Chapter 7: Business Operations

Transcription

1 Chapter 7: Business Operations 1. UNLIMITED In a sole proprietorship and partnership, owners have this kind of liability. 2. LIMITED In a corporation, owners have this kind of liability. 3. FIXED COST Total cost equals this plus variable cost. 4. MARGINAL COST The additional cost of producing an additional unit of a good. 5. LAW OF DIMINISHING MARGINAL RETURNS States that if additional units of a resource are added to a resource that is in fixed supply, eventually the additional output produced will be decreased. 6. PER-UNIT COST Another term for average total cost. 7. FRANCHISER The entity that offers a franchise. 8. COUPON RATE If 10% of the face value of a bond is paid out regularly, then 10 % is this. 9. ASSET Anything to which a firm has legal claim. 10. The owners of a CORPORATION are its stockholders. (163) 11. Rent is an example of a FIXED cost. (172) 12. Law firms and medical offices are examples of PARTNERSHIPS. (162) 13. Suppose a bond has a $10,000 face value and a coupon rate of 8%. What is the dollar amount of each annual coupon payment? $800 (calculation: $10,000 x 0.08) 14. A firm will increase production when marginal cost is LESS (less or greater) than marginal revenue. (177) 15. A strawberry farmer who has used more and more nutrients on her fixed plot of land, but doesn t see an increase in her strawberry crop, is experiencing the law of DIMINISHING MARGINAL RETURNS. (180) 16. There are about 18.3 million sole proprietorship firms in the U.S. and 2.3 million partnerships, but corporations account for about 83% of all business receipts. 17. Calculate the marginal cost for the additional unit in each of the following cases (TC = total cost and Q = quantity of output) A) Q = 100, TC = $4,322 Q = 101, TC = $4,376 MC = $54 B) Q = 210, TC = $5,687 Q = 211, TC = $5,699 MC = $12 C) Q = 547, TC = $1,009 Q = 548, TC = $10,123 MC = $114

2 18. Calculate the average total cost in each of the following cases (TC = total cost and Q = quantity of output) A) Q = 120, TC = $3,400 ATC = $28.33 B) Q = 200, TC = $4,560 ATC = $22.80 C) Q = 150, TC = $1,500 ATC = $ The marginal BENEFIT of playing chess (in money terms) is listed below. The marginal COST of playing chess (in money terms) is always $5. What is the right number of games of chess to play? Three games (by the fourth game, marginal costs are greater than marginal benefits so you would not want to play this game) 1 st Game = $10 2 nd Game = $8 3 rd Game = $6 4 th Game = $4 5 th Game = $2 6 th Game = $0 ******************************************** Chapter 8: Competition and Markets 20. PRICE TAKER A seller that can sell all its output at the equilibrium price but not at 1 penny higher. 21. MONOPOLY The conditions that characterize this market include one seller, no close substitutes for the good the seller sells, and high barriers to entry. 22. SEARCHER A price can sell some of its output at various prices, although it sells less output at higher prices. 23. GOVERNMENT MONOPOLY A monopoly that is legally protected from competition. 24. NATURAL MONOPOLY A company that ends up being the only seller of a good because of its low average total cost. 25. MONOPOLISTIC COMPETITION The conditions that characterize this market include many buyers and sellers, firms that sell slightly differentiated products, and easy entry into and exit from the market. 26. OLIGOPOLY The conditions that characterize this market include few sellers, firms that produce and sell either identical or slightly differentiated products, and significant barriers to entry. 27. CARTEL An agreement among firms that specifies that they will act in a coordinated way to reduce the competition between them. 28. PUBLIC FRANCHISE A right granted to a firm by the government that permits the firm to provide a particular good or service and excludes all others from doing so.

