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The theory of the firm is the focus and central theme of managerial economics. A company is an organization that combines and organizes resources to produce goods and/or services for sale. The business model is called the theory of the firm. In its simplest version, a company is thought to have profit maximization as its primary objective. Today the emphasis was on profits augmented by uncertainty and the time value of money.
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In this more complete model, it is the firm’s primary goal is long-term expected value maximization. Firm value is the present value of all expected future earnings of the firm. Future profits must be discounted at a reasonable rate of interest .to the present because a dollar of profit in the future is worth less than today. This model can be expressed as follows.
ECO501 MIDTERM SOLVED PAPERS:
Managerial decisions are often made in light of constraints imposed by technology, resource scarcity, contractual obligations, laws, and regulations. Organizations frequently face limited availability of essential inputs, such as skilled labor, raw materials, energy, specialized machinery, and warehouse space.
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Some critics question why the value maximization criterion is used as a foundation for studying
firm behavior. The theory of the firm which postulates that the goal of the firm is to maximize
wealth or the value of the firm has been criticized as being much too narrow and unrealistic.