The loss ratio (or claims ratio) should always be less than 100 in order for an insurance company to make a profit; this means that premiums earned are sufficient to cover losses incurred on a particular line. The second way that these funds are used is to pay expenses incurred in the selling and providing of insurance protection. Some examples would be loss adjustment expenses, commissions, and other expenses. The underwriting gain or loss can be calculated by subtracting claims and expenses incurred from net premiums written. The combined ratio is a common measure of the overall underwriting profitability.
Thus, if we assume that price and AVC are constant, (1) can be rewritten as follows P.QBE = TFC + AVC.QBE which yields: (1) Q BE = TFC P − AVC (2) K The difference “P ! AVC” is often called the average contribution margin1 (ACM) because it represents the portion of selling price that "contributes" to paying the fixed costs. ! Formula (2) can be generalized to deal with the situation where the firm has determined in advance a target profit. The output quantity Q* that will yield this profit is implicitly given 1 The total contribution margin is simply (P !
Since capital is assumed to be the only binding production constraint, investment (I) in the Harrod-Domar model is defined as the growth in capital stock. I = (change in K) But investment is also equal to savings (S), which is equal to the average propensity to save (APS) times GDP (Y). Denote APS = s I = S = APS * Y = s*Y So, ICOR = (s Y) / (change in Y) Rearranging terms, G(Y) = (change in Y) / Y = s / ICOR Growth Rate of GDP per Capita The growth rate of GDP per Capita is defined as G(Y/P) = G(Y) – G(P) From (1), G(Y/P) = s / ICOR - G(P) (2) where G(P) = the population growth rate (1) Thus, a 1 percent increase in population growth will cause the growth rate of GDP per capita to decrease by 1 percent. The empirical question is whether policy makers can achieve a constant marginal product of capital when the centralize investment decisions. Examples 1.
Margin of safety (MOS) is the excess of budgeted or actual sales over the break even volume of sales. It states the amount by which sales can drop before losses begin to be incurred. The higher the margin of safety, the lower the risk of not breaking even. The formula or equation for the calculation of margin of safety is as follows: [Margin of Safety = Total budgeted or actual sales − Break even sales] The margin of safety can also be expressed in percentage form. This percentage is obtained by dividing the margin of safety in dollar terms by total sales.
Case Study: Nike 1. What is the WACC and why is it important to estimate a firm’s cost of capital? What does it represent? Is the WACC set by investors or by managers? The weighted average cost of capital is the maximum rate of return a firm must earn on its investment so that the market value of company's shares will not drop.
Depending in the result of this equation the good can be thought as a normal good when the result is > 0 (positive income elasticity), or an inferior good when the result is < 0 (negative income elasticity). Within the category of normal goods there is a distinction between necessities and luxuries. A luxury will have an Ey >1. To categorize income elasticity of demand we check to see if it is more, equal or less than 1. If it is more is elastic, if it is less is inelastic and if it is equal is unit elastic and quantity demanded changes by the same percentage as the price.
1. What are pricing objectives that firms may pursue? Answer : 1) Profit-Oriented * Designed to maximize price relative to competitors' prices, the products perceived value, the firm's cost structure, and production efficiency. Profit objectives are typically based on a target return, rather than simple profit maximization. 2) Volume-Oriented * Sets prices In order to maximize dollar or unit sales volume.
Profit maximisation occurs when a firm produces at the point where marginal cost equal marginal revenue (MC=MR). This is the point of profit maximisation as any unit produced after this point will have a greater marginal cost than marginal revenue therefore the marginal revenue being gained from the extra unit will decrease total revenue rather than increase it, thus causing profits to decrease. A reason why a firm may want to profit maximise is that it keeps shareholder happy as they receive a greater share of dividends and also if a firm has profits they can reinvest these profits into research and development (dynamic efficiency). There are many different objectives a firm could have other than profit maximisation. The knowledge of a firm finding out where marginal costs equal marginal revenue is very difficult so some firms may not be able to profit maximise as they do not have the correct knowledge required to do so.
The RRR can also be called as the discount rate, hurdle rate or the opportunity cost of capital. NPV takes into account the principle in economics referred to as the “time value of money” which implies that a dollar earned today is more valuable than a dollar earned tomorrow. It is to be noted that projects with zero or positive NPV are acceptable to a company from a financial viewpoint as the return from these projects equals or exceeds the cost of capital. Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. IRR represents the discount rate at which the present value of the expected cash inflows from a project equals the present value of the expected cash outflows.
This is based on an equilibrium being created with a given set of resources, perfect information and price taking firms. They also argue that a competitive equilibrium will be reached based on a given set of resources under the condition of Pareto optimal where 'no one can be made better off without making someone else worse off'. A competitive equilibrium is efficient, in production and consumption and welfare is maximised. (Carlton and Perloff 2005, pg. 69) In this essay I will use both the Austrian School of Thought and Post-Keynsian theory to criticise the Neoclassical Theory.