3 29. How can low average total cost (per-unit costs) act as a barrier to entry? Per-unit profit is the difference between price and average total cost. If one firm has a lower average total cost than others, it can lower its price and still make a profit which other firms may not be able to do thereby creating a barrier to entry. 30. Firms in a monopolistic competitive market produce slightly different products. In what ways might these products differ? They can be different in terms of features, location, proximity, accompanying services, and so on. 31. Why are most monopolies illegal in the United States? (199) A capitalist economy is based on the competition. Antitrust laws are designed to ensure fair competition and integrity in the marketplace. 32. What is the difference between government and natural monopolies? What are some examples of each? (199) Government monopolies are legal barriers to entry set by the government. They include such this as public franchises for exclusive rights to provide a service to a geographic area. They might also be in the form of patents and copyrights. Natural monopolies occur because a company can produce at a lower average total cost than all other companies. Chapter 9: Labor, Employment and Wages 33. MINIMUM WAGE LAW Sets a level below which wages rates are not allowed to fall. 34. CLOSED SHOP An organization that hires only union members. 35. STRIKE A tactic used by unions to put pressure on employers by having workers refuse to work. 36. WAGE RATE The price of labor. 37. UNION SHOP An organization that requires employees to join the union within a certain period of time after being hired. 38. TAFT-HARTLEY ACT This law, passed in 1947, gave the states the right to pass right-to-work laws. 39. An economist would explain the huge salaries commanded by entertainers and professional athletes as the result of SUPPLY and DEMAND.

4 40. If there were a sharp increase in demand for Hershey s chocolate bars, we might expect a(n) INCREASE (increase or decrease) in demand for workers. 41. Three jobs, A, B, and C, all pay the same salary, $70,000 a year. What additional information do you need to decide which of the three jobs is best for you? You need to know the dollar value of the nonmoney benefits in each job. The best job for you is the job with the highest OVERALL benefits, as measured by you. 42. If minimum wage is set ABOVE (above, below or equal to) the equilibrium wage rate, it will result in employers being willing to hire fewer workers. (233) 43. A REAL wage is a person s wage rate in terms of what it buys. (234) 44. Unions NEGOTIATE agreements with employers for the benefit of their members and assist members in receiving higher wages and BENEFITS. (238, 241) 45. One of the key elements in the productivity of workers is their EDUCATION and TRAINING. (231) 46. Government REGULATIONS protect workers against occupational injuries and illnesses, specify minimum standards for potentially unsafe products and increase costs to taxpayers. (244) 47. A SHORTAGE of workers exists when the demand for workers exceeds the supply. (225) 48. Typically, union members earn more than nonunion workers with similar skills by 10 to 15 percent. (240) Chapter 10: Money, Banking and the Federal Reserve System 49. BARTER ECONOMY An economy in which trades are made in terms of goods and services instead of money. 50. MEDIUM OF EXCHANGE Anything that is generally accepted in exchange for goods and services. 51. FRACTIONAL RESERVE BANKING A banking arrangement in which banks hold only a fraction of their deposits and lend out the remainder. 52. M1 MONEY SUPPLY Composed of currency, checking accounts, and traveler s checks. 53. OPEN MARKET OPERATIONS When the Fed buys or sells government securities (bonds). 54. BOARD OF GOVERNORS The governing body of the Federal Reserve System. 55. EXCESS RESERVES Total reserves minus required reserves.

5 56. REQUIRED RESERVES The minimum amount of reserves a bank must hold against its checking account deposits, as mandated by the Fed. 57. FEDERAL FUNDS RATE The interest rate that one bank charges another bank for a loan. 58. DISCOUNT RATE The interest rate that the Fed charges a bank for a loan. 59. TRANSACTION costs include the time and effort expended to make the trade. (256) 60. When you write a check to pay for clothes at the local mall, you are using money as a MEDIUM of EXCHANGE. (260) 61. The money creation process takes place when banks loan out their EXCESS reserves. (276, 277) 62. If a bank receives a new deposit of $100 and the reserve requirement is 15 percent, the bank must increase REQUIRED reserves by $15. (280) 63. The job of the U.S. Treasury is to collect TAXES and borrow the money needed to run the GOVERNMENT. (281) 64. An open market purchase by the Fed will INCREASE (increase or decrease) the money supply. (282) 65. When a bank makes a new loan of $1,000 then the money supply INCREASES (increases or decreases) by $1,000 (how much?). 66. A tiny economy has the following money in circulation: 25 dimes, 10 nickels, 100 one-dollar bills, 200 five-dollar bills, and 40 twenty-dollar bills. In addition, traveler s checks equal $500, balances in checking accounts, equal $1,900, and balances in savings accounts equal $2,200. What is the M1 money supply? $4, The Fed conducts an open market purchase and increases the reserves of bank A by $2 million. The reserve requirement is 20%. By how much does the money supply increase? $10 MILLION Chapter 11: Measuring Economic Performance 68. A good measure of a nation s economic health is the total OUTPUT of the economy. 69. Chocolate chips made by the Nestlé Company are FINAL goods when your friend Mark buys them to try the recipe on the back. 70. Steel purchased by General Motors would be an example of a(n) INTERMEDIATE good. 71. ILLEGAL goods and services are not counted in GDP because they are not capable of being counted. 72. If you earn cash every week babysitting, it will be excluded from GDP since it isn t reported on TAX forms.

