Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
Question
Book Icon
Chapter 21, Problem 1CQ
To determine

Effect of residual income claimant behavior of the owners of a firm.

Expert Solution & Answer
Check Mark

Explanation of Solution

The owners, whose income depends on the profit of the firm, are called as residual income claimants. An increase in gap between (positive) total cost and total revenue increases the income of the owners. Therefore, the owners would have a great incentive to increase the percentage of profit of the firm. The property right to the residual income of the owners affects their incentive to produce efficiently with a lower cost. In order to attain this, the owners try to allocate the resources efficiently and induce the workers to produce more by giving incentives to them. This would help to produce maximum at a minimum cost and increases the level of profit.

The owner’s property right to residual income also affects the supply of goods. They try to increase the value of product relative to the cost of production. This is because if people over value a product relative to its cost, the level of profit increases by raising its price. Thus, the owners adopt some strategies to increase the value of their product and maintain the cost of production as lower. These actions are important for the owners who are residual income claimants. This is because their income depends on the level of profit of the firm.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Suppose that you want to open a new business or purchase an existing one. Describe that business.  What good or service would you provide?  Where would you be located?  What would be some explicit costs of starting the business?  What would be some implicit costs?
Danielle decides to withdraw her savings of $70,000 and invest in starting her own clothing business. She normally earns $3,000 in interest from her savings. If Danielle earned an accounting profit of $60,000 last year, what was her economic profit?
what is the distinction between economic and accounting profit
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Microeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506893
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Text book image
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Text book image
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Microeconomics
Economics
ISBN:9781337617406
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Macroeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning