Deck 10: Revenue and Profit

Question 1

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

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

Answer 1

downward- sloping; perfectly elastic.

Question 2

For a price- making firm, when marginal revenue is above zero the demand curve is

A) unitarily elastic.
B) perfectly inelastic.
C) inelastic.
D) elastic.

Answer 2

elastic.

Question 3

Any firm's total revenue is

A) P/sales in units.
B) MR/sales in units.
C) P x sales in units.
D) MR x sales in units.

Answer 3

P x sales in units.

Question 4

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

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 5

If the fourth unit of a product is sold at £10 and the fifth unit is sold at £8, what does this tell us about the firm?

A) The firm is a monopolist.
B) Need more information to say.
C) The firm is a price- maker.
D) The firm is a price- taker.

Question 6

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

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 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?

A) £3
B) £20
C) £4
D) £5
E) £15

Question 8

The price- taking competitive equilibrium of a large number of identical firms implies that

A) the net revenue of each firm is zero.
B) no firm earns economic profits in the long run.
C) no firm can earn more from its assets by investing them elsewhere.
D) B and C

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

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

Question 10

If at the current level of output a firm's price exceeds its marginal revenue and its marginal revenue exceeds its marginal cost, then to maximise profits it should

A) reduce price and raise output.
B) keep price the same and increase output.
C) keep price the same and reduce output.
D) reduce price and output.
E) raise price and output.

Question 11

If a firm is making normal profit, it

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.

Question 12

The firm in the following diagram is currently producing at output Q.
The firm will shut down in the short term if

A) AR = AVC
B) AR < AVC
C) AR > AVC
D) AVC < AC

Question 13

A firm will shut down in the long run if

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

Question 14

A monopoly that makes a loss will

A) change production so that marginal cost equals marginal revenue.
B) continue production providing total revenue covers fixed costs.
C) always shut down and leave the industry.
D) continue production providing total revenue covers variable costs.

Question 15

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

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 16

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

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 17

For a price- taker, average revenue is always more than marginal revenue.

Question 18

A price- taker is a firm which has no control over its prices.

Question 19

For a price- maker, the slope of the marginal revenue curve is always greater than the slope of the average revenue curve.

Question 20

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

Question 21

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

Question 22

The demand curve facing a price- taking industry is perfectly elastic.

Question 23

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

Question 24

A decrease in income will cause a shift in the demand curve and so revenue will be affected.

Question 25

The following diagram shows a firm facing a downward- sloping demand curve.
The profit- maximising quantity is equal to the point of unit elasticity of demand.

Question 26

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

Question 27

In the short run firms can continue production once price falls below average total cost.

Question 28

Normal profit is not regarded as a cost of production.

Question 29

A monopoly that makes a loss will continue production providing total revenue covers variable costs.

Question 30

In the short run firms will cease production once price falls below ATC.

Question 31

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

Question 32

If a firm is not making economic profit it should leave the industry.

Question 33

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

Question 34

Why does a firm set price equal to the level suggested by the average revenue curve?

Question 35

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

Question 36

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

Question 37

Jack is self- employed. Last year he made £25,000 but he could have earned £30,000 by working for his brother George. What is his economic profit?

Question 38

Explain why fixed costs do not exist in the long run and why they are typically irrelevant to the production decision in the short run.

Question 39

Why does equating marginal cost to marginal revenue maximise profits (or minimise losses)?

Question 40

Explain the significance of normal profit and supernormal profit.

Question 41

In the short run, under what circumstances will a firm shut down?

Question 42

Should a firm that is making a loss close down?

Question 43

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).