Exam Questions Ch8 Output Price And Profit The Importance Of

Indicate whether the statement is true or false.

1. If marginal profit is negative when the firm produces one more unit, then the firm is currently maximizing profits.

2. The rule of equating marginal benefit with marginal cost is a tool that can be applied to a wide variety of decisions, not just economics.

3. Given total cost and the quantity of output, marginal cost and average cost can be determined.

4. When a firm’s fixed costs increase it should raise its prices in order to maximize profits.

5. Economists assume that business firms attempt to maximize their profits.

6. Total revenue cannot be derived from the demand curve or a demand schedule.

7. If marginal profit is zero, then average profit is at a maximum.

8. If the price of a product is $10 per unit and the variable cost per unit is $5, the firm is making a profit.

9. A firm should use marginal analysis when making a price-output decision.

10. Average cost is the cost of producing the next unit.

11. If marginal cost of an additional unit of output is greater than average cost, then average cost will rise.

12. If a firm’s marginal profit is negative, it should reduce its output level.

13. In the case study discussed in the chapter, the electronics firm was losing money by selling its calculators at a price that was below average cost.

14. If a firm’s fixed costs increase, then profits drop but its output should not change.

15. Average cost can be thought of as the cost per unit.

16. Marginal analysis is useful in economics, but not in other areas of life.

17. If the marginal profit of the next unit is negative, the firm should produce more output in order to generate greater profit.

18. Whenever marginal cost is positive, average cost curves are upward sloping.

19. If the average cost of a product is $10 per unit and the price is $5, the firm is losing money.

20. Average revenue is slightly higher than price.

21. The average revenue curve can also be described as the demand curve.

22. Economists use a model that is a literal description of business’ behavior.

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

24. All business firms should consider their fixed costs in determining the prices they set.

25. A firm is generally more interested in marginal profits than in total profits.

26. Firms need to know the shape of a demand curve to use marginal analysis.

27. A small business owner who is earning a positive economic profit, no matter how small, is doing better than if he or she sold his or her business and went to work for another firm.

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

29. Profit is maximized at the output at which marginal revenue exceeds marginal cost by the greatest margin.

30. A firm’s total revenue is simply the price of its product multiplied by the quantity sold.

31. Economists assume that business firms have many goals, and profit maximization is just one of them.

32. If marginal cost is rising, then average cost must be rising.

33. Marginal, average, and total figures are unrelated.

34. Economists and accountants have very different definitions of profit.

35. Marginal revenue equals the change in total revenue that is earned by selling one more unit of output.

36. Total profit is represented by the vertical distance between a total revenue curve and a total cost curve.

37. A firm that is earning zero economic profit should go out of business.

38. Marginal revenue is the addition to total revenue resulting from the addition of one unit to total output.

39. Average cost equals total cost multiplied by the number of units of output.

40. Total revenue is equal to quantity multiplied by average revenue.

41. If total profit is maximized, then marginal cost must equal marginal revenue.

42. Marginal profit is positive at all positive output levels.

43. If the quantity output and average cost at that output level are known, then it is possible to determine marginal cost for that output level.

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

45. Economists and accountants use the same definition of profit.

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

47. If marginal cost is less than average cost, average cost must fall when more units are produced.

48. An optimal level of output is one at which marginal profit > 0.

49. Marginal cost is defined by the slope of the total revenue curve.

50. Profit is maximized at the output at which marginal revenue equals marginal cost.

51. Profit maximization occurs when MC = MR.

52. The rule of equating marginal benefit with marginal cost is proper for economics, but it does not describe the way in which people make non-economic decisions.

53. If marginal profit is zero, then total profit is at a maximum.

54. Marginal profit is the additional profit that accrues to the firm when the output rises by one unit.

55. Over the range of most of a firm’s output, average revenue is greater than price.

56. If average cost is falling, then marginal cost must be less than average cost.

57. Marginal cost curves and average cost curves are both purely upward sloping.

58. Marginal profit is the slope of the total profit curve.

59. The assumption that firms attempt to maximize profits will yield good predictions even if firms sometimes pursue other goals.

