question archive What is false in the following reasoning? "The use of language in economics can be very confusing because the economic logic itself is subtle
What is false in the following reasoning? "The use of language in economics can be very confusing because the economic logic itself is subtle
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What is false in the following reasoning?
"The use of language in economics can be very confusing because the economic logic itself is subtle. A case in point is profit maximization and cost minimization. One cannot exist without the other. We all know that profit maximization implies cost minimization. What may not be as obvious is that cost minimization also implies profit maximization. This explains why economists' advice to the real world managers that they should be concerned only with cost minimization if they want to maximize profits." Please note carefully this question is about what is false, not about what is correct.
Part A. Clear identification of what is false in the reasoning
Part B. Justification of choice of sentences in Part A
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Part A: Answer:
The statement "Profit maximization implies cost minimization" is false. However, it is true that when a firm is maximizing profit, the firm is producing this profit-maximizing level of output in the cheapest way possible. Thus, profit maximization implies economic efficiency, but does not imply cost minimization.
Part B: Answer:
However, it is true that when a firm is maximizing profit, the firm is producing this profit-maximizing level of output in the cheapest way possible. Thus, profit maximization implies economic efficiency, but does not imply cost minimization. Productivity measures output over time whereas efficiency measures input versus output so, when efficiency increase, productivity increase and vice-versa. So, Higher productivity lead to higher profitability.
