HW 1: pg. 20-21

1. Scarcity means that resources are limited relative to human desires. The opportunity cost of any decision is the highest valued alternative forsaken. Constraints force choices and the choosing from a set of options gives rise to an opportunity cost. Managers have limited resources and also must make choices. The choosing should lead to a consideration of the concept of opportunity cost.

6. The entrepreneur is the risk-taker, or the person starting the business. The manger is the decision-maker or allocator. Both are obviously essential business.

HW 2: pg. 41

1. The company may be able to profit from this activity in many ways. There may be some tax/accounting advantages. The practice may help recruitment of graduates from the school. The publicity may increase the demands for products produced by the company.

2. Profit margin is another one of those partial goals that makes little sense as stated, but can be qualified so that it contains some truth. Profit margin is profit as a percent of total sales revenue. For a given amount of sales revenue, the firm wants profit to be as large a percent as possible. This is really only saying that the firm wants to profit maximize. The problem is that sales revenues are not constant and depend on the decisions of the firm, so we can not really add that qualification. We know the firm wants to obtain as much profit, in total, as possible. Would you rather have $1 of profit or $100? The answer is obvious. Now if the $1 of profit is earned on revenues of $2, the profit margin is 50 percent. If the $100 profit is earned on revenues of $1000, the profit margin is only 10 percent. We have more profit but a lower margin. I know which I would choose.

7. Managers can be fired and replaced by better managers (competition with other managers). Managers can have their compensation tied to firm performance.

10. Both define profit as the difference between total revenues and total costs, but economists also include implicit costs which are the opportunity costs of resources owned by the producer (time, interest on money invested, foregone rent on any owned property used in production, and so on).