Consequently, the demand curves of the firms under monopolistically and monopolistic competition are downward sloping. While the firms under perfect competition operating in an opposite manner to the imperfect competitive firms have a horizontal curve as there are numerous competitors and the prices of the products are kept according to the forces of demand and supply. (Hobday I.) Q4. Why is a perfectly competitive firm's long-run supply curve the same as its marginal cost curve above the average total cost curve? Ans: The long-run supply curve of a firm is same as its marginal cost curve above the average total cost curve in the perfect competition because of the unwillingness of the firm to supply its products below the price which can cover the variable costs of the firm. (Hobday I.) Q5. Explain why monopolists do not achieve efficiency. (1 point) Ans: The monopolists existing in the imperfect competition are said to be very inefficient types of firms due to various reasons. Monopolists charge higher prices to the consumers for low output having low quality. Moreover, these firms do not care about the consumer wants and affordability as their products are unique and are always in demand. Therefore, they pay less attention on the necessity of the consumers and always produce what is profitable for them (Menger C. 2007). Q6. Another student advocates the forced break-up of large firms, such as Microsoft and AT&T, on the grounds that they have a lot of monopoly power, which they use to charge inefficiently high prices. According to Schumpeter, would breaking apart these gigantic firms guarantee consumers lower prices? Explain. (1 point) Ans: The breaking up of these gigantic firms into smaller firms will surely allow the consumers to enjoy lower prices as the imperfect competition will no longer exist. This is because when these firms will be broken into numerous smaller firms there will be several producers producing the same product which will ultimately give birth to perfect competition. All the competitors of the product will have to offer their products at the market price which is fairly lower than the prices charged by the monopolists. (Hobday I.) Q7. Explain why firms should not shut down in the short run until price falls below average variable cost. (2 points) Ans: In the short run in order to operate profitably the firm should ensure that it is covering its average variable costs which vary according to the output produced. The firm is not liable to cover its fixed costs which remain constant and exist even if the firm closes down. If the product is priced at an amount less than the ATC but more than the AVC, then the firm faces loss, but produces the quantity that makes marginal revenue and marginal cost equal. Conversely, if the price is less than the AVC, the firm decides to shut down its production in the short run, facing loss equal to the TFC. (Beckert W., 2010). Q8. Suppose your economics professor publicly states that she grades on a curve (i.e., the top 10% of the students get an A, the next 20% get a B, the next 40% get a C, the next 20% get a D, and the lowest 10% fail). The whole class could save itself a lot of work by agreeing privately not to study at all for the final exam and just letting the rankings thus far determine the final grades. Why might such an agreement be difficult to maintain and enforce? Which market structure, if any, is this situation most analogous to? (1 point) Ans: In this situation the students are the consumers while the teacher is seller. It refers to the perfect competition where the students have a choice to accept or reject the agreement. For this reason it is difficult to enforce the agreement as the rejection of some students will make the situation awkward. (Beckert W., 2010). Q9. Why do firms practice price discrimination? Is efficiency affected by price discrimination? If so, how? (1 point) Ans: Firms practice price discrimination to ensure that they are able to cater different category of people who can afford different prices. It is very unclear whether the price discrimination affects efficiency or not. At times the prices set are lower for some people while for some they are higher. When the price discrimination occurs to be efficient it leads to increased output whereas being inefficient it leads to decreased output and misallocation of products between customers along with the attempts to extract surplus form the high-valued customers rather than attempting to expand sales for the low-valued customers (Menger C. 2007). Q1. What is the relationship between the law of diminishing returns and the downward slope of the marginal physical product curve? (1 point) Ans: The marginal return curve and the marginal cost concept are significantly related to each other. This vital relationship assists in understanding the shape of the AVC, ATC and MC curves. The Marginal Physical Product (MPP) refers to the change in output resulting from the change in the variable input by each unit, keeping rest of the inputs fixed (Menger C. 2007). Q2. Farm workers= marginal revenue product (MRP) in Canada keeps falling even though they keep producing more output. Explain how this can happen. Ans: This may be as a