Question 1

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

Accepted Answer

Total profit is calculated by subtracting total costs from total revenue (sales).

Question 2

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

Accepted Answer

This statement is true. Marginal figures are the changes in total figures due to a one-unit change in an input or output. Average figures are the result of dividing the total figures by the quantity of inputs or outputs. Total figures are the sum of all input or output quantities multiplied by their respective prices or values. These concepts are interconnected, so if any two are known, the third one can be calculated using mathematical formulas.

Question 3

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

Accepted Answer

Total revenue = Price x Quantity sold

Question 4

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

Accepted Answer

Average revenue is the total revenue divided by the quantity sold. Price is the amount charged per unit. Since total revenue equals price multiplied by quantity, it can be seen that average revenue per unit sold is always equal to the price per unit. Hence, average revenue and price are always equal.

Question 5

Accounting profit is usually larger than economic profit.

Accepted Answer

Accounting profit only takes into account explicit costs (such as wages, rent, and material costs) and does not consider implicit costs (such as opportunity costs and the cost of using self-owned resources). Economic profit, on the other hand, considers both explicit and implicit costs. Therefore, accounting profit is usually larger than economic profit since implicit costs are not taken into account.

Question 6

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

Accepted Answer

The answer of Economists assume that business firms have many...

Question 7

Total revenue is equal to quantity multiplied by average revenue.

Accepted Answer

This is the definition of total revenue. Total revenue (TR) = quantity (Q) x average revenue (AR) or TR = Q x AR.

Question 8

Average revenue is slightly higher than price.

Accepted Answer

Average revenue is equal to the price of the good, as it is calculated by dividing the total revenue by the quantity sold.

Question 9

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

Accepted Answer

Total revenue can be derived by multiplying the price by the quantity sold. The demand curve or schedule provides information on the quantity demanded at different prices, but to calculate total revenue, both price and quantity are necessary.

Question 10

Economists and accountants have very different definitions of profit.

Accepted Answer

Economists define profit as the revenue earned minus the opportunity cost of all resources used in producing the goods or services, while accountants define profit as revenue minus expenses incurred.

Question 11

Economists assume that business firms attempt to maximize their profits.

Accepted Answer

Economists generally believe that business firms aim to maximize their profits by producing and selling goods or services at a price that is higher than the cost of production. This assumption is a key part of economic models and theories about how businesses make decisions.

Question 12

Economists and accountants use the same definition of profit.

Accepted Answer

Economists consider both explicit and implicit costs, including opportunity costs, when calculating economic profit, while accountants focus on explicit costs to determine accounting profit.

Question 13

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

Accepted Answer

Marginal revenue is defined as the change in total revenue that results from producing one additional unit of output.

Question 14

Accounting profit is usually smaller than economic profit.

Accepted Answer

Accounting profit only considers explicit costs (actual cash outflows), while economic profit also includes implicit costs (opportunity costs). Therefore, economic profit is usually smaller than accounting profit because it accounts for a broader range of costs.

Question 15

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

Accepted Answer

Economic profit is the difference between total revenue and total opportunity cost (explicit and implicit costs). If the small business owner is earning a positive economic profit, it means that her revenue is covering all costs including the opportunity cost of running the business (the income she could have earned from the best forgone alternative). Therefore, she is better off running her own business than working for another firm.

Question 16

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

Accepted Answer

A firm that is earning zero economic profit is still covering its costs and has the potential to earn a profit in the future. It may choose to continue operating in the hopes of earning a profit in the long run, even if it is not currently profitable.

Question 17

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

Accepted Answer

Price and output decisions are two interdependent aspects of the same decision-making process in any business. The price of a product or service is determined by the level of output that a business can produce at a given cost, taking into account market demand and competition. As such, price and output decisions influence each other and must be considered together when making strategic decisions about a business.

Question 18

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

Accepted Answer

Marginal revenue represents the additional revenue a firm receives by selling one more unit of output. Therefore, it equals the change in total revenue divided by the change in quantity.

Question 19

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

Accepted Answer

Once a firm sets a price for its product, the quantity demanded by consumers will depend on their individual demand curves for the product at that price. The interaction of all consumers' demand curves will determine the overall market demand for the product, which will in turn influence the quantity that the firm is able to sell at that price.

Question 20

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

Accepted Answer

The average revenue curve shows the revenue generated per unit of output, which is equivalent to the price per unit if all units are sold at the same price. Therefore, the average revenue curve is identical to the demand curve, which shows the quantity of a product consumers are willing and able to buy at different prices.

Quiz 8: Output, Price, and Profit: The Importance of Marginal Analysis