Answer to Question #62892 in Microeconomics for Awais Khan

Question

What effect would each of the following have on the value of the firm? (a) A new competitor enters the market. (b) The production department achieves a technological breakthrough, which reduces production cost. (c) The firm is required to install pollution-control equipment. (d) The work force votes to unionize.

Answer 1

(a) The value of the firm is likely to decrease due to increased competition on the market which may result in losing the market share and lower profit
(b) The value of the firm is likely to increase because the lower production costs will lead to increase in profit
(c) The value of the firm is likely to decrease because the pollution-control equipment will increase the production costs and, therefore, decrease the profit
(d) The value of the firm is likely to decrease because the union will demand higher wages, shorter working hours etc. which will lead to increased costs (labor force) and decreased profit