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

The marginal cost of Alexa's Guide to Street People and Their Pets is constant at $5. Alexa sells 5,000 copies per year at $20 per copy. She would like to increase readership and hold total profit constant. If the price goes to $15, how many copies must she sell?

Why assume that firms maximize profit, when it is easy to find companies that pursue other goals such as saving rain forests (Ben and Jerry's)and sponsoring Mister Rogers (Sears)?

Table 8-3 Explain how much the firm shown in Table 8-3 should produce, first using total profit and then using marginal analysis.

A firm that sells at a price below average cost is losing money.

Michael Jordan averaged 35 points per game over a 100-game season. During the playoff round of 10 games, he averaged 50 points, and in the five-game championship series, he led the Chicago Bulls to victory, averaging 40 points. For the entire season, how many points did Jordan score, what was his average, and did the championship series pull his previous average up or down?

Once the profit-maximizing output where MR = MC is determined, price is set by

A firm can choose a quantity of output, and the price is then determined by

Profits will be maximized when the slope of the total revenue curve and the slope of the total cost curve equal zero.

A firm's total profit is the difference between its sales and what it pays out in costs.

Profit maximization occurs when MC = MR.

Economic profit is always positive when

Firms may reasonably decide to cut prices if

A firm should keep producing output as long as the marginal profit is greater than zero, no matter how small it is.

Since the demand curve is downward sloping, the graph of total profits is also has a negative slope.

Assume that you have taken over management of a small concession stand on a local beach for the summer. Your main product is iced water, popular on hot days. You've been selling 400 cups per day at 50 cents each. The cups cost 5 cents each. One of your customers suggests that you cut the price to 40 cents to make more money. For the customer to be correct, how much must your sales increase?

The total cost curve generally has

Robert left a law firm to begin his own catering business. Robert's salary at the law firm was $100,000. He put $40,000 of his own funds into the business to purchase cooking equipment. His funds were previously earning 10 percent per year. The cost of operating the business including food and supplies was $60,000. Robert's catering firm earned $170,000 in revenues for the first year. Robert's brother insists that he should go back to the law firm, since he was making $100,000 there. Robert says his brother is wrong. Robert is right because

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

"As long as total revenue slopes up, marginal revenue must slope up also." Explain whether this statement is true or false.

Accounting profit is usually larger than economic profit.