6 73. NONMARKET goods and services include cooking for your own family and balancing your checkbook and paying family bills. 74. When Canadian citizens purchase American-made DVDs, then for the U.S. economy export spending INCREASES (increases or decreases). 75. QUALITY of LIFE in a country cannot be equated with a high GDP alone. 76. The components of GDP (abbreviation) include consumption, investment, government purchases, and export spending minus import spending. (295) 77. The CONSUMER PRICE index is calculated using thousands of households. (302) 78. Which spending component of GDP is the largest? CONSUMER (exhibit on 295) 79. What happens to GDP if import spending rises and no other spending component of GDP changes? GDP FALLS 80. Using the following data, compute the GDP: $6 TRILLION Consumption = $3.2 trillion Government Purchases = $1.2 trillion Export Spending = $1.9 trillion Import Spending = $1.8 trillion Investment = $1.5 trillion 81. The CPI is 143 in year 1 and 132 in year 2. By what percentage have prices fallen? 7.69% 82. Use the following data to compute the unemployment rate: 5% Total population = 145 million Noninstitutional adult civilian population = 135 million Persons not in the labor force = 10 million Unemployed persons = 7 million Chapter 12: Economic Changes and Cycles 83. An increase in the average level of prices is called INFLATION. 84. Money s value INCREASES (increases or decreases) when the price level falls. 85. Inflation generally reduces PURCHASING power and reduces the VALUE of money. 86. During a recession, consumer spending FALLS (rises or falls). 87. Inflation can be measured by finding the percentage change in the GENERAL level of prices. 88. When foreign countries economies are doing poorly, then U.S. exports DECREASE (increase or decrease). 89. The Rule of 72 is a way to determine the time required for any variable to DOUBLE. 90. The BUSINESS CYCLE is caused by politics, business investment and changes in the money supply.

7 91. When businesses decrease production and investment, then firms FIRE (hire or fire) workers. 92. An economy can produce more if there are advances in TECHNOLOGY, an increase in CAPITAL investment and an increase in LABOR. 93. Countries with few natural resources can still experience GROWTH. 94. How does inflation reduce the value or purchasing power of money? During inflation, money cannot transfer as many goods from other people to you. 95. Explain how inflation affects both individuals on fixed incomes and savers. Inflation lowers the standard of living of people on fixed incomes by reducing their purchasing power. They can transfer fewer goods and services from others to themselves. Inflation hurts savers by lowering the purchasing power of the dollars they are saving. Chapter 13: Fiscal and Monetary Policy 96. FISCAL policy addresses government s changes in government spending or taxation. 97. The objective of fiscal policy is to INCREASE (increase or decrease) total spending and reduce UNEMPLOYMENT. 98. The global impact of China s participation in the world market has DECREASED (increased or decreased) the possibility of inflation in the United States. 99. The Fed would use EXPANSIONARY policy when the economy is experiencing unemployment Contractionary policy by the Fed DECREASES (increases or decreases) the money supply The concept that small changes can be catalysts for huge changes is known as the BUTTERFLY effect Stagflation last appeared in the United States in the 1970s (which decade) If the government purchases more goods and services, it will affect the amount CONSUMERS have to spend, the UNEMPLOYMENT rate and the production/output of BUSINESS firms If the money supply increases, output of goods and services RISES (rises or falls) before prices rise.

