Mathematics of Investment

ASSIGNMENT

CHAPTER 10: FIRMS

SELF ASSESSMENT QUESTION: FIRMS

1) Why does a Firm Exists?

Firms came into being to make it easier and less costly to get work done. A well-managed
company strives to achieve an optimal balance between what work gets done within and outside its
boundaries. Economist article points out, market frictions and transaction costs are not the only
reason why firms exist.

2) State the Limits to Firm Size.

Atmospheric Consequences, Bureaucratic Insularity, Incentive Limits, and Communication
Distortion

3) Under the Firm, what is Profit?

Profit is the revenue remaining after all costs are paid. These costs include labor, materials,
interest on debt, and taxes. Profit is usually used when describing business activity. But everyone
with an income has profit. It is what is left over after paying the bills.

Profit is the reward to business owners for investing. In small companies, it is paid directly as
income. In corporations, it is often paid in the form of dividends to shareholders. 

4) Do Companies Maximize Profit? Elaborate your Answer.

While price alone does not guarantee profit, it does give companies the opportunity to maximize
profit. All else being equal, the higher the price that companies charge for their products' or
services' superior quality, the more profit companies can expect. The differentiation strategy
works only if companies have a target market in which customers are less price-sensitive, but
more quality-conscious than customers of other markets.

5) What is Business Risk, Financial Risk and Leverage?

Business risk refers to the company's ability to generate sufficient revenue to cover its
operational expenses.
Financial Risk and Leverage The use of debt to fund investment in a company’s assets is called
financial leverage, an important concept that should be understood because of its effect on return
on investment (ROI) for equity holders, as well as the risk it introduces for both lenders
and investors.
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