Deck 9: Profit Maximization

Question 1

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 $1,024 per week.Its marginal cost is MC = 3Q².What is the profit maximizing output if the price is P = $192?

A) 0 or 5.33 or 8
B) 5.33 or 8
C) 0 or 5.33
D) 0 or 8

Answer 1

0 or 8

Question 2

In which situation might 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 that has to decide between hiring a family member and hiring a highly-qualified external 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

Answer 2

A family-owned company that has to decide between hiring a family member and hiring a highly-qualified external candidate

Question 3

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.

Answer 3

both marginal benefit and marginal revenue.

Question 4

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 5

Profit is:

A) Revenue - Cost.
B) Revenue + Cost.
C) Revenue/Cost.
D) Cost - Revenue.

Question 6

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

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

Question 7

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 8

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

A) Profit = Revenue - Cost
B) π = R(Q) - C(Q)
C) π = [P(Q) × Q] - [C(Q) × Q]
D) π = [P(Q) × Q] - C(Q)

Question 9

Refer to Figure 9.1.At what price and quantity combination is profit maximized?

A) Q = 50; P = $5
B) Q = 50; P = $15
C) Q = 85; P = $10
D) Q = 85; P = $15

Question 10

How much a firm must 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.

Question 11

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

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

Question 12

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

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

Question 13

Refer to Figure 9.1.The firm's profit stays the same whether it produces:

A) 0 or 50 units of output.
B) 50 or 85 units of output.
C) 0 or 85 units of output.
D) 0, 50 or 85 units of output.

Question 14

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 Q^d = D(P)= 1200 - 4P.At what price would you sell the MP3 players if you wanted to sell 100 of them?

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

Question 15

A firm's profit is denoted by the Greek letter:

A) rho.
B) delta.
C) chi.
D) pi.

Question 16

Given a demand function of Q^d = D(P)= 500 - 10P,what is the inverse demand function?

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

Question 17

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

Question 18

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 19

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

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

Question 20

Suppose you own a store that sells computers.You have determined that the demand function for your computers is Q^d = 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

Question 21

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 22

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

A) fixed
B) variable
C) opportunity
D) sunk

Question 23

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

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

Question 24

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 25

The output expansion effect of the sale of a firm's last ΔQ units of output is:

A) the additional revenue from selling ΔQ units at price P(Q).
B) the reduced revenue from selling (Q - ΔQ) units at a lower price of P(Q).
C) the additional revenue from selling ΔQ units at price P(Q + ΔQ).
D) the reduced revenue from selling (Q - ΔQ) units at a lower price of P(Q - ΔQ).

Question 26

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 27

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 28

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

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

Question 29

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 30

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

A) horizontal
B) vertical
C) inelastic
D) convex

Question 31

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

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

Question 32

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 33

Any price ______ will cause the firm to shut down production.

A) below the minimum of MC
B) above the maximum of AC
C) below the minimum of AC
D) between MC and AC

Question 34

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 35

The price reduction effect of the sale of a firm's last ΔQ units of output is:

A) the additional revenue from selling ΔQ units at price P(Q).
B) the reduced revenue from selling (Q - ΔQ) units at a lower price of P(Q).
C) the additional revenue from selling ΔQ units at price P(Q + ΔQ).
D) the reduced revenue from selling (Q - ΔQ) units at a lower price of P(Q - ΔQ).

Question 36

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 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

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 39

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 40

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 41

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 42

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 43

Dan is the owner of a price-taking company that manufactures sporting goods.One particular facility Dan owns produces baseball bats and baseball gloves.His cost function for baseball bats is C_B(Q_B,Q_G)= 100Q_B + Q_B² + Q_BQ_G and the marginal cost is MC_B = 100 + 2Q_B + Q_G,where Q_B is the output level for bats and Q_G is the output level for gloves.Dan's cost function for baseball gloves is C_G(Q_B,Q_G)= 50Q_G + Q_G² + Q_GQ_B,and the marginal cost is MC_G = 50 + 2Q_G + Q_B.The price of a baseball bat is $240 and the price of a baseball glove is $150.What is the profit-maximizing sales quantity for baseball bats?

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

Question 44

Refer to Figure 9.5.The firm is producing Q units.Which area represents avoidable cost?

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

Question 45

At any price equal to ______ a firm can maximize profit either by producing the best positive sales quantity or by shutting down.

A) the maximum of AC
B) the minimum of MR
C) the minimum of AC
D) the minimum of MC

Question 46

How would a $10 increase in per-unit input costs affect 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 47

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

A) always
B) usually
C) occasionally
D) never

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 9.5.The firm is producing Q units.Which area represents producer surplus?

