Deck 9: Maximizing Profit

Question 1

If the total cost curve is greater than the total revenue curve at every level of output, the firm incurs a loss.

Answer 1

True

Question 2

There are situations in which average revenue and price are different.

Answer 2

False

Question 3

If marginal cost equals marginal revenue on the downward-sloping segment of the marginal cost curve, then increasing production until marginal cost again equals marginal revenue, this time on the upward-sloping segment of the marginal cost curve, is a profit-maximizing decision.

Answer 3

True

Question 4

If a firm faces a price of $12 regardless of how many units it produces and the marginal cost is constant at $10 regardless of how many units it produces, then theoretically, the firm should never stop producing.

Question 5

If at 4,000 units, the price the firm can charge is higher than its AVC and lower than its ATC, then the firm will earn a profit.

Question 6

Profit maximization can occur at some output level where marginal cost and marginal revenue are not equal.

Question 7

If a firm's marginal revenue is equal to marginal cost at an output level where average variable cost is rising, the firm should shut down.

Question 8

Once profit is maximized at the output level where MR = MC, profit can be calculated by subtracting the ATC from price and multiplying the result by the quantity produced.

Question 9

If: (1) you produce 1,000 units, (2) your total revenue is $7,500, (3) the wage rate you pay each of the 10 workers you hired is $9.50 per hour, and (4) they each work 8 hours to produce that 1,000 units, then you should not shut down.

Question 10

If TR > TC, the firm should produce more of whatever it is producing.

Question 11

Picture the curve. The total revenue curve originates at the origin.

Question 12

Following the MC = MR rule to profit maximization tells us how much profit can be made.

Question 13

Setting P = ATC allows us to calculate total profit or loss.

Question 14

If, at its profit-maximizing output level, the price of the good is less than average variable cost, the firm should shut down immediately.

Question 15

Corporate managers and stockholders usually have the same goal of maximizing profit.

Question 16

According to William Baumol, many corporate managers engage in empire-building.

Question 17

Adam Smith believed that the rich derive the most enjoyment from their wealth by knowing that others observe their consumption.

Question 18

The Marshall Kiwanis Club noticed the organizer of their bratwurst booth, at the Celebrate Marshall Festival, seemed more interested in the size and flair of their booth than the cost of achieving it. This excessive interest in prestige of the booth rather than profits made for charity is an example of stakeholder rights.

Question 19

The profit outcome achieved by setting MC = MR is the same as that achieved by setting TR = TC.

Question 20

For the level of output, Q, firm profit is the same whether measured by TR - TC or (AR - AVC) * Q.

Question 21

The goals of charitable organizations are inevitably inconsistent with the principles associated with profit maximization.

Question 22

The MR = MC rule is no longer accepted by most economists as representing the behavior of firms.

Question 23

All economists agree that the firm's only goal is to maximize profit.

Question 24

A firm will never operate at a loss.

Question 25

Marginal cost is always greater than zero, regardless of the output level.

Question 26

A firm would be maximizing profit if MR > MC and TR > TC.

Question 27

ATC always exceeds AVC.

Question 28

Each firm knows where its MR = MC output level is located.

Question 29

If MR = MC, then TR and TC differ by a maximum if positive profits are earned.

Question 30

If MR > MC, a profit-maximizing firm should increase output.

Question 31

Producing where MR = MC guarantees that the firm earns a profit.

Question 32

Price = MR only if the price is fixed.

Question 33

At the last board meeting a member proposed that the Marshall Lions Club lower its hamburger price at the Celebrate Marshall Festival. He argued this would sell more hamburgers for charity.

A) He is wrong.
B) Revenues would decrease.
C) Revenues would rise.
D) Revenues are not what matters.
E) Profits would increase.

