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.

Accepted Answer

B

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.

Accepted Answer

The demand for labor is derived from the profit function by differentiating it with respect to the wage rate (w), as firms hire labor until the marginal revenue product of labor equals the wage rate.

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.

Accepted Answer

Assumption I is necessary because a perfectly competitive firm seeks to maximize profits. Assumption II is necessary because if the marginal cost curve is not positively sloped, the firm's supply curve will not be upward-sloping. Assumption III is necessary because if price does not exceed average variable cost, the firm will shut down in the short run. Assumption IV is not necessary because the firm can still supply in the short run if price exceeds average variable cost, even if it does not cover all its costs. Therefore, the necessary assumptions are 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.

Accepted Answer

The term "derived demand" refers to the demand for a good or service that arises as a result of the demand for another good or service. In the case of labor, the demand for it is derived from the demand for the output it helps produce. Therefore, the amount of labor hired by a firm is dependent on how much output the firm is able to sell.

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.

Accepted Answer

A firm's demand curve and marginal revenue curve are interrelated. When the demand curve shifts to the right, it indicates that customers are willing to pay a higher price for the same quantity of goods/services. This, in turn, leads to an increase in revenue for the firm. As a result, the marginal revenue curve shifts to the right as well, because the additional revenue from selling one more unit of the good is also higher. Therefore, the correct choice is C.

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.

Accepted Answer

When calculating demand functions from profit functions, it is assumed that firms choose their output level in a way that maximizes their profits. Therefore, the resulting demand function reflects the optimal output level chosen by the firm given the market price. On the other hand, demand functions calculated from cost functions assume that firms choose their output level in a way that minimizes their costs, holding market price constant.

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.

Accepted Answer

The answer of If the demand faced by a firm...

Question 8

If demand facing the firm is price-inelastic,marginal revenue will be:
A)positive.
B)zero.
C)negative.
D)constant.

Accepted Answer

If demand facing the firm is price-inelastic, it means that the change in price will not have a significant impact on the quantity demanded. As a result, if the firm lowers the price, the increase in revenue from selling more goods will not be enough to offset the decrease in revenue from charging a lower price. This means that the marginal revenue will be negative.

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.

Accepted Answer

Maximizing profits requires marginal revenue to equal marginal cost, as this ensures that the last unit produced adds the same amount of revenue as it does cost. While minimizing average cost and marginal cost may be important for efficiency, they do not necessarily lead to profit maximization. Similarly, maximizing the difference between price and average cost may lead to higher profits in the short run, but in the long run competition is likely to erode these profits.

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)

Accepted Answer

The answer of Short-run producer surplus can be calculated by...

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.

Accepted Answer

If a firm is a price taker, it has no control over the market price and must accept the going rate. Therefore, its marginal revenue is equal to the market price.

Question 12

If a price-taking firm's production function is given by  ,its profit function is given by:
A) 
B) 
C) 
D)

Accepted Answer

The answer of If a price-taking firm's production function is...

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.

Accepted Answer

If the demand faced by a firm is elastic, it means that a small change in price will lead to a relatively larger change in quantity demanded. Therefore, if the firm sells one less unit of output, it will have to reduce the price in order to sell that unit. As a result, the total revenue of the firm will decrease, making option B the correct answer.

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.

Accepted Answer

To maximize total revenues, a firm should produce where marginal revenue (MR) is zero. This is because at the point where MR=0, any additional unit sold would not increase total revenue, indicating the revenue-maximizing level of output. Producing beyond this point would start to decrease total revenue.

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.

Accepted Answer

Profit functions are homogeneous of degree one in input and output prices, meaning if all input and output prices are scaled by a constant factor, the profit will scale by the same factor.

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.

Accepted Answer

If the firm's marginal revenue is below its marginal cost, it means that the additional cost incurred in producing one more unit is more than the additional revenue earned. Therefore, an increase in production will lead to a further increase in marginal cost, which will not be fully compensated by the marginal revenue earned. This will result in lower profits or even losses.

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.

Accepted Answer

The short run marginal cost curve reflects the supply behavior of a profit maximizing firm only when the elasticity of demand facing the firm is greater than or equal to -1. If the elasticity of demand is less than -1 (absolute value greater than 1), the short run marginal cost curve would not correctly reflect the firm's supply behavior. Therefore, option C is the correct answer. Options A, B, and D are not relevant to the question.

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.

Accepted Answer

Convex profit functions imply that firms benefit from price fluctuations because they can exploit the upsides of price changes, leading to higher average profits compared to stable 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.

Accepted Answer

Marginal revenue is the additional revenue received when selling one more unit of output. It can be calculated by dividing the change in total revenue by the change in quantity sold. Therefore, option D is the correct answer.

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.

Accepted Answer

When price is equal to short-run average variable cost, the firm is at the shutdown point. At this point, the firm is not making any profit and is only covering its variable costs. If the price falls below the minimum level of short-run average variable cost, the firm would be better off shutting down temporarily and using its resources elsewhere until prices rise again.

Quiz 9: Profit Maximization

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

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

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

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

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

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

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

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

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) :

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

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

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

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

Profit functions are homogeneous of degree:

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

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?

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

A firm's marginal revenue is defined as:

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