Chapter 2: The Firms and its Goals 1. Why does a firm perform certain functions

Question

Chapter 2: The Firms and its Goals

1.      Why does a firm perform certain functions internally and others through the market? Provide instances of both functions in your work place.

2.      What is profit maximization hypothesis? Is this the goal of the firm you work for?

3.      What is the difference between optimizing and satisficing? What firms do in reality?

4.      How do we measure risk and how do we calculate stockholder’s wealth?

5.      How implicit costs and opportunity costs differentiate financial profits from economic profits?

6.      Explain how the Economic Value Added is the closest measure for economic profit?

Explanation / Answer

1.

Internal functions are like the pillars of a house at which the whole building is formed. Internal functions are necessary to develop a product which is to be sold in the market. In the course of developing a product internally, helps from the market are also necessary for acquiring factors of production, like land, labor, and capital.

Instances: Internal functions are production function, management function, research and development function, accounting function, etc. Market functions are financing activity, investment activity, and sales activity.

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