Question 1: Does a firm know its costs before it knows its revenues? What is the ideal relation between knowledge of costs and knowledge of revenues? Suggest ways in which a firm can obtain the ideal relation.
Question 2: In your explanation make sure you:
A. Provide a timeline for a firm’s operations, explaining when decisions on costs and revenues are normally made.
B. Explain why there is difference in time regarding fixed and flexible cost
C. Use the concept of risk to explain how the firm’s decision-making capability is affected by the difference in time between cost and revenue decisions.
D. Explain how a firm can use its bank to manage risks.
E. Explain the decision problem faced by the bank
F. Explain how to use invoicing and payroll periods to remove discrepancies in the timing of taking cost and revenue decisions
I was confused and asked if there was a specific type of firm I should discuss, this was the answer:
No specific firm. First, you need to start with the neoclassical theory of the firm--lay it out. Then you can talk about short-run and long-run--this is the about the only reference to time in the model. Note in this model the firm knows everything about the market, including demand. Once this is discussed, then consider how real planning in typical firm (maybe there is no typical firm) is carried out. The first phase is the ex ante phase in which plans are made. What plans? Output, price and the quantity you plan on selling, desired rate of return on investment, then you estimate what you need to meet these objectives. Then there is the ex post phase.....I will let you take it from there. How does this model compare to the neoclassical model of the firm?