Question 34

The Marshall Lions Club increased the price of hamburgers at their Celebrate Marshall Festival and found that revenues increased. This is likely because, ceteris paribus,

A) the quality of the hamburgers was different
B) the demand for their hamburgers was inelastic
C) the demand for their hamburgers was elastic
D) the quality of the hamburgers was lower
E) more people came to the festival

Question 35

The town of Marshall's Boy Scout Troop 1099 decreased car parking prices at the Celebrate Marshall Festival and found they made higher profits. This likely occurred because

A) marginal cost was equal to marginal revenue
B) marginal revenue was higher than marginal cost
C) marginal revenue was less than marginal cost
D) demand was inelastic
E) marginal revenue was increasing

Question 36

The Skandusky Downtown Development Corporation (SDDC), a nonprofit entity, was accused by local taxpayers of being overstaffed and too lavishly accommodated for its purpose of achieving its community development goals. This accusation is an argument that the SDDC

A) is managed by stakeholders
B) staff is following the MC = MR rule
C) is an example of the Lester-Machlup controversy
D) is engaged in empire building
E) is minimizing community losses

Question 37

Which of the following is not possible when a firm is maximizing its profits?

A) MC = MR
B) AVC is at its minimum point
C) AFC < AVC
D) MC = MR and MC is decreasing
E) MC = MR and MC is increasing

Question 38

Suppose you were working for Richstone's bakery and calculating whether the bakery was making a profit, considering the recent increase in rent. You have data for price (P),MR, ATC, MC, AVC, at the quantity of 1,000 breads a day. Among the other relationships you consider is (P - ATC) which measures the firm's

A) total profit
B) profit per unit of output
C) marginal profit
D) total revenue
E) average variable cost

Question 39

Suppose you were working for Richstone's bakery and calculating whether the bakery was making a profit, considering the recent increase in rent. You have data for price (P),MR, ATC, MC, AVC, at the quantity of 1,000 breads a day. The firm's total profit is calculated by

A) P - AVC
B) P - ATC
C) P - MC
D) (P - ATC)Q
E) TR - TVC

Question 40

Suppose you were working for Richstone's bakery and calculating whether the bakery was making a profit, considering the recent increase in rent. You have the following data: P = $20, AVC = $10, AFC = $12, and quantity of birthday cakes produced a day is 20.You conclude that the bakery ends up at the end of the day with a

A) loss of $10
B) profit of $10
C) loss of $20
D) profit of $40
E) loss of $40

Question 41

Suppose you were working for Richstone's bakery and calculating whether the bakery was making a profit, considering the recent increase in rent. You have the following data:P = $20, AVC = $10, AFC = $10, and quantity of birthday cakes produced a day is 20.You conclude that the bakery ends up at the end of the day with a

A) loss of $10
B) profit of $10
C) loss of $20
D) no loss, no profit
E) loss of $40

Question 42

Suppose you were working for Richstone's bakery and calculating whether the bakery was making a profit, considering the recent increase in rent. You have the following data:P = $20, AVC = $10, AFC = $8 and quantity of birthday cakes produced a day is 20.

A) loss of $10
B) profit of $10
C) profit of $20
D) profit of $40
E) loss of $40

Question 43

It is clear from the text that most economists assume the primary goal of all firms is to

A) maximize sales
B) minimize cost
C) maximize efficiency
D) maximize profit
E) minimize loss

Question 44

At the end of the day, Gracia's Pizza looks into the cash register to count up the day's total revenue. Another way of calculating its total revenue would be to find

A) price × average revenue
B) price × marginal revenue
C) price × quantity
D) marginal revenue × average revenue
E) marginal revenue × marginal cost

Question 45

Total revenue is a term economists use to describe the

A) price the firm charges for its goods
B) money remaining after costs are paid
C) average profit earned per good sold
D) total profit earned by the firm
E) money the firm receives selling its goods

Question 46

Technically speaking, when the firm's output level is zero, its total revenue equals

A) zero
B) its fixed cost
C) its variable cost
D) its marginal revenue
E) its average revenue