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

Question 50

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 51

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 52

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 53

Refer to Figure 9.5.The firm is producing Q units.Which area represents revenue?

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

Question 54

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 variable 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) $1.25
B) $2.50
C) $3.75
D) $6.25

Question 55

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 56

How would a $10 increase in an avoidable per-unit 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 57

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 58

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 59

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; stays the same

Question 60

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 variable cost for making sandwiches is C(Q)= 2.5Q + (Q²/40)and her marginal cost is MC = 2.5 + (Q/20).She is currently producing sandwiches according to the quantity rule.What should Jessica do if she has an avoidable fixed cost of $50 a day?

A) She should keep producing sandwiches because the price is greater than the minimum of average fixed cost.
B) She should keep producing sandwiches because she is maximizing profit at the current quantity.
C) She should shut down production because the price is greater than the minimum of average cost.
D) She should shut down production because the fixed cost can be avoided if she does.

Question 61

Dan is the owner of a price-taking company that manufactures sporting goods.One particular facility Dan owns produces baseball bats and baseball gloves.His cost function for baseball bats is C_B(Q_B,Q_G)= 100Q_B + Q_B² + Q_BQ_G and the marginal cost is MC_B = 100 + 2Q_B + Q_G,where Q_B is the output level for bats and Q_G is the output level for gloves.Dan's cost function for baseball gloves is C_G(Q_B,Q_G)= 50Q_G + Q_G² + Q_GQ_B,and the marginal cost is MC_G = 50 + 2Q_G + Q_B.The price of a baseball bat is $240 and the price of a baseball glove is $150.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 62

Dan is the owner of a price-taking company that manufactures sporting goods.One particular facility Dan owns produces baseball bats and baseball gloves.His cost function for baseball bats is C_B(Q_B,Q_G)= 100Q_B + Q_B² + Q_BQ_G and the marginal cost is MC_B = 100 + 2Q_B + Q_G,where Q_B is the output level for bats and Q_G is the output level for gloves.Dan's cost function for baseball gloves is C_G(Q_B,Q_G)= 50Q_G + Q_G² + Q_GQ_B,and the marginal cost is MC_G = 50 + 2Q_G + Q_B.The price of a baseball bat is $240 and the price of a baseball glove is $150.What is the profit-maximizing sales quantity for baseball gloves?

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

Question 63

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 64

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 MC(Q)= 2 + (Q/30).How much output should the firm produce? What if the firm has $2,000 of avoidable fixed costs?

Question 65

Dan is the owner of a price-taking company that manufactures sporting goods.One particular facility Dan owns produces baseball bats and baseball gloves.His cost function for baseball bats is C_B(Q_B,Q_G)= 100Q_B + Q_B² + Q_BQ_G and the marginal cost is MC_B = 100 + 2Q_B + Q_G,where Q_B is the output level for bats and Q_G is the output level for gloves.Dan's cost function for baseball gloves is C_G(Q_B,Q_G)= 50Q_G + Q_G² + Q_GQ_B,and the marginal cost is MC_G = 50 + 2Q_G + Q_B.The price of a baseball bat is $240 and the price of a baseball glove is $150.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 66

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

Question 67

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 68

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

Question 69

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 70

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 71

Dan is the owner of a price-taking company that manufactures sporting goods.One particular facility Dan owns produces baseball bats and baseball gloves.His cost function for baseball bats is C_B(Q_B,Q_G)= 100Q_B + Q_B² + Q_BQ_G and the marginal cost is MC_B = 100 + 2Q_B + Q_G,where Q_B is the output level for bats and Q_G is the output level for gloves.Dan's cost function for baseball gloves is C_G(Q_B,Q_G)= 50Q_G + Q_G² + Q_GQ_B,and the marginal cost is MC_G = 50 + 2Q_G + Q_B.The price of a baseball bat is $240 and the price of a baseball glove is $150.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 72

Dan is the owner of a price-taking company that manufactures sporting goods.One particular facility Dan owns produces baseball bats and baseball gloves.His cost function for baseball bats is C_B(Q_B,Q_G)= 100Q_B + Q_B² + Q_BQ_G and the marginal cost is MC_B = 100 + 2Q_B + Q_G,where Q_B is the output level for bats and Q_G is the output level for gloves.Dan's cost function for baseball gloves is C_G(Q_B,Q_G)= 50Q_G + Q_G² + Q_GQ_B,and the marginal cost is MC_G = 50 + 2Q_G + Q_B.The price of a baseball bat is $240 and the price of a baseball glove is $150.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