60. If a firm’s average cost is currently $100, and the marginal cost is $95, then the average cost is currently falling.

61. Firms can make decisions using marginal analysis even if they do not know the shape of a demand curve.

62. Total cost equals average cost multiplied by the quantity of output.

63. A firm’s demand curve can be used to determine average revenue.

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

65. Accounting profit is usually larger than economic profit.

66. If average cost is falling, then marginal cost must be falling.

67. Most consumers in stores use marginal analysis to make their buying decisions.

68. In the case study discussed in the chapter, the electronics firm was actually enhancing its profits by selling calculators at a price that was below average cost.

69. If total profit is at a maximum, then average profit is zero.

70. Total profit is maximized when marginal profit maximized.

71. Price and output decisions are two aspects of the same choice.

72. A firm that decides to make a price cut assumes that marginal profit is negative.

73. Accounting profit differs from economic profit by the amount of the explicit costs faced by a firm.

74. Marginal, average, and total figures are bound together. If any two are known, the third can be calculated.

75. Over the range of output, a firm’s marginal revenue initially increases and then decreases.

76. Most business people calculate marginal cost and marginal revenue to decide how much to produce.

77. Any change in a firm’s fixed costs will change its profit-maximizing level of output.

78. The addition to total revenue resulting from one more unit of output is called marginal revenue.

79. Marginal cost for a firm can be derived from its demand curve.

80. If a firm’s average cost is currently $150, and the marginal cost is $195, then the average cost is rising.

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

82. A graph of total profits is always likely to be positively sloped throughout its length.

83. Once a firm has selected a price for its product, quantity is decided by consumers and their demand curves.

84. It can be shown that average revenue and price are always equal.

85. Virtually all firms expend resources to do precise calculations of marginal cost and marginal revenue for decision making.

86. Accounting profit is usually smaller than economic profit.

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

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

89. Net benefit is equal to total benefit minus marginal cost.

90. Business people often use “hunches” and intuition to make decisions regarding what to produce.

Indicate the answer choice that best completes the statement or answers the question.

91. Regarding the relationship between marginal profit and average profit, which of the following statements is NOT true?

92. If a firm finds itself at an output level where MR < MC, then the firm

93. If output is increased beyond the point where total profit is maximized,

94. A firm’s price is

95. Economic profit is always positive when

Figure 8-3

96. Figure 8-3 shows a firm’s total profit function. At an output of 40, the firm’s total profit equals ____.

97. Marginal profit is the profit

98. In the short run, which are most important in determining changes in output?

99. Dunston Military Academy has an annual deficit of $250,000. Its 1,000 students pay tuition of $10,000 each per year. The economics faculty has recommended solving the problem by recruiting additional athletes with $5,000 scholarships. Each additional athlete will cost the school $2,500 (equipment, etc.). Assuming the academy agrees, how many athletes are needed to eliminate the deficit?

100. When marginal cost exceeds marginal revenue,

101. In the case study in the text involving calculator production, the fact that each calculator produced added $10.30 to cost and $12 to revenue made clear the value of ____ in determining whether or not to suspend production.

102. If MC > MR,

103. Thomas Edison once said that he began making real profit on light bulbs when he dumped his surplus on the European market at less than the “cost of production.” From this we can deduce Edison

104. By definition, a firm that practices satisficing

105. Herbert Simon has concluded that decision making in industry is often best described as

106. A firm’s average fixed cost

107. If marginal revenue and marginal cost are not equal, profit can be maximized by

108. Maureen left her teaching job, which paid $30,000 per year, and invested $20,000 of her retirement fund (which was earning 10 percent interest) in a new real estate business. Her accountant predicted a $60,000 revenue the first year. Her husband, an economist, forecast her profit to be

