Deck 7: Profit Analysis of the Firm

Question 1

A firm has a marginal cost equation SMC = 10 + .01Q and its AVC = 10 + .005Q. If it can sell any amount of output it wished for $200.00 per unit, its total profit will be maximized loss minimized) at Q = 19,000 units.

Answer 1

True

Question 2

Marginal profit can be found by subtracting total cost from total revenue.

Answer 2

False

Question 3

Marginal profit is the rate of change of total profit with respect to changes in the level of output.

Answer 3

True

Question 4

A firm has a marginal cost equation SMC = 10 + .01Q and its AVC = 10 + .005Q. If it can sell any amount of output it wished for $200.00 per unit, its total profit will be maximized loss minimized) at Q = 12,000 units.

Question 5

If the marginal revenue from producing one more filing cabinet is $45.00 and the marginal cost of producing that cabinet is $40.00, then the firm is maximizing marginal profit.

Question 6

If a firm produces where marginal revenue is equal to marginal cost and price is less than average variable cost then the firm should not produce at all - even in the short run.

Question 7

At the profit-maximizing level of output, the additional revenue to be gained from another unit of output must be equal to the additional cost the firm incurs by producing it.

Question 8

Total profit will be maximized where total revenue is maximized.

Question 9

The goal of the firm is not to have greatest total profits, but rather the firm's goal is to have the greatest profit per unit.

Question 10

Average profit is maximized where the difference between average revenue and average cost is the greatest possible amount.

Question 11

Economic profit for a firm is equal to revenue minus total cost, where total cost includes all opportunity costs associated with the firm's activities.

Question 12

The unit contribution margin equals the price of a product less the firm's average variable costs.

Question 13

If the marginal revenue from producing one more toaster is $3.50 and the marginal cost of producing that same toaster is $4.25, the firm is maximizing marginal profit.

Question 14

At the profit-maximizing level of output, the additional revenue to be gained from another unit of output must be greater than the additional cost the firm incurs by producing it.

Question 15

Average profit is the profit per unit sold and is equal to total profit divided by quantity of output.

Question 16

Economic profit for a firm is equal to revenue minus total cost, where total cost includes only explicit costs associated with the firm's activities.

Question 17

Given the following total and marginal cost functions, where Q is the output per week, profit maximum will occur at Q = 265.

Question 18

Marginal profit can be found by subtracting marginal cost from marginal revenue.

Question 19

If a firm produces where marginal revenue is equal to marginal cost and price is less than average variable cost then the firm is maximizing profits.

Question 20

Total profit will be maximized where marginal revenue equals marginal cost.

Question 21

The contribution margin ratio is [1-AVC/P)].

Question 22

Economic profit for a firm:

A) is equal to revenue minus total cost, where total cost includes all opportunity costs associated with the firm's activities.
B) is equal to revenue minus total cost, where total cost includes only explicit costs associated with the firm's activities.
C) does not include a normal or average return for the funds invested in the business.
D) is equal to revenue minus total cost, where total cost includes only implicit costs associated with the firm's activities.
E) includes a normal or average profit margin on the sales of the firm.

Question 23

Breakeven analysis assumes constant selling price and constant average variable cost.

Question 24

Incremental revenue is additional revenue that a firm will receive by undertaking a particular project.

Question 25

A firm's short run marginal cost is SMC = 20 + Q. It's demand curve is P = 200-Q. It knows its price will cover it AVC. Which of the following outputs will maximize profit minimize loss)?

A) Q = 180
B) Q = 90
C) Q = 60
D) Q = 120
E) Q = 100

Question 26

The breakeven level of output of a firm occurs where marginal revenue is equal to marginal cost.

Question 27

The main difference between profit maximization analysis and breakeven analysis is that breakeven analysis holds price and average variable cost constant, while profit maximization analysis does not.

Question 28

Incremental cost is additional cost that a firm will incur by undertaking a particular project.

Question 29

Total profit will be maximized where:

A) total revenue minus total cost is at its greatest positive level.
B) total revenue minus total cost is at its lowest positive level.
C) where long run average cost is at it lowest point.
D) where total revenue is at its greatest point.
E) where total cost is at its lowest point.

Question 30

Total profit will be maximized:

A) where total revenue is maximized.
B) where total costs are minimized.
C) where marginal revenue equals marginal cost.
D) where marginal revenue equals zero.
E) where marginal costs equal zero.

Question 31

The main difference between profit maximization analysis and breakeven analysis is that profit maximization holds price and average variable cost constant, while breakeven analysis does not.

Question 32

Incremental profit is equal to incremental revenue less incremental costs resulting from a specific change in the activity of a firm.

Question 33

Assuming price is greater than average variable cost in the short-run, the firm will maximize profit if:

A) marginal profit is zero and marginal revenue is below marginal cost at higher output levels.
B) marginal profit is zero and marginal revenue is greater than marginal cost at higher output levels.
C) marginal profit is zero and marginal cost is decreasing.
D) marginal profit is zero and marginal revenue is decreasing.
E) marginal profit is zero.