8 Chapter 14: Taxes and Spending 105. The largest source of tax revenues for the federal government comes from PERSONAL INCOME tax The federal budget process begins when a budget is prepared by THE PRESIDENT Corporate income tax is paid on the corporation s PROFITS When people pay at a higher tax rate as their income levels rise, it is described as a PROGRESSIVE income tax Interest on the national debt is paid by the FEDERAL government The federal government spends most of its tax revenue on NATIONAL DEFENSE and HOMELAND SECURITY A BALANCED federal budget occurs when tax revenues equal government expenditures. Adam Smith would have approved of this and it was an expectation until the time of the Great Depression The hospital and medical insurance for Social Security beneficiaries is called MEDICARE A regressive tax impacts POOR people more than RICH people Spending on EDUCATION usually takes the biggest slice of the budget of a state The gasoline tax is an example of the BENEFITS-RECEIVED principle 116. Property tax is a major source of revenue for STATE and LOCAL government When government EXPENDITURES exceed tax REVENUES, the difference is a budget deficit. *********************************************************************************************************** Chapter 16: Stocks and Bonds 118. FINANCIAL MARKETS help to bring one person with money together with someone else s investment opportunity A STOCK is a form of investment and a claim on the assets of a corporation that may rise or fall in value A company that wants to raise money may borrow money from a BANK, issue STOCK or issue BONDS When a company offers to sell its stock to the public for the first time, it is called a(n) INITIAL PUBLIC OFFERING.

9 122. The share of the profits of a corporation, paid out to stockholders, is DIVIDENDS Currently the Dow Jones Industrial Average is composed of 30 stocks The Dow Jones Industrial Average, Standard & Poor s 500 and Wilshire 5000 are all examples of well-know stock INDEXES The price of a share of stock is determined by SUPPLY and DEMAND If a company, government, or government agency wants to borrow money, it may issue BONDS On a particular day, the number of shares traded is the called the VOLUME The stock market page reports the difference between the current closing price of a stock and the previous day s closing price under the heading of NET CHANGE A BOND represents an IOU or a promise to pay The two major financial markets in our economy are the STOCK market and the BOND market A STOCK OPTION gives an employee the right to buy shares of company stock at a price specified by the employer In financial markets, a BULL market is one in which prices are expected to rise AMEX, NASDAQ and the NYSE are examples of stock MARKETS or EXCHANGES A MUTUAL FUND is a collection of stocks in which to invest A feature of MUTUAL FUNDS is that they give consumers an investment handled by a fund manager Unlike bonds, stocks provide the holder with OWNERSHIP in the company A stock INDEX is a portfolio of stocks that represent a particular market or portion of it The yield of a stock is the dividend divided by the CLOSING price BONDS are evaluated by Standard & Poor s and Moody s As the price paid for a bond rises, the yield DECLINES.

10 Economics (Povletich) Application Section REVIEW for the FINAL EXAM Complete the chart below using formulas from Chapter 7. For this firm, marginal revenue is the same as price. Gadget/ Fixed Variable Total Marginal Marginal Total Profit or hour Cost Cost Cost Cost Revenue Revenue (Loss) 0 $18 $0 $18 $0 $18 $0 ($18) 1 $18 $5 $23 $5 $18 $18 ($5) 2 $18 $12 $30 $7 $18 $36 $6 3 $18 $18 $36 $6 $18 $54 $18 4 $18 $22 $40 $4 $18 $72 $32 5 $18 $30 $48 $8 $18 $90 $42 Assume the market basket includes only the goods shown in the following table. Use the table to answer the following questions based on formulas from Chapter 11. Good Quantity Price in base year Price in current year Pepperoni Pizza 15 $10.00 $13.50 Bottles of Soda 30 $ 0.75 $ 1.25 DVDs 10 $20.00 $15.00 The total amount spent on goods in the market basket in the base year was $ The total amount spent on goods in the market basket in the current year was $ The CPI for the base year was 100. The CPI for the current year is The percentage change in the CPI from the base year to the current year was 4.69%. Complete the following table using formulas from Chapter 11. Change decimal answers to percents and round to the nearest tenth of a percent. Year Noninstitutional Adult Civilian Population Employed Unemployed Civilian Labor Force Unemployment Rate Employment Rate ,000 41,235 5,123 46, % 82.47% ,000 37,689 8,459 46, % 68.53% ,000 52,769 4,983 57, % 87.95% ,000 49,357 10,230 59, % 75.93%

