Exam 8: Output, Price, and Profit: the Importance of Marginal Analysis

Dunston Military Academy has an annual deficit of $250,000.Its 1,000 students pay tuition of $10,000 each per year.The economics faculty has recommended solving the problem by recruiting additional athletes with $5,000 scholarships.Each additional athlete will cost the school $2,500 (equipment, etc.).Assuming the academy agrees, how many athletes are needed to eliminate the deficit?

Explain whether a firm's decisions are optimal if economic profit is (a) positive, (b) zero, or (c) negative.

A firm may choose to raise price when

What is the value of marginal profit at the profit-maximizing output?

Thomas Edison once complained that he was not making a profit selling light bulbs because his plants were operating 25 percent below capacity.He estimated that he could increase output 25 percent with a 2 percent increase in the cost of production.He sold the 25 percent on the foreign market at a price below what he called the "cost of production." We can deduce that Edison really meant

Once a firm has selected a price for its product, quantity is decided by consumers and their demand curves.

Joe and Ed go to a diner that sells hamburgers for $5 and hot dogs for $3.They agree to split the lunch bill evenly.Ed chooses a hot dog.The marginal cost to Joe if he orders a hamburger, instead of a hot dog, is

Average cost is the cost of producing the next unit.

Ben quit his job as an economics professor to become a golf professional.He gave up his salary ($40,000) and invested his retirement fund of $50,000 (which was earning 10 percent interest) in this venture.After all expenses, his net winnings (profit) were $45,000.Ben's economic profits were

Accounting profit is usually larger than economic profit.

The rule of equating marginal benefit with marginal cost is proper for economics, but it does not describe the way in which people make non-economic decisions.

Over the range of output, a firm's marginal revenue initially increases and then decreases.

An airline can profit by offering standby customers an unsold seat at a substantial discount just before takeoff because

Using marginal analysis, explain why many restaurants and coffee shops offer low-cost refills on beverages (for example, a shop may charge $1.50 for a cup of coffee and only $.50 for a refill).

Total profit equals

In the short run, which are most important in determining changes in output?

If at optimum output of 1,000 units, the firm is incurring average variable cost per unit of $3, average fixed cost per unit of $1.50, and selling its output at $7 per unit, total profit is

Many large universities rent out parts of their campuses to conference groups during the summer because such groups cause little damage, require little staff attention, and bring in large amounts of income.A university's decision to rent its campus to a conference group is most clearly based on

When marginal cost exceeds marginal revenue,

Marginal profit equals the difference between marginal revenue and marginal cost.