Deck 9: Rofit Maximization

Question 1

A price-taking firm's variable cost function is C = Q³,where Q is the output per week.It has a sunk fixed cost of $2,000 per week.Its marginal cost is MC = 3Q².What is the profit maximizing output if the price is P = $192?

A) 0
B) 6
C) 8
D) 10

Answer 1

8

Question 2

Suppose you own a store that sells computers.You have determined that the demand function for your computers is D(P)= 900 - 3P.At what price would you sell the computers if you wanted to sell 60 of them?

A) $250
B) $275
C) $280
D) $300

Answer 2

$280

Question 3

How much a firm much charge to sell any given quantity of their product is described by a(n)

A) Demand curve
B) Supply curve
C) Inverse demand function
D) Production function

Answer 3

Inverse demand function

Question 4

Given a demand function of D(P)= 500 - 10P,what is it's inverse demand function?

A) D(P) = 50 - P
B) P(Q) = 50P
C) P(Q) = 50 - Q/10
D) P(Q) = 500 - 10Q

Question 5

Which of the following is NOT true about marginal revenue?

A) It is a firm's marginal benefit
B) It is defined as the extra revenue generated by the production of one more unit
C) It can be expressed mathematically as MR = [R(Q - ∆Q) - R(Q)]/∆Q
D) It can be expressed mathematically as ∆R/∆Q

Question 6

Suppose you own a store that sells top of the line MP3 players.You have determined that the demand function for your MP3 players is D(P)= 1200 - 4P.At what price would you sell the MP3 players if you wanted to sell 120 of them?

A) $250
B) $270
C) $280
D) $300

Question 7

In which situation may a company NOT want to maximize profit?

A) A small business owner who sells a highly specialized product at a high price in order to compete with more established businesses in the area
B) A family-owned company who has to decide who to hire between a family member and a highly qualified candidate
C) A conglomerate with a highly streamlined supply chain who sells generic goods
D) A corporation that has performed poorly in the last two quarters and is looking for new upper-management

Question 8

The extra revenue produced by the change in quantity,on a per unit basis,is called

A) Marginal benefit
B) Marginal revenue
C) Inframarginal units
D) Both marginal benefit and marginal revenue

Question 9

To earn the greatest possible profit,a firm must

A) Maximize revenue less cost
B) Minimize revenue less cost
C) Maximize quantity at any price
D) Maximize price at any quantity

Question 10

Which of the following is NOT a way to express the formula for profit?

A) Profit = Revenue - Cost
B) P = R(Q) - C(Q)
C) P = P(Q)Q - C(Q)Q
D) P = P(Q)Q - C(Q)

Question 11

Given the inverse demand function P(Q)= 250 - Q,what is the demand function?

A) D(P) = 250 - P
B) D(P) = 250/P
C) D(P) = P + 250
D) D(P) = 250 + P

Question 12

A firm's profit is denoted by the Greek letter

A) Rho
B) Delta
C) Chi
D) Pi

Question 13

Refer to Figure 9.2.Whenever a CD is sold,5% of the sale goes to the artist and the remainder of the revenue goes to the record company.The graph above depicts this with R being the total revenue from sales,(0.95)R being the record company's share less the 5% given to the artist and C being the cost of producing the CD.At what quantity would the record company like to produce the CD?

A) 0
B) Q1
C) Q2
D) Q3

Question 14

The simplified profit maximization equation is

A) Profit = Revenue - Cost
B) Profit = Revenue + Cost
C) Profit = Revenue/Cost
D) Profit + Revenue x Cost

Question 15

Refer to Figure 9.2.Whenever a CD is sold,5% of the sale goes to the artist and the remainder of the revenue goes to the record company.The graph above depicts this with R being the total revenue from sales,(0.95)R being the record company's share less the 5% given to the artist and C being the cost of producing the CD.At what quantity would the artist prefer to produce the CD?

A) 0
B) Q1
C) Q2
D) Q3

Question 16

A price-taking firm's variable cost function is C = Q³,where Q is the output per week.It has an avoidable fixed cost of $2,000 per week.Its marginal cost is MC = 3Q².What is the profit maximizing output if the price is P = $192?

A) 0
B) 6
C) 8
D) 10

Question 17

When a firm's demand curve is downward sloping,its marginal revenue at any positive sales quantity is ______ its price.

A) Greater than
B) Less than
C) Equal to
D) Less than or equal to

Question 18

The relationship between a firm's price and sales quantity is described by the ______ for its product.

A) Demand curve
B) Supply curve
C) Marginal cost curve
D) Average cost curve

Question 19

When a firm's profit maximizing sales level is positive,its marginal revenue is ______ its marginal cost at that quantity.

A) Greater than
B) Less than
C) Equal to
D) Less than or equal to

Question 20

Refer to Figure 9.1.What is the maximum profit that can be achieved?

A) $250
B) $500
C) $750
D) $850

Question 21

Refer to Figure 9.3.At what quantity is the firm maximizing profit?

A) 0
B) Q1
C) Q2
D) Q3

Question 22

When actions are finely divisible marginal benefit is ______ marginal cost at an interior best choice.

A) Greater than
B) Less than
C) Equal to
D) Greater than or equal to

Question 23

Jessica owns a company that makes pre-packaged sandwiches for convenience stores.The market price for a sandwich is $5 and Jessica is a price-taker.Her daily cost for making sandwiches is C(Q)= 2.5Q + (Q²/40)and her marginal cost is MC = 2.5 + (Q/20).What is the average cost of a sandwich at the quantity of sandwiches Jessica should be selling each day?

A) $2.50
B) $2.90
C) $3.75
D) $3.50

Question 24

Refer to Figure 9.4.In the short run,how much should the firm produce at the price P3?

A) 0
B) Q1
C) Q2
D) Q3

Question 25

A firm that is a price taker faces a perfectly ______ demand curve.

A) Horizontal
B) Vertical
C) Inelastic
D) Convex

Question 26

A firm is a ______ when it can sell as much as it wants at some given price P,but nothing at any higher price.

A) Monopoly
B) Oligopoly
C) Price taker
D) Price setter

Question 27

Firms in perfectly competitive markets take the ______ as given when deciding how much to sell.

A) Market quantity
B) Lowest prices
C) Market prices
D) Input prices

Question 28

Identifying any positive sales quantities at which MR = MC - and determining which positive sales quantity is best if there is more than one - is the description of what rule?

A) Interior Action Rule
B) Quantity Rule
C) Shut-down Rule
D) Profit-maximizing Rule

Question 29

A price-taking firm's marginal revenue is ­­­­______ the price of its output.

A) Equal to
B) Greater than
C) Less than
D) Less than or equal to

Question 30

Refer to Figure 9.3.The firm's profit it represented by what area?

A) AHID
B) ABCD
C) DCK0
D) EFG0

Question 31

Jessica owns a company that makes pre-packaged sandwiches for convenience stores.The market price for a sandwich is $5 and Jessica is a price-taker.Her daily cost for making sandwiches is C(Q)= 2.5Q + (Q²/40)and her marginal cost is MC = 2.5 + (Q/20).How many sandwiches should Jessica produce each day?

A) 20
B) 40
C) 45
D) 50

Question 32

Jessica owns a company that makes pre-packaged sandwiches for convenience stores.The market price for a sandwich is $5 and Jessica is a price-taker.Her daily cost for making sandwiches is C(Q)= 2.5Q + (Q²/40)and her marginal cost is MC = 2.5 + (Q/20).What should Jessica do if she has an unavoidable fixed cost of $150 a day?

A) She should keep producing sandwiches because she has a positive sales quantity
B) She should keep producing sandwiches because she is maximizing profit at the current quantity
C) She should shut down production because his profit less the unavoidable cost is negative
D) She should shut down production because his profit less the unavoidable cost is positive

Question 33

Refer to Figure 9.3.What is the smallest sales quantity that this firm will produce?

A) 0
B) Q1
C) Q2
D) Q3

Question 34

When a firm is a price taker,changes in its sales quantity have ______ effect on the price it can charge.

A) A positive
B) A negative
C) No
D) Little

Question 35

Any sales quantity below ______ will cause the firm to shut down production.

A) MC
B) AC
C) AC_min
D) MR = D(P)

Question 36

What type of cost has NO impact on determining the profit-maximizing sales quantity?

A) Avoidable fixed costs
B) Sunk fixed costs
C) Variable costs
D) Average variable costs

Question 37

Checking to see whether the most profitable positive sales quantity results in a greater profit than not producing at all is the basis of what rule?

A) Interior Action Rule
B) Quantity Rule
C) Shut-down Rule
D) Profit-maximizing Rule

Question 38

If a firm has no ______ costs,then the profit from shutting down is zero.

A) Fixed
B) Variable
C) Opportunity
D) Sunk

Question 39

Suppose a firm lowers its price in order to increase sales.The lower price will reduce the revenue the firm earns on the

A) Marginal units
B) Inframarginal units
C) Surplus units
D) Incremental units

Question 40

At any price below ______ a firm has no incentive to produce anything.

A) AC
B) MR
C) AC_min
D) MC_min

Question 41

Refer to Figure 9.1.If Dan were to shut down his production of bats and only produce gloves,what would be his profit-maximizing sales quantity of gloves?

A) 20
B) 25
C) 30
D) 50

Question 42

Since sunk costs are incurred no matter what,

A) They are relevant in deciding how much to produce
B) They are essential in the profit-maximizing sales quantity formula
C) They can generally be ignored in making economic decisions
D) They are considered fixed costs

Question 43

The Law of Supply ______ holds for price-taking firms.

