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Managerial Economics 12th Edition by Mark Hirschey
Edition 12ISBN: 978-1439042144Managerial Economics 12th Edition by Mark Hirschey
Edition 12ISBN: 978-1439042144 Exercise 2
Explain how the valuation model given in Equation (1.2) could be used to describe the integrated nature of managerial decision making across the functional areas of business.
Reference Equation (1.2)
Reference Equation (1.2)
Explanation
Verified
Verified
The theory of firm explains that the value of firm could be determined by summing all the future profits at its present value.
Value of firm
Where TR=Total revenue, TC= Total cost, t=time (t=1, 2… n)
Profit is the difference between total revenue and total cost. If we calculate each year's profit at its present value and sum it up, then we get the value of the firm.
The difference between total revenue and total cost is called profit or loss of the company. The firms can maximize its profits by either finding ways to increase its total revenue, such as increasing the total sales or by reducing cost of the company such as using resources efficiently, having the right mix of labor and technology etc. The maximization of profits should be the aim of the firm so that the value of the firm increases by increase in efficiency. It is always a joint effort to achieve higher profits by the firm. As the profits are achieved efficiently, the value of the firms increases.
Value of firm
Where TR=Total revenue, TC= Total cost, t=time (t=1, 2… n) Profit is the difference between total revenue and total cost. If we calculate each year's profit at its present value and sum it up, then we get the value of the firm.
The difference between total revenue and total cost is called profit or loss of the company. The firms can maximize its profits by either finding ways to increase its total revenue, such as increasing the total sales or by reducing cost of the company such as using resources efficiently, having the right mix of labor and technology etc. The maximization of profits should be the aim of the firm so that the value of the firm increases by increase in efficiency. It is always a joint effort to achieve higher profits by the firm. As the profits are achieved efficiently, the value of the firms increases.
Managerial Economics 12th Edition by Mark Hirschey
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