11 Listed below are the U.S. tax rates for a single person. Use the table to answer the following questions. Filing Status: Single Tax Rate $0 - $7,825 10% $7,825 - $31,850 15% $31,850 - $77,100 25% $77,100 - $160,850 28% $160,850 - $349,700 33% $349,700 and up 35% If your taxable income for the year is $80,000, how much income tax do you owe? $22,400 If your total income for the year is $34,000 and you have $10,000 in tax deductions, how much income tax do you owe? $3,600 If your taxable income for the year is $54,000 and you have $1,000 in tax credits, how much income tax do you owe? $12,500 If your total income for the year is $40,000 and you have $10,000 in tax deductions and $1,000 in tax credits, how much income tax do you owe? $3,500 In 2008, the earnings limit for Social Security was $102,000 and the Social Security tax rate was 6.2%. Use that information to answer the following questions. If your income is $150,000, how much Social Security tax do you have to pay? $6324 If your income is $150,000, what percentage of your income do you pay in Social Security taxes? 4.24% If your income is $80,000, how much Social Security tax do you have to pay? $4960 If your income is $80,000, what percentage of your income do you pay in Social Security taxes? 6.2%

12 The entries in the following table represent the closing numbers for stocks traded on Wednesday, December 7. 52W 52W Yield Vol Net high low Stock Ticker Div % P/E OOs High Low Close chg Nike NKE Apple AAPL N/A N/A Hershey HSY Microsoft MSFT Coca-Cola KO Target TGT Disney DIS Which stock has the highest yield? Coca-Cola If you bought 300 shares of Disney at the highest price for the year and sold it at the closing price on March 5, what was your capital gain/loss? (be sure to state whether it was a gain or loss) Loss of $5,556 If you bought 500 shares of Nike at the lowest price for the year and sold it at the closing price on March 5, what was your capital gain/loss? (be sure to state whether it was a gain or loss) Loss of $655 If you bought 200 shares of Apple at the lowest price for the year and sold it at the highest price for the year, what was your capital gain/loss? (be sure to state whether it was a gain or loss) Gain of $22,808 How many shares of Microsoft traded on Wednesday, December 7? 74,709,000 What was the closing price of Target on Tuesday, December 6? $27.17 If you have owned 100 shares of Microsoft, 100 shares of Target and 100 shares of Nike, how much total money did you receive in dividend payments? $216 If you owned 500 shares of Hershey, how much would you expect to receive in dividend payments this year? $595

13 Bob pays $10,000 for a bond with a face value of $10,000 and a coupon rate of 8 percent. Jane buys a bond for $9,000. The face value of the bond is $10,000 and the coupon rate is 8 percent. Bob will receive a coupon payment of $800 each year. When the bond matures, Bob will receive $10,000 from the issuer of the bond. The yield that Bob will receive on the bond is 8.00%. If the maturity date is five years from the day Bob buys the bond, he will earn a total of $4,000 on his investment. Jane will receive a coupon payment of $800 each year. The yield that Jane will receive on the bond is 8.89%. When the bond matures, Jane will receive $10,000 from the issuer of the bond. If the maturity date is five years from the day Jane buys the bond, she will earn a total of $5,000 on her investment. Both Bob and Jane bought bonds with face values of $10,000, coupon rates of 8 percent, and maturity dates five years from the date of purchase. Jane will earn $1000 MORE / LESS (circle the correct one) on her investment than Bob will earn on his investment because she paid $1000 MORE / LESS (circle the correct one) than the face value of the bond.