A) Always
B) Usually
C) Occasionally
D) Never

Question 44

How would a $10 increase in an avoidable fixed cost effect a price-taking firm's supply curve?

A) MC would increase by $10 and AC would not change
B) AC would increase by $10 and MC would not change
C) MC and AC would both decrease by $10
D) MC and AC would both increase by $10

Question 45

A firm's marginal and average costs may differ in the long and short run because

A) In the short run all inputs are fixed
B) In the long run all inputs are fixed
C) In the short run all inputs are variable
D) In the long run all inputs are variable

Question 46

The Law of Supply states that when the market price ______,the profit-maximizing sales quantity for a price taking-firm never ______.

A) Increases, increases
B) Increases, decreases
C) Decreases, decreases
D) Decreases, increases

Question 47

Refer to Figure 9.1.What is the profit-maximizing sales quantity for baseball bats?

A) 10
B) 20
C) 30
D) 60

Question 48

Refer to Figure 9.4.In the short run,how much should the firm produce at the price P1?

A) 0
B) Q1
C) Q2
D) Q3

Question 49

Refer to Figure 9.1.If he only produced gloves,what would Dan's profit be if he produces the profit-maximizing quantity?

A) $2,000
B) $2,200
C) $2,500
D) $3,100

Question 50

A firm's producer surplus equals its

A) Profit less its avoidable costs
B) Revenue less its avoidable costs
C) Profit less sunk costs
D) Revenue less sunk costs

Question 51

For a firm that produces several products,the marginal cost of producing one product often depends on

A) The level of demand for other products
B) The production level of other products
C) The price of other products
D) The quality of other products

Question 52

Refer to Figure 9.5.Which area represents avoidable cost?

A) ABCDE
B) EDGF
C) EDCHF
D) CHGD

Question 53

Refer to Figure 9.4.In the long run,how much should the firm produce at the price P3?

A) 0
B) Q1
C) Q2
D) Q3

Question 54

Refer to Figure 9.5.Which area represents revenue?

A) ABCDE
B) CHGD
C) EDGF
D) ABHF

Question 55

How would a $10 increase in an input price effect a price-taking firm's supply curve?

A) MC would increase by $10 and AC would decrease by $10
B) AC would increase by $10 and MC would decrease by $10
C) MC and AC would both decrease by $10
D) MC and AC would both increase by $10

Question 56

Refer to Figure 9.1.What is Dan's total profit assuming he is producing both products at their profit-maximizing sales quantities?

A) $3,600
B) $4,000
C) $4,400
D) $4,500

Question 57

A competitive firm's profit-maximizing sales quantity ______ when the market price increases.

A) Cannot decrease
B) Cannot increase
C) May increase or decrease
D) Will always decrease

Question 58

Refer to Figure 9.1.How would the profit-maximizing sales quantities for bats and gloves change if the price of bats was $270?

A) The quantities of bats and gloves will remain unchanged
B) The quantity of gloves will increase while the quantity of bats will decrease
C) The quantity of bats will increase while the quantity of gloves will decrease
D) The quantities of bats and gloves will both increase

Question 59

Refer to Figure 9.1.What is the profit-maximizing sales quantity for baseball gloves?

A) 10
B) 20
C) 30
D) 60

Question 60

Refer to Figure 9.5.Which area represents producer surplus?

A) ABCDE
B) EDGF
C) EDCHF
D) ABHF

Question 61

What is an inverse demand function? If the demand for a firm's product is given by the expression Q = 600 - 3P,what is the firm's inverse demand function? By how much would the firm have to change its price in order to increase sales from 300 units to 450 units?

Question 62

Graphically illustrate the quantity rule and the shut down rule for a price-taking firm.

Question 63

Using a graph,explain why the law of supply holds for a competitive firm.

Question 64

Consider a price-taking firm with a minimum efficient scale that is greater than zero.Using a graph,explain how the firm's supply curve is derived.What happens to the firm's supply curve if the cost of producing each unit decreases by $10? Show this in a graph.

Question 65

Define producer surplus.Using a graph,illustrate producer surplus for a firm with an avoidable fixed cost.Why is it convenient to focus on producer surplus when analyzing policy changes?

Question 66

Suppose a competitive firm produces spaghetti dinners.The market price of a spaghetti dinner is $20.The cost of making the dinners is given by C(Q)= 10Q + (Q²/160).The marginal cost is given by MC = 10 + (Q/80).
a)How many spaghetti dinners should the firm make each day?
b)What if the firm has avoidable fixed costs of $1562.50?
c)What is the firm's supply function if there is no avoidable fixed cost?
d)What is the supply function if the firm has avoidable fixed costs of $1562.50?

Question 67

Suppose that a price-taking firm charges $12 for its product and has a cost function given by C(Q)= 2Q + (Q²/60).The corresponding marginal cost is given by C(Q)= 2 + (Q/30).How much output should the firm produce? What if the firm has $2,000 of avoidable fixed costs?