Question 1

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

Accepted Answer

When the total cost curve is above the total revenue curve at all levels of output, it means that the costs of production exceed the revenues generated from sales, resulting in a loss for the firm.

Question 2

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

Accepted Answer

Average revenue is calculated by dividing total revenue by the quantity sold, which is essentially the price per unit sold, making average revenue and price the same in most contexts.

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.

Accepted Answer

When marginal cost equals marginal revenue on the upward-sloping segment of the marginal cost curve, it indicates that the firm is maximizing profit, as producing beyond this point would result in marginal costs exceeding marginal revenue, reducing profit.

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.

Accepted Answer

Given that the price ($12) is higher than the marginal cost ($10) for each unit produced, the firm will continue to make a profit on each additional unit produced, thus incentivizing continuous production.

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.

Accepted Answer

At this level of output, since the price is higher than AVC but lower than ATC, the firm will cover its variable costs but not all of its fixed costs, resulting in a loss, not a profit.

Question 6

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

Accepted Answer

Profit maximization occurs at the output level where marginal cost (MC) equals marginal revenue (MR), as this is the point where the addition to revenue from selling one more unit equals the addition to cost from producing one more unit, maximizing the difference between total revenue and total cost.

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.

Accepted Answer

A firm should continue operating as long as the price (or marginal revenue) covers the average variable cost, even if the average variable cost is rising, because it means the firm is covering its variable costs and contributing to fixed costs. Shutting down is considered if the revenue does not cover the average variable costs.

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.

Accepted Answer

Profit per unit is calculated by subtracting average total cost (ATC) from the price (P) at which the product is sold. The total profit is then found by multiplying this profit per unit by the quantity (Q) of the product sold, which aligns with the formula: Profit = (P - ATC) * Q. This calculation is relevant after determining the profit-maximizing output level where marginal revenue (MR) equals marginal cost (MC).

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.

Accepted Answer

The answer of If: (1) you produce 1,000 units, (2)...

Question 10

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

Accepted Answer

If TR (Total Revenue) is greater than TC (Total Cost), the firm is making a profit, but producing more may not always increase profit due to factors like diminishing returns or increased costs.

Question 11

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

Accepted Answer

The total revenue curve originates at the origin because when the quantity sold is zero, the total revenue is also zero.

Question 12

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

Accepted Answer

The MC = MR rule helps determine the quantity of output at which profit is maximized, but it does not directly tell us how much profit can be made. Profit calculation requires additional information on total costs and total revenue.

Question 13

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

Accepted Answer

Setting P = ATC (Price equals Average Total Cost) allows us to determine the break-even point where total revenue equals total cost, resulting in neither profit nor loss. Profit or loss is calculated by comparing total revenue to total costs, not just by setting price equal to average total cost.

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.

Accepted Answer

At the profit-maximizing output level, if the price is less than the average variable cost, the firm cannot cover its variable costs, and continuing production would lead to greater losses than shutting down immediately.

Question 15

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

Accepted Answer

Corporate managers may prioritize other objectives such as growth, market share, or personal incentives, which may not always align with stockholders' primary goal of maximizing profit.

Question 16

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

Accepted Answer

William Baumol suggested that managers, rather than strictly following the goal of profit maximization, might pursue their own objectives, such as the expansion of the firm beyond what might be considered optimal from an owner's perspective, a behavior often referred to as "empire-building."

Question 17

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

Accepted Answer

Adam Smith, in "The Theory of Moral Sentiments," suggested that the wealthy derive satisfaction from the admiration and attention they receive from others due to their consumption and display of wealth.

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.

Accepted Answer

This scenario is an example of differing stakeholder interests or priorities, not stakeholder rights. Stakeholder rights refer to the legal and moral entitlements individuals or groups have in relation to an organization, whereas this situation illustrates a conflict in priorities between stakeholders.

Question 19

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

Accepted Answer

Setting MC = MR (Marginal Cost equals Marginal Revenue) is a rule for maximizing profit, not for determining the profit level itself. TR = TC (Total Revenue equals Total Costs) determines the break-even point, not the profit maximization point.

Question 20

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

Accepted Answer

Firm profit is correctly measured by TR - TC (Total Revenue minus Total Cost), not by (AR - AVC) * Q. The latter formula calculates the contribution margin per unit multiplied by quantity, which doesn't account for fixed costs, thus not accurately representing total profit.

Quiz 9: Maximizing Profit