Effect of residual income claimant behavior of the owners of a firm.
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?
Chapter 21 Solutions
Economics: Private and Public Choice (MindTap Course List)
- What would change if you found a new niche market to sell your product and your sales jumped to $200,000 and your input costs went up to $30,000? What is your accounting profit? Economic profit? Should you stay in business? Would other firms enter into the market? please show work!arrow_forwardWhat incentive compensation needed by employees to remain competitive within the industry?arrow_forwardMost manufacturing companies divide manufacturing costs into which three broad categories?arrow_forward
- Gerstner added $20 billion in annual revenue to IBM. Which one of the following formulas would calculate the profit IBM earned? Select one: a. Profit = cost – income b. Profit = price x cost c. Profit = income – cost d. Profit = price x units soldarrow_forwardOur firm produces two products: generators and solar panels. Name five economies of scale you would expect our company to leverage and explain how you would expect the company to leverage them.arrow_forwardPlease help someonearrow_forward
- Info in imagesarrow_forwardStark Industries' accounting profit for the year ended 31 December 2012 amounted to $3,130 million. CEO Tony Stark could have earned an amount of $230 million by signing up for different movies instead of running the stark industries. Instead of developing the Iron Man outfit, the resources could have been used to develop robots for medical use. The project could have earned a profit of $1,500 million. Find Stark Industries' economic profit.arrow_forwardJake is a corn farmer in Nebraska. He rents his land on a long-term lease for $250,000 a year. He pays his farm hands $28,000 a year. Is his rent a fixed cost or a variable cost? Are the wages he pays his workers a fixed cost or a variable cost?arrow_forward
- Microeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506893Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage LearningEconomics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage LearningEconomics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
- Macroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506756Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning