Assume That a Firm Finds That Its Profits Will Be

question 26

Essay

Assume that a firm finds that its profits will be maximized (or losses minimized) when it produces $30 worth of product X.Each of these techniques shown in the following table will produce exactly $30 worth of X. (a) Which method is most efficient? Why?
(b) Given the above prices, will the firm adopt a new method, which involves 10 units of land, 3 of labour, 2 of capital, and 2 of entrepreneurial ability?
(c) Suppose the price of capital falls to $1 without any other prices changing.Which of the methods will the firm now choose? Why?

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Definitions:

Inventory Turnover Ratio

The inventory turnover ratio is a measure of how often a company sells and replaces its stock of goods within a certain period, indicating the efficiency of inventory management.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including the cost of materials and labor.

Average Inventory

An accounting metric that estimates the value or the number of a particular good that a company has in stock over a specific period.

Return on Common Shareholders' Equity Ratio

A financial metric that measures a company's profitability by showing how much profit it generates with the money shareholders have invested, specifically focusing on common stockholders.