Questions:

You are considering starting up a company. What is the economic cost of your time? What is the opportunity cost of the money that you put into the company? What are supernormal profits and how do they differ from accounting profits?

How might the objective of a firm owned and run by one person differ from that of a firm run by directors and owned by a large number of shareholders?

Suppose that a profit maximising firm in a perfectly competitive industry has two types of cost in each year that it operates. At the start of each year there is an upfront cost covering items such as software and legal fees which is fixed in the sense that it does not depend on how much the firm produces. Once the upfront cost has been paid it is not possible for the firm to get back any of the money. There is also a variable cost which depends on output. Assume that the average variable cost is U-shaped. Show in a diagram the firm's average total cost, average variable cost and marginal cost curves. Show in your diagram the price at which the firm makes zero economic profits when it takes the fixed costs into account.

Now assume that the firm learns that next year the fixed cost will be higher but the variable cost will be the same. How does this change the cost curves? What effect will this have on the firm's output this year? What is likely to happen to the firm and the industry next year?