Question 47

-In Exhibit I-1, if the firm charges $18, total revenue will equal

A) $12
B) $18
C) $108
D) $216
E) $324

Question 48

-In Exhibit I-1, the marginal revenue of the twelfth unit equals

A) $7
B) $18
C) $216
D) $1
E) $19

Question 49

J. J. Joubert, of the Joubert Dairy, tells his friend Jacques that the average revenue he gets for a liter of milk is $1. We know then that $1 is the dairy's

A) marginal profit
B) marginal cost
C) price
D) total revenue
E) total profit

Question 50

Technically speaking, average revenue is

A) price × marginal revenue
B) total revenue/quantity
C) total revenue/total cost
D) marginal revenue/marginal cost
E) price × marginal cost

Question 51

If you know what marginal cost is, then you should know what marginal revenue is. It's the change in

A) total profit generated by a change in quantity
B) price generated by a change in quantity
C) total revenue generated by a change in quantity
D) output generated by a $1 change in price
E) average revenue generated by a change in quantity

Question 52

Peter Schran plays no favorites. It's one price for all customers. Under this circumstance, we know that

A) MR = MC
B) P = MC
C) TR = TC
D) P = AR
E) P = TR

Question 53

If price is unchanging across the firm's entire production range, then for the firm selling bagels at $0.40 each,

A) P = MR = AR
B) MR = MC = AC
C) TR = TC = 0
D) TR - TC = 0
E) AC = MC = TC

Question 54

-In Exhibit I-2, the firm is currently producing 14 units. What would you advise this firm to do?

A) decrease quantity to 13
B) increase quantity to 15
C) remain at 14 units
D) increase quantity to 16
E) increase quantity to 17

Question 55

-In Exhibit I-2, this firm is currently producing 16 units. What would you advise this firm to do?

A) decrease quantity to 13
B) increase quantity to 15
C) remain at 16 units
D) decrease quantity to 14
E) increase quantity to 17

Question 56

-In Exhibit I-2, at what quantity does the firm maximize profit?

A) 13 units
B) 14 units
C) 15 units
D) 16 units
E) 17 units

Question 57

-Suppose, in Exhibit I-2, that the firm is maximizing profit. How much profit is itearning?

A) zero
B) $1
C) $16
D) -$16
E) insufficient data to determine profit

Question 58

-In Exhibit I-3, the firm is producing 50 units. What would you advise this firm to do?

A) shut down
B) increase quantity
C) stay at 50 units
D) decrease quantity
E) decrease price

Question 59

-In Exhibit I-3, a firm is currently producing 45 units. What would you advise this firm to do?

A) shut down
B) increase quantity
C) stay at 45 units
D) decrease quantity
E) decrease price

Question 60

Whatever else you learned about profit-maximization, you should have learned this: Maximum profit is obtained at the production level where

A) P = AC
B) TR = TC
C) MR = AR
D) MR = MC
E) TR = MR

Question 61

It's logical, it's a rule of thumb, it's an economic guideline: As long as MR > MC, and the firm responds by increasing the quantity it produces,

A) profit will eventually fall to zero
B) profit will increase
C) profit will decrease
D) profit will remain unchanged
E) the firm will minimize loss

Question 62

It's logical, it's a rule of thumb, it's an economic guideline: As long as MR > MC, and the firm responds by decreasing the quantity it produces,

A) profit will increase to infinity
B) profit will increase
C) profit will decrease
D) profit will remain unchanged
E) loss will be minimized

Question 63

It's logical, it's a rule of thumb, it's an economic guideline: As long as MR < MC, and the firm responds by increasing the quantity it produces,

A) profit will equal zero
B) profit will increase
C) profit will decrease
D) profit will remain unchanged
E) the firm will minimize loss

Question 64

It's logical, it's a rule of thumb, it's an economic guideline: As long as MR < MC, and the firm responds by decreasing the quantity it produces,

A) profit will equal zero
B) profit will increase
C) profit will decrease
D) profit will remain unchanged
E) the firm will minimize loss

Question 65

It's logical, it's a rule of thumb, it's an economic guideline: By producing at a quantity where MR = MC,

A) profit is guaranteed
B) profit becomes zero
C) the firm incurs a loss
D) profit is maximized (or loss minimized)
E) the firm should increase quantity

