Deck 9: Profit Maximization

Question 1

If a price-taking firm's production function is given by ,its supply function is given by:

A)q = 2pw.
B)q = p/2w.
C)q = 2p/w.
D)q = 2w/p.

Answer 1

q = p/2w.

Question 2

A profit-maximizing firm's demand function for labor can be found by differentiating:

A)the profit function with respect to w.
B)the cost function with respect to w.
C)the supply function with respect to w.
D)the production function with respect to w.

Answer 2

the profit function with respect to w.

Question 3

It is usually assumed that a perfectly competitive firm's supply curve is given by its marginal cost curve.In order for this to be true,which of the following additional assumptions are necessary?
I.That the firm seeks to maximize profits.
II.That the marginal cost curve be positively sloped.
III.That price exceeds average variable cost.
IV.That price exceeds average total cost.

A)All of the above.
B)I and II but not III and IV.
C)I and III but not II and IV.
D)I,II and III,but not IV.

Answer 3

I,II and III,but not IV.

Question 4

A firm's demand for labor is known as a "derived demand" because:

A)the firm gains utility from hiring more labor.
B)the amount of labor hired depends upon how much output the firm can sell.
C)the wage rate paid to workers is derived from the market for labor.
D)it's derived from the demand for capital.

Question 5

If the demand curve a firm faces shifts to the right,usually:

A)it would be impossible to tell whether the marginal revenue curve shifts.
B)the marginal revenue curve would shift to the left.
C)the marginal revenue curve would shift to the right.
D)the marginal revenue curve would not shift.

Question 6

Input demand functions that are calculated from profit functions differ from those calculated from cost functions because:

A)they assume cost-minimization.
B)they hold output constant.
C)they assume output price is constant.
D)they assume output is set at its profit-maximizing level.

Question 7

If the demand faced by a firm is inelastic,selling one more unit of output will:

A)increase revenues.
B)decrease revenues.
C)keep revenues constant.
D)increase profits.

Question 8

If demand facing the firm is price-inelastic,marginal revenue will be:

A)positive.
B)zero.
C)negative.
D)constant.

Question 9

In order to maximize profits,a firm should produce at the output level for which:

A)average cost is minimized.
B)marginal revenue equals marginal cost.
C)marginal cost is minimized.
D)price minus average cost is as large as possible.

Question 10

Short-run producer surplus can be calculated by integration as (where q* is the firm's profit maximizing output level and MC(q)is its marginal cost function):

A)
B)
C)
D)

Question 11

If a firm is a price taker,its marginal revenue is:

A)equal to market price.
B)less than market price.
C)greater than market price.
D)a multiple of market price that may be either greater than or less than one.

Question 12

If a price-taking firm's production function is given by ,its profit function is given by:

A)
B)
C)
D)

Question 13

If the demand faced by a firm is elastic,selling one less unit of output will:

A)increase revenue.
B)decrease revenue.
C)keep revenues constant.
D)decrease price.

Question 14

If a firm wished to maximize total revenues,it should produce where:

A)marginal cost is zero.
B)marginal revenue is zero.
C)marginal revenue is equal to marginal cost.
D)marginal revenue is equal to price.

Question 15

Profit functions are homogeneous of degree:

A)zero in input and output prices.
B)zero in input prices.
C)one in input and output prices.
D)one in input prices.

Question 16

If a firm's marginal revenue is below its marginal cost,an increase in production will usually:

A)increase profits.
B)leave profits unchanged.
C)decrease profits.
D)increase marginal revenue.

Question 17

Which of the following conditions would result in the short run marginal cost curve not correctly reflecting the supply behavior of a profit-maximizing firm?

A)The firm is a price taker.
B)Price exceeds average total cost.
C)The elasticity of demand facing the firm is -3.
D)the firm can vary several inputs in the short run.

Question 18

One implication of the fact that profit functions are convex in prices is that firms will always prefer:

A)stable input and output prices.
B)input and output prices that fluctuate about a given level.
C)stable input prices and fluctuating output prices.
D)fluctuating input prices and stable output prices.

