Question 1

If at an output of 4,000 units Sloan Company is making an economic profit and marginal profit is $20 per unit,the firm should

Accepted Answer

When marginal profit is positive, increasing output will result in increased total profit. The firm should continue to increase output until marginal profit falls to zero, at which point the firm is producing at the point of maximum profit. If the firm continues to produce beyond this point, marginal profit will become negative and total profit will decrease. Therefore, the firm