result of firm making its employees redundant thus, decreasing its labour costs. Moreover, the decrease in the revenue may be due to the insecure feeling its remaining labour force may have of being made redundant in future leading to inefficiency in their work (Hobday I.). Q3. Why is the marginal labor cost identical to the wage rate in perfectly competitive labor markets? Ans: This is because of the fact that in the perfect market the marginal product multiplied by its output price equals the marginal revenue product. This equalisation point is referred to as the profit maximisation point where the firm faces no losses or profits. Thus, the marginal labour cost equals the wage rate (Menger C. 2007). Q4. Will imposing a minimum wage lead to a larger increase in the unemployment rate (a) if the labor supply curve is relatively price elastic or relatively price inelastic; and (b) if the labor demand curve is relatively price elastic or relatively price inelastic? Explain your answers in both cases. Ans (a): If the labour supply curve is relatively elastic, then the imposition of minimum wage would lead to increment in the supply of workers who would willingly work, thereby, increasing unemployment rate. Equally, if the curve is inelastic, then the labour supply would not increase much (Alfred M., 1920). Ans (b): If the labour demand curve is relatively inelastic, then the labour would be hired by the businesses at a faster rate according to their requirement, leading to good employment rates. While the elastic labour curve would discourage businesses from hiring labour resulting in low employment rates (Alfred M., 1920). Q5. What are efficiency wages and under what circumstances would a firm choose to pay efficiency wages? (1 point) Ans: Efficiency wages are the wages which are slightly higher than the market wages. These are paid to the employees to encourage them to work actively, inventory shrinkage, decreasing absenteeism and to increase worker morale. The fear of workers losing these high wages leads them to work even more efficiently increasing company’s profits. Furthermore, the employer is saved from the high turnover rates (Alfred M., 1920). Q6. How does a monopsonist decide how many workers to hire and what wage rate to pay? Ans: The monopsonist hires the labour in accordance with sales forecasts keeping in mind the need for labour to produce output. Conversely, the wage rate is paid in accordance with the break even of the firm and his qualification (Hobday I.) Q7: What is the difference between a closed shop and a union shop? Which of these would unions prefer, and why? Which would the management of a business firm prefer, and why? The closed shop refers to a shop wherein the persons have to join a specific union as a prerequisite to employment remaining union members till the period of their employment. Whereas in the union shop, the workers employed should become union members in a specified time period if they wish to continue employment. The unions would prefer the union shop as it gives them a variety of unions to choose from whichever suits them while the management would prefer the closed shop as it is easier for them to deal with only one trade union (Alfred M., 1920). Q8. Explain why a monopsonist's marginal labour cost curve must lie above its labour supply curve. It should always do so because the addition of a labour increases the cost of the extra labour employed by the firm relative to the costs of labour already employed. Consequently, increasing the total cost of the firm by a greater wage. (Beckert W., 2010). Q9. Explain how breaking up the monopsony that baseball team owners had in the players' market could raise the incomes of the players. (1 point) Ans: Before breaking up of monopsony the players could have been employed only by one team owner. After the breaking up of monopsony, the choices of the players would increase. Now, there will be more team owners who will make efforts to attract players to play for their own respective teams. They would do so by offering higher salaries and benefits. Thus, Leading to increased choice for the players and increasing their salaries. (Hobday I.) Q10. Why do many less-developed economies have greater income inequality than more-developed economies? What is the key to greater income equality in less-developed countries? Explain. Ans: There are several reasons that lead to inequality of income in less developed economies. Firstly, due to inefficient administration people at the helm of affairs are not aware about the channelling of resources. Moreover, corruption in developing countries is a menace. Furthermore, resources such as education and health care are only provided to those who can afford them. (Beckert W., 2010). References Alfred M. “Principles of Economics”. ed. 8. London. Macmillan and Co., Ltd. (1920). Accessed from www.econlib.org. Beckert W. “A Micro-Econometric Approach to Geographic Market Definition in Local Retail Markets: Demand Side Considerations”. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 4, 2010-29. (n.p). (2010). Hobday I. “Microeconomics”. Economics. ed. 1. (n.p). (n.d) Menger C. “Principles of Economics”. (2007). Accessed from www.mises.org Read More