Question 34

Marginal profit is:

A) the rate of change of total profit with respect to changes in the level of output.
B) the average profit per unit sold.
C) is equal to total profit divided by quantity of output.
D) will be maximized where marginal revenue is greater than marginal cost.
E) the price of a product less the firm's average variable costs.

Question 35

Assuming price is greater than long-run average cost in the long run, the firm will maximize profit if:

A) marginal profit is zero and marginal revenue is below marginal cost at higher output levels.
B) marginal profit is zero and marginal revenue is greater than marginal cost at higher output levels.
C) marginal profit is zero and marginal cost is decreasing.
D) marginal profit is zero and marginal revenue is decreasing.
E) marginal profit is zero.

Question 36

The unit contribution margin indicates the contribution that each unit sold will make toward covering fixed cost and, eventually, generating profit.

Question 37

The unit contribution margin equals the price of a product less the firm's average fixed costs.

Question 38

A firm's marginal cost is constant at $40 per unit. If it's demand curve is described by the equation P = 150 - Q, which of the following will be it's profit maximizing loss-minimizing) output:

A) Q = 55
B) Q = 110
C) Q = 80
D) Q = 40
E) Q = 220

Question 39

Assuming price is greater than average variable cost in the short-run and that at higher output levels marginal revenue is less that marginal cost, the firm will maximize profit if:

A) marginal revenue is maximized.
B) marginal cost is minimized.
C) marginal profit is maximized.
D) marginal revenue is equal to marginal cost.
E) total revenue is equal to total cost.

Question 40

Fill out the following table and find the arc marginal profit.

A) 5.63, 6.7, 5, 2.3, -.38
B) 5.63, 6.3, 5, .2, -.38
C) 6.7, 5.4, 5, .2 -2.4
D) 6.7, 6.3, 5, 1.3, -.87
E) 8.2, 6.3, 7, 1.3, -.87

Question 41

Jim's Car Rental has fixed costs of $220,000 per month and variable costs per car rented per day of $3. If Jim's charges $25 per day to rent a car, how many car-rental days the number of cars rented times the number of days each is rented) must Jim's have each month to breakeven? To make $33,000 per month before taxes?

Question 42

Based on the above numbers, how many plants would Ruth's Green Thumb have to sell to make $10,000 before taxes?

A) 5,672.24
B) 6,238.95
C) 7,857.19
D) 8,485.73
E) 9,522.02

Question 43

Jim's Car Rental has fixed costs of $220,000 per month and variable costs per car rented per day of $3. If Jim's charges $25 per day to rent a car, how many car-rental days the number of cars rented times the number of days each is rented) must Jim's have each month to make $33,000 per month before taxes?

A) 9,500
B) 10,500
C) 11,500
D) 12,500
E) 13,500

Question 44

Break-even analysis is:

A) a more complex type analysis than profit maximization.
B) based on constant price and a constant average variable cost.
C) used in the long run analysis of firms because of its accuracy.
D) the preferred method even when the firm knows its cost and revenue functions
E) not well suited to short-run simplified approximations.

Question 45

Profit-oriented managers will:

A) accept an alternative as long as incremental revenue less incremental cost is greater than zero.
B) accept an alternative as long as incremental revenue less incremental cost is less than zero.
C) accept an alternative as long as marginal revenue is positive.
D) accept an alternative as long as incremental costs are negative.
E) accept an alternative as long as incremental revenue less incremental cost is equal to zero.

Question 46

A firm has the following sales data for one year:
5.

a. Find the firm's breakeven quantity.
b. Find the firm's new breakeven output if it builds an new automated plant which increases Fixed Manufacturing Expenses by $85,000 per year but decreases the Variable Manufacturing Expense by $100 per unit. Assume all other items remain the same.

Question 47

Jim's Car Rental has fixed costs of $220,000 per month and variable costs per car rented per day of $3. If Jim's charges $25 per day to rent a car, how many car-rental days the number of cars rented times the number of days each is rented) must Jim's have each month to breakeven?

A) 5,000
B) 10,000
C) 15,000
D) 20,000
E) 25,000

Question 48

A firm has the following sales data for one month:

a. Find the firm's breakeven quantity.
b. The form is considering a plant modernization proposal from the Manufacturing V- Pres. This proposal increases Fixed Manufacturing Expenses to $27,250 per month but decreases the Variable Manufacturing Expense to $ 6 per unit. Find the firm's new breakeven output if it undertakes this modernization program. Assume all other items remain the same.
c. As an economic consultant to the firm who has been hired to help them evaluate this new modernization, what advice would you have?

Question 49

Based on the above numbers, what is Ruth's Green Thumb's breakeven quantity?

A) 4714.31
B) 4738.26
C) 5525.75
D) 5600.42
E) 5947.94

Question 50

A firm has the following sales data for one month:
1.

a. Find the firm's breakeven quantity.
b. Find the firm's new breakeven output if it builds an new automated plant which increases Fixed Manufacturing Expenses by $8,250 per month but decreases the Variable Manufacturing Expense to $50 per unit. Assume all other items remain the same.