109. A firm may choose to raise price when

110. Total profit

111. A firm’s fixed cost

112. At its current level of output, a firm’s average cost is $25 and its marginal cost is $20. If the firm increases output by one unit and marginal cost is $22, average cost will be

113. Total profit is maximized where

114. Average cost

115. Ski resorts have begun to offer activities in the summer, like music festivals and mountain biking, rather than closing down the facilities for the season. This a good decision for a ski resort when

116. Profit maximization is

117. For any firm, price always equals

118. If the output of a firm is increased by one unit, the revenue addition is called

119. The demand curve facing Company ABC is perfectly elastic. What is its marginal revenue?

120. If at an output of 4,000 units, Sloan Company is making an economic profit and marginal profit is $20 per unit, the firm should

121. If the marginal profit from increasing output by one unit is negative, then to attain an optimum, the firm should

122. Marginal cost

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123. At optimal output, the firm described in Table 8-1 earns a profit of

124. If a profit-maximizing firm’s fixed cost of producing widgets falls,

125. A firm can always increase its output by one unit at a marginal cost of $10. Its marginal cost curve is

126. Total profit equals

127. An airline can profit by offering standby customers an unsold seat at a substantial discount just before takeoff because

128. Ben quit his job as an economics professor to become a golf professional. He gave up his salary ($40,000) and invested his retirement fund of $50,000 (which was earning 10 percent interest) in this venture. After all expenses, his net winnings (profit) were $45,000. Ben’s economic profits were

Figure 8-2

129. Figure 8-2 shows a manufacturer’s total profit curve. To maximize total profit, the manufacturer should produce ____ units of output.

130. A profit-maximizing firm always

131. Price and quantity decisions made by a company have vital influences on

Table 8-2

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132. In Table 8-2, the profit-maximizing level of output is

133. Average cost equals

134. Average revenue is equal to

135. An airline is considering adding a flight from Chicago to Sioux Falls. Revenue from the flight is expected to be $3,000. The total cost of the flight is $5,500, and the variable cost is $2,000. Should the airline add this flight?

136. Joe and Ed go to a diner that sells hamburgers for $5 and hot dogs for $3. They agree to split the lunch bill evenly. Ed chooses a hot dog. The marginal cost to Joe if he orders a hamburger, instead of a hot dog, is

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

138. Bob goes to his favorite hot dog stand, which is offering one hot dog for $2.50 or two for $4.00. Bob’s marginal cost of a second hot dog is

139. Management gets two numbers (price and quantity) from one decision because

140. A cellphone maker sells 6,000 units per month at $600 each. The firm is investigating whether a price cut to $500 is warranted. The firm’s marginal cost of production of each phone is a constant $400 per unit. To maintain profits at their current level, quantity sold must increase to at least

141. When a firm’s fixed cost rises, its total profit curve shifts

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142. At optimal output, the firm described in Table 8-1 sells its output at a price of

Figure 8-5

143. From Figure 8-5, one can deduce

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144. To maximize its profits, the firm described in Table 8-1 should produce ____ unit(s) of output.

145. Optimal decisions are made on the basis of

146. Thomas Edison once complained that he was not making a profit selling light bulbs because his plants were operating 25 percent below capacity. He estimated that he could increase output 25 percent with a 2 percent increase in the cost of production. He sold the 25 percent on the foreign market at a price below what he called the “cost of production.” We can deduce that Edison really meant

147. The goal of the business firm is maximization of ____, and the goal of the consumer is maximization of ____.

148. 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?