Question 66

If Claeys, a candy-making firm that specializes in old-fashioned hard candies, chooses not to produce at a production level where its MR = MC, then it

A) is making as much profit as possible
B) will incur losses
C) cannot be earning a profit
D) should really shut down before it loses everything
E) is not earning maximum profit

Question 67

If SnuggleTight, a pillow-making firm in Long Island, NY, incurs losses by producing where its MR = MC, then at least in the short run, it should

A) shut down
B) increase output
C) decrease output
D) remain at that output level only if P > AVC
E) remain at that output level only if P > ATC

Question 68

There may be a different criterion used for the long run, but for the short run, a firm should shut down production if price is less than

A) ATC
B) AR
C) MC
D) AVC
E) AFC

Question 69

Considering production decisions for only the short run, a firm producing where MC = MR should stop producing if

A) its losses are less than TFC
B) its losses equal TFC
C) its losses are greater than TFC
D) TR is less than TC
E) TR exceeds TVC

Question 70

You're called in as a consultant: Price is $24. At a production level of 200 units, MC = MR, AFC = $6, and AVC = $16. What do you advise this firm to do?

A) Increase output.
B) Decrease output.
C) Shut down operations.
D) Stay at 200 units; the firm is earning $400 profit.
E) Stay at 200 units; the firm is minimizing losses of $200.

Question 71

You're called in as a consultant: Price is $24. At a production level of 200 units, MC = MR, AFC = $6, and AVC = $25. What do you advise this firm to do?

A) Increase output.
B) Decrease output.
C) Shut down operations.
D) Stay at the current output; the firm is earning a profit of $1,400.
E) Stay at the current output; the firm is losing $1,400.

Question 72

-In Exhibit I-6 (on the previous page), the price is fixed at $35. The firm is producing where MR = MC. What do you advise this firm to do in the short run?

A) Shut down.
B) Increase output.
C) Decrease output.
D) Stay at its current output.
E) Decrease price.

Question 73

-In Exhibit I-6, the price is fixed at $35. This firm is currently operating where MR = MC. Which of the following is true in the short run?

A) Price < AVC and this firm should shut down.
B) This firm is earning a profit of zero.
C) This firm could increase profits by increasing output.
D) Price > ATC and the firm is earning a positive profit.
E) Price > AVC, and the firm should stay at its current output.

Question 74

-In Exhibit I-7, the price is fixed at $14. This firm is currently operating where MR = MC. What do you advise this firm to do?

A) It should shut down.
B) It could increase profit by increasing output.
C) It could increase profit by decreasing output.
D) It should continue to operate at its current output.
E) It should decrease price.

Question 75

It may be advisable for a firm to stay in business, even if it's losing money,

A) but only in the short run
B) but only if its profit covers the loss
C) but only in the long run
D) because "things may change"
E) when the owner has lots of money

Question 76

Technically speaking, if price > AVC, then

A) TR > TC
B) profit is positive
C) TR > TVC
D) profit is negative
E) the firm should shut down

Question 77

If a firm is currently producing where MR = MC and price = $24, AVC = $22, and ATC = $26, then in the long run this firm should

A) continue to operate at a loss
B) earn a positive profit
C) go out of business
D) increase output
E) decrease price

Question 78

There may be other goals an entrepreneur pursues, but the primary goal of the entrepreneur is to maximize

A) market share
B) production
C) the difference between price and cost
D) profit
E) size of the firm's plant

Question 79

An entrepreneur can be fairly certain about some factors associated with production, but is most likely to use guesswork or intuition to estimate

A) wage rate
B) monthly rent
C) price
D) labor productivity
E) interest rate

Question 80

Suppose the firm's total revenue is $4,000 and its total cost is $1,200. We know, then ,that the firm

A) should produce more to maximize profit
B) should lower its price to maximize profit
C) should lower average total cost to maximize profit
D) should stay where it is because it's maximizing profit
E) can't determine what it should do with that incomplete information