WashburnSeptember 16, 2014Econ 101-Turchio Goals of a firm are to maximize profito Profit is total revenue minus total (opportunity) costo TOCo Direct (explicit)o Implicito The cost of moneyo Depreciationo The loss in market value generally due to use (wear and tear) of capital equipmento New car-$3000o $100,000 Buy new machineo Only one producto Cannot move machineo Negligible scrap valueo $10,000 per year depreciationo $29,000 Revenue per yearo $35,000 Total Costo Profit= -6000 per yearo Since the machine has no resale value, opportunity costis $0, so actual profit is $4000 when depreciation is set equal to 0o Risk Takingo Lender takes on the risk that the borrower will not be able to pay it backo Cover the risk with interesto Co-sign a loano Charge riskier borrowers a higher rateo Special Advantageo Brand Nameo A Nameo Owner’s Timeo Total Paymentso =$30,000o Total Revenueo =$36,000o Profit= Total Revenue- (direct cost+ imputed costs)o Accounting profit= TR-TDCo Total Direct Cost= TDCo Economic Profit= TR- (TDC+TIC)o Total Imputed Cost= TIC6 yearsActualEven depreciationTimeValueNew CarWashburno 3 time frameso Short Runo At least one fixed inputo Long Runo All inputs are variable given known technologyo Very Long Runo The technology is not even known
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