149. A firm is producing 2,500 units at its optimal output, with average variable cost per unit of $4 and average fixed cost per unit of $2.50. If sells its output at $8 per unit, total profit is

150. A computer manufacturer sells 1,000 units per month at $500 each. A price cut to $400 is being considered. His marginal cost is constant at $300 per unit. To maintain profits, quantity sold must increase to at least

151. In 1984, British Prime Minister Margaret Thatcher decided to shut down so-called uneconomic coal mines owned by the government. The National Union of Mineworkers protested, asserting that there was enough coal in the mines to continue current levels of production for years. Thatcher implicitly argued that her decision was economically sound because, at any practical level of output, for each “uneconomic” mine,

Figure 8-1

152. Which graph in Figure 8-1 shows a typical firm’s total revenue and total cost curves?

153. The demand curve facing a firm is also the firm’s

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154. The firm described in Table 8-1 has a fixed cost of ____ at its optimal level of output.

155. In arriving at the quantity of output and price of its product, a company

156. Firms may reasonably decide to cut prices if

157. Economic profit of a decision in question equals

158. A grocery store sells soup for $1.50 a can, or $2.50 for two cans. To a customer, the marginal cost of buying the second can of soup is

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

160. If output is increased beyond the point where total profit is maximized,

161. To find its profit-maximizing output level, a firm should operate where

162. To find a firm’s total revenue at every quantity, all you need to know is

163. A profit-maximizing firm always

164. Whenever average cost exceeds marginal cost,

165. Marginal profit is the addition to a firm’s total profit from a

166. Which of the following is true if the opportunity cost of producing a particular good is less than its accounting profit?

167. The difference between economic profit and accountant’s definition of profit is that an economist’s total cost counts the ____ of inputs.

168. At a profit-maximizing output level,

169. Total profit is maximized if the slope of the total profit curve is

170. Total profit = Total revenue − Total cost (including opportunity cost).

Total profit defined in this way is called

171. The total cost curve generally has

Figure 8-5

172. In Figure 8-5, profits are maximized at output of

173. Sally leaves her $24,000 secretarial position with a company and invests her savings of $15,000 (on which she was earning 6 percent interest) in her own Ready Sec agency. After expenses, her net income was $28,900. Her economic profit was

Figure 8-4

174. In Figure 8-4 at output level 2,

175. “Satisficing” rather than “maximizing” primarily emerges under conditions where

176. When a firm’s fixed cost increases,

177. A company draws its total cost curve and total revenue curve on the same graph. If the firm wishes to maximize profits, it will select the output at which the

178. If a company plots its total profit curve, it would show

179. The term “satisficing” for decision-making behavior by many firms was coined by

180. 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

181. Anna is a tax accountant and she left her job with a large public accounting company to start her own accounting office. In doing this, Anna gave up her salary of $120,000 and took $60,000 out of her savings (which was earning a return of 5 percent) to fund her startup. Her first year, she had $180,000 in revenues and had $40,000 in operating expenses. Anna’s tax accounting business earned economic profits of

182. If fixed cost rises,

183. In reality, decisions made by firms may not always produce maximum total profit because some executives

184. Total profit is maximized

185. The federal government, in order to fund expanded health care, imposes a lump-sum tax on all business property. Profit-maximizing firms that stay in business will respond by

186. Profit can be maximized only where marginal revenue equals

187. Average cost

188. A firm has positive fixed cost and positive variable cost. At its current level of output, marginal cost equals average cost. The firm must

189. Green Duck Airways is considering adding a new flight between Portland and Seattle. Revenue from the flight is expected to be $8,000. The total cost of the flight is $9,500, and the variable cost is $4,000. Should the airline add this flight?

190. A firm can use its demand curve to calculate

191. Decision making that seeks only solutions that are acceptable is called

192. The typical total profit graphical presentation is shown as

193. Marginal revenue is defined as

194. The optimal number of units to produce is best expressed when

195. Many large universities rent out parts of their campuses to conference groups during the summer because such groups cause little damage, require little staff attention, and bring in large amounts of income. A university’s decision to rent its campus to a conference group is most clearly based on

196. Marginal revenue is the addition to a firm’s revenue from

197. The demand curve for a firm’s product is also the curve showing

198. The typical total profit graphical presentation is shown as

199. If at optimum output of 1,000 units, the firm is incurring average variable cost per unit of $3, average fixed cost per unit of $1.50, and selling its output at $7 per unit, total profit is

200. If a firm has determined its optimal output level, where MR = MC, then price

201. Company A manufactures a single automotive component. It had total revenue of $100,000 and an economic profit of $20,000. What is the price of the component it manufactures?