Question 19

A firm's marginal revenue is defined as:

A)the ratio of total revenue to total quantity produced.
B)the additional output produced by lowering price.
C)the additional revenue received due to technical innovation.
D)the additional revenue received when selling one more unit of output.

Question 20

If price is equal to short-run average variable cost,the firm is at the point known as:

A)the break even point.
B)the profit maximizing point.
C)the shutdown point.
D)the revenue maximizing point.

Question 21

The output effect of a change in the wage rate on a firm's demand for labor input will be greater:

A)the larger the share of labor costs in total costs and the greater the price elasticity of demand for output.
B)the larger the share of labor costs in total costs and the smaller the price elasticity of demand for output.
C)the larger the share of labor costs in total costs and the higher the quantity demanded.
D)the smaller the possibilities of substituting capital for labor.

Question 22

The substitution effect of a change in wage rate on a firm's demand for labor input will be more significant:

A)the greater the change in output.
B)the more sharply curved are the firm's isoquants.
C)the flatter are the firm's isoquants.
D)the larger the quantity of labor employed.

Question 23

An input's marginal revenue product is given by:

A)the input's marginal expense times marginal revenue.
B)the input's marginal expense times the input's marginal physical productivity.
C)marginal revenue times the number of units employed.
D)the input's marginal physical productivity times marginal revenue of the firm's output.

Question 24

If a firm is a price taker in both the input and output markets,its marginal revenue product of labor is given by:

A)the price of its output times the labor's marginal physical productivity.
B)the marginal value product of labor.
C)the marginal revenue product of capital times the ratio of the wage rate to the rental rate on capital.
D)all of the above.

Question 25

In an input market,economic rent is defined as the:

A)total remuneration paid to a factor of production.
B)minimum amount required to retain a factor of production in its present use.
C)total cost for a firm of renting land,equipment,and buildings.
D)extent to which payments to a factor of production exceed the minimum amount required to retain it in its present use.

Question 26

If the firms in perfectly competitive industries each have a production function given by And the price elasticity of demand for the industry's output is -1,the wage elasticity of demand for labor by the industry will be:

A)0.
B)
C)-1.
D)-2.

Question 27

The size of the reduction in quantity of labor hired by a firm due to an increase in the wage rate depends upon all of the following except:

A)what percentage of total costs are made up of labor costs.
B)how much quantity demanded in the output market will be reduced by a higher price.
C)the capital to labor ratio before the wage increase.
D)how easily other inputs can be substituted for labor.

Question 28

Suppose capital and labor must be used in fixed proportions to produce widgets and that the price elasticity of demand for widgets is zero.Then the wage elasticity of demand for labor by widget makers will be:

A)+1.
B)
1)
C)0.
D)infinite.

Question 29

A firm will hire additional units of any input up to the point where:

A)the marginal productivity of the input is maximized.
B)the marginal cost of employing the input is minimized.
C)the expense of employing the last unit is equal to the revenue brought in by the last unit.
D)the revenue brought in by the input is maximized.

Question 30

If the wage rate rises,labor's share in the total costs of a production process:

A)will increase.
B)will decrease.
C)may increase or decrease depending on the elasticity of demand for the product.
D)may increase or decrease depending on the ease of substitution of other inputs for labor.

Question 31

If the price of an input falls,a firm would increase the use of that input for two reasons:

A)the input is now more productive,and the firm can substitute this input for other relatively more expensive inputs.
B)the input is now more productive,and overall production costs are now lower,meaning a firm may choose to increase production.
C)overall production costs are now lower and the firm can substitute this input for other relatively more expensive inputs.
D)overall production costs are now lower and the firm will have more of other inputs to use with the one in question.

Question 32

A profit-maximizing firm will never hire that quantity of a factor of production for which that factor has an increasing marginal productivity because:

A)it would not be maximizing output.
B)it would not be maximizing the productivity of labor.
C)it would not be minimizing costs.
D)it would not be maximizing profits.