Question 1

In a perfectly competitive industry (where firms are price- takers), the market demand curve is
And the firm's demand curve is__________.

Accepted Answer

A)  upward- sloping; perfectly inelastic. 
B)  downward- sloping; perfectly elastic. 
C)  upward- sloping; perfectly elastic. 
D)  downward- sloping; perfectly inelastic. 
A)  upward- sloping; perfectly inelastic. 
B)  downward- sloping; perfectly elastic. 
C)  upward- sloping; perfectly elastic. 
D)  downward- sloping; perfectly inelastic. B

Question 2

Draw a set of MC, AC, AR and MR curves for a price- making firm. Show on your diagram the profit- maximising price and output, and also indicate the area of economic profit (or loss).

Accepted Answer

The answer for a price- setting firm that maximises profits should look similar to Figure 10.7 of the textbook.

Question 3

A firm will shut down in the long run if

Accepted Answer

A) MC > MR B) AR > AC C) MC = MR D) AR < AC A) MC > MR B) AR > AC C) MC = MR D) AR < AC D

Question 4

Normal profit is not regarded as a cost of production.

Accepted Answer

A) True 
 B)False

Question 5

Tom and Barbara grow tomatoes for profit, and their business faces a perfectly elastic demand curve. If they wish to increase revenue they should

Accepted Answer

A)  raise the price to make more per kilogram sold. 
B)  accept that there is no way of increasing revenue. 
C)  keep the price the same, but produce more to increase sales. 
D)  lower the price to sell more. 
A)  raise the price to make more per kilogram sold. 
B)  accept that there is no way of increasing revenue. 
C)  keep the price the same, but produce more to increase sales. 
D)  lower the price to sell more.

Question 6

If marginal cost is currently above marginal revenue then profits can be increased by lowering output and raising price.

Accepted Answer

A) True 
 B)False

Question 7

A firm is a price- taker and accepts £5 as the market price. What will be the marginal revenue of the fourth unit of output sold?

Accepted Answer

A)  £3 
B)  £20 
C)  £4 
D)  £5 
E)  £15 
A)  £3 
B)  £20 
C)  £4 
D)  £5 
E)  £15

Question 8

If a price- taking firm is in short- run equilibrium, it must also be in long- run equilibrium.

Accepted Answer

A) True 
 B)False

Question 9

The following diagram shows a firm facing a downward- sloping demand curve.
  The diagram indicates that, at a price of £4, output should be

Accepted Answer

A)  decreased. 
B)  permanently stopped. 
C)  temporarily stopped. 
D)  increased. 
A)  decreased. 
B)  permanently stopped. 
C)  temporarily stopped. 
D)  increased.

Question 10

Explain the significance of normal profit and supernormal profit.

Accepted Answer

Normal profit is the opportunity cost of

Question 11

What are average and marginal revenue? In what way do they affect a firm's profits?

Accepted Answer

Average revenue is the total revenue div

Question 12

What do economists assume about a firm's attitudes to profit?

Accepted Answer

Economists use the assumption that firms

Question 13

What could shift the average revenue curve for a price- making firm to the right?

Accepted Answer

The answer should recognise that AR is t

Question 14

The higher the variable cost/total cost ratio, the less likely a firm will cease production.

Accepted Answer

A) True 
 B)False

Question 15

If incomes rise, what will happen to the TR (total revenue) curve for a normal good?

Accepted Answer

A)  There will be an upward shift in TR. 
B)  There will be a movement up the TR curve. 
C)  There will be a downward shift in TR. 
D)  There will be a movement down the TR curve. 
E)  It will not shift. 
A)  There will be an upward shift in TR. 
B)  There will be a movement up the TR curve. 
C)  There will be a downward shift in TR. 
D)  There will be a movement down the TR curve. 
E)  It will not shift.

Question 16

Firms will sometimes choose to operate at a loss. Why?

Accepted Answer

A)  Having sales revenue will contribute to variable costs which need to be paid even if no production takes place. 
B)  There may be fixed costs that need to be paid and producing something may be a way to minimise a loss. 
C)  A firm should always stop production if a loss is going to be made. 
D)  This is something that firms may do in the long run to cover fixed costs. 
A)  Having sales revenue will contribute to variable costs which need to be paid even if no production takes place. 
B)  There may be fixed costs that need to be paid and producing something may be a way to minimise a loss. 
C)  A firm should always stop production if a loss is going to be made. 
D)  This is something that firms may do in the long run to cover fixed costs.

Question 17

An MR curve cuts the quantity axis at the point of unit elasticity.

Accepted Answer

A) True 
 B)False

Question 18

Profits per unit can be assessed by measuring the vertical distance between the marginal cost and marginal revenue curves.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following correctly explains when a firm will choose to shut down?

Accepted Answer

A)  When it cannot make any profits 
B)  When it cannot cover its average variable costs in the short run 
C)  When it cannot cover its implicit costs in the long run 
D)  When it cannot make supernormal profits 
E)  When it cannot cover its average total costs in the short run 
A)  When it cannot make any profits 
B)  When it cannot cover its average variable costs in the short run 
C)  When it cannot cover its implicit costs in the long run 
D)  When it cannot make supernormal profits 
E)  When it cannot cover its average total costs in the short run

Question 20

If a firm is making normal profit, it

Accepted Answer

A)  will not be able to sell the company for as much as it paid for it. 
B)  is wasting its funds by investing on new plant and equipment. 
C)  is covering the opportunity cost of being in business. 
D)  should exit the industry and reinvest its assets elsewhere. 
A)  will not be able to sell the company for as much as it paid for it. 
B)  is wasting its funds by investing on new plant and equipment. 
C)  is covering the opportunity cost of being in business. 
D)  should exit the industry and reinvest its assets elsewhere.

Exam 10: Revenue and Profit

In a perfectly competitive industry (where firms are price- takers), the market demand curve is And the firm's demand curve is__________.

Draw a set of MC, AC, AR and MR curves for a price- making firm. Show on your diagram the profit- maximising price and output, and also indicate the area of economic profit (or loss).

A firm will shut down in the long run if

Normal profit is not regarded as a cost of production.

Tom and Barbara grow tomatoes for profit, and their business faces a perfectly elastic demand curve. If they wish to increase revenue they should

If marginal cost is currently above marginal revenue then profits can be increased by lowering output and raising price.

A firm is a price- taker and accepts £5 as the market price. What will be the marginal revenue of the fourth unit of output sold?

If a price- taking firm is in short- run equilibrium, it must also be in long- run equilibrium.

The following diagram shows a firm facing a downward- sloping demand curve. The diagram indicates that, at a price of £4, output should be

Explain the significance of normal profit and supernormal profit.

What are average and marginal revenue? In what way do they affect a firm's profits?

What do economists assume about a firm's attitudes to profit?

What could shift the average revenue curve for a price- making firm to the right?

The higher the variable cost/total cost ratio, the less likely a firm will cease production.

If incomes rise, what will happen to the TR (total revenue) curve for a normal good?

Firms will sometimes choose to operate at a loss. Why?

An MR curve cuts the quantity axis at the point of unit elasticity.

Profits per unit can be assessed by measuring the vertical distance between the marginal cost and marginal revenue curves.

Which of the following correctly explains when a firm will choose to shut down?

If a firm is making normal profit, it

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Profit Maximisation Under Perfect Competition and Monopoly

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An Introduction to Business Strategy

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