Question 51

Incremental profit analysis:

A) is a form of break-even analysis.
B) is a form of traditional profit maximization.
C) is used to determine whether an opportunity will contribute more to total revenue that to total profits.
D) is more concerned with the indirect costs associated with a project or activity.
E) makes no distinction between the direct and indirect costs associated with a project or activity.

Question 52

The Damien Guard Dog Rental service has fixed costs of $300,000 per month, which include a $50,000 monthly liability insurance premium, in-house legal counsel and six tons of raw meat to feed the service's 200 Rottweilers. Variable costs per dog rented per day, which consists mostly of transportation costs and hazardous duty pay for the drivers who have to deliver the dogs, averages about $14. If Damien charges $74 per day to rent a dog, and the person or business who rents the dog is responsible for anything such as furniture, doors or employees that the dog might eat or otherwise destroy, how many dog-rental days the number of dogs rented times the number of days each is rented) must Damien have each month to breakeven? To make $84,000 per month before taxes?

Question 53

AUTHOR'S NOTE - As the acceptance of the offer entails no variable selling and administrative expenses, the total variable costs associated with producing the needed cases is $30.00 per case. This is arrived at by dividing total variable manufacturing expense of $300,000 by the 10,000 case output level. Acceptance of the offer also means that the $1.00 per case in variable selling and administrative expenses $10,000 divided by 10,000 cases) will not have to be paid on the 2000 cases of lost sales. Also, the problem assumes that the 7,000 cases used from inventory will be replaced out of excess future capacity. However, the cost of doing so, because it results form the decision to accept the offer, must be included in the incremental costs associated with its acceptance. Thus, the 10,000 cases referred to in the incremental cost analysis represents the 3,000 cases manufactured utilizing unused capacity and the 7,000 cases of inventory which must be replaced.
Incremental revenues which results from decision to accept the order:
Yes, accept the offer because incremental revenues exceed incremental costs.
Complete the following cost and revenue data and find the profit-maximizing price and out put.

Question 54

Fill out the following table and find the profit maximization level of output and price.

A) Q = 20, P = 10.20
B) Q = 40, P = 9.20
C) Q = 50, P = 8.40
D) Q = 60, P = 7.20
E) None - the firm would shut down

Question 55

The unit contribution margin refers to:

A) the selling price of a product.
B) the price of the product less its average variable cost.
C) the cost of a product.
D) the net profit generated by a product.
E) the price of a product less its average fixed cost.

Question 56

For the short run, which of the prices in the following table should be charged by a profit oriented firm?

A) $12.00
B) $11.00
C) $10.00
D) $9.00
E) $8.00

Question 57

A firm has the following sales data for one month.

a. Find the number of cases the firm must sell per month to break even.
b. The firm has an unexpected situation in which it can sell 4,000 cases of its product for the next three months 12,000 cases total) for $55 per case. The firm can only supply 7,000 cases from inventory and can only increase production to 11,000 cases total per month. There will be no variable Selling & Administrative Expenses connected with the sale. Should the firm supply the 4,000 cases per month? Why or why not?

Question 58

There is a sudden and very severe drought and the cost of water skyrockets from $1.00 to $20.00 a gallon. If Ruth's uses 1000 gallons to water the current month's output of 5500 plants, what is their new breakeven quantity of output?

A) 38,578.91
B) 44,267.13
C) 54,672.31
D) 60, 238.49
E) none - Ruth's would shut down.

Question 59

Find Ruth's Green Thumb's new breakeven output if Ruth's builds a new greenhouse that will raise fixed manufacturing costs to $13,000.00 and lower variable manufacturing cost by $.50 each unit. Assume average variable selling expenses, fixed selling expenses and selling price remain the same.

A) 4888.92
B) 5012.67
C) 6298.23
D) 6842.61
E) 7556.48

Question 60

Assuming price is greater than long-run average cost and that at higher output levels marginal revenue is less that marginal cost, the firm will maximize profit in the long run if:

A) marginal revenue is maximized.
B) marginal cost is minimized.
C) marginal revenue is equal to marginal cost.
D) marginal profit is maximized.
E) total revenue is equal to total cost.

Question 61

A firm has the following total revenue and total cost functions:
TR = 86Q - .5Q²

a. At what level of output does the firm maximize total revenue?
b. At what level of output does the firm maximize total profit?
c. How much is the firm's total profit at its maximum?

Question 62

Do It Yourself Weather Systems sells a monitoring and weather predicting system so that you don't have to stay up and watch the comedian-wanna-be weather person on your late news. It estimates the monthly quantity demanded for its complete kit to be represented by the equation:
P = 100 - .6Q, where P is price of the whole kit.
Its monthly cost function is
STC = 2100 - 8Q +.6Q².
Determine the profit maximizing quantity sold and the price for the kit. How much will the maximum monthly profit be?

Question 63

In the following table, complete the cost and revenue data. What is the profit maximizing price and output?