202. Total revenue

203. In arriving at the quantity of output and price of its product, a company

204. If a person who weighs 100 lbs. is riding in an elevator and is joined by a person weighing 120 lbs., what happens to the average weight of persons on the elevator?

Figure 8-5

205. In Figure 8-5, the firm’s marginal profit at the profit maximizing output level

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

207. Tour companies and cruise lines often offer last minute fares that are far below the prices paid by customers who have booked their trips far in advance. Use marginal analysis to explain this pricing tactic.

208. Why is the total profit curve shaped like a hill?

209. According to the text, when management selects a price or quantity, it also selects the other. Explain why this is true.

210. Using marginal analysis, explain why many restaurants and coffee shops offer low-cost refills on beverages (for example, a shop may charge $1.50 for a cup of coffee and only $.50 for a refill).

211. Do firms really seek to maximize profits?

212. The state is considering adding a satellite campus to its major university. How can marginal analysis assist, even though the university does not attempt to maximize profits?

213. If your cumulative Grade Point Average (GPA) after two years of college is 3.0, and your grades for the current semester average 3.5, what will happen to your cumulative GPA? Explain the similarity of this example to the case of marginal cost and average cost.

214. 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?

215. If a firm’s fixed cost (overhead) increases, what happens to its profit-maximizing price and output?

216. A separate average revenue curve is not required when you have the demand curve for a firm. Explain.

217. Explain the rules for finding maximum profit using total revenue and total cost and marginal revenue and marginal cost.

218. Explain whether a firm’s decisions are optimal if economic profit is (a) positive, (b) zero, or (c) negative.

219. Suppose that on a Saturday night at 10 pm, a large hotel has 300 vacant rooms, with little expectation of renting them at such a late hour on a weekend. A traveler comes in the door, looking a bit down on his luck, and asks how much a room will cost. Since he can’t afford the normal rate of $150, the night manager decides to let him stay in the room for only $40. Is it likely that this decision reduced, or increased, the hotel’s profits? Explain your answer.

220. Complete the following table and determine the point of profit maximization.

221. 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)?

222. What rule(s) should a firm follow in deciding optimum output for profit maximization?

223. The phone network says it loses money on local calls, because the $20 average monthly bill does not cover its average cost of $30. It estimates that $18 of costs are directly related to local service, with $12 the share from overall expenses (overhead). Why would the phone network be willing to operate if it is losing money?

224. Define the following terms completely and concisely.

a. Marginal revenue

b. Average revenue

c. Optimal decision

d. Satisficing

e. Marginal profit

225. For a number of years, General Motors used a pricing strategy designed to maintain at least 40 percent of the American car market. Does this strategy suggest that GM was maximizing profits or pursuing an alternative strategy?

226. 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?

227. Is it a good thing to go to a point where marginal profit is zero? Explain.

228. A firm has $200,000 to spend on either direct sales or advertising. Suppose further that if the $200,000 is spent on direct sales, it will bring in an accounting profit of $40,000. Instead, the (accounting) profit it could obtain from a $200,000 investment in advertising is $X. Compare the profitability of the two options if (a) X = 50,000, (b) X = 30,000, or (c) X = 40,000.

229. Given a demand curve, explain how total revenue may be calculated.

230. Some companies follow a strategy of sales maximization. They say that this puts them in close touch with their customers and they can better track the market, responding to needs more quickly. However, this increases costs because of the need to stock a wider variety of parts, sizes, colors, etc. What would make this strategy a profit-maximizing one?

Table 8-3

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

232. Distinguish between the economist’s definition of profit and the accountant’s definition. Which is superior for decision making?

233. What is the value of marginal profit at the profit-maximizing output?