Week 3 Questions

Q1 . Producing at an output where marginal cost equals price , maximizes a perfect competitor 's profit because if he produces above this level of output the additional cost incurred by the producer to produce one extra unit of output will be greater than the price at which the product is being sold in the market and hence he will incur a loss . In case he produces below that level of output , he can earn profits but it will be less than the maximum profits that he could earn

Q2 . The advantage of such

a budgetary policy is that the federal government is trying to pull the US economy out of its recessionary period and invest in their own economy because of which they are borrowing money . The main disadvantage of such a policy is that even though the borrowing per 1 spend is reducing , it still is a huge amount which eventually means that US 's fiscal deficit is going to be enormous and even if the economy is pulled out of the recession , it will be in vast debts

Q3 . Accounting Profit (Sales Revenue - all costs except the cost of equity capital , while Economic Profit (Sales Revenue - all costs including the opportunity cost of equity capital . CEOs should worry about economic profits as they need to allocate the capital to its best use so that its opportunity cost is minimized and the economic profits are maximized . IRS only care about accounting profits as the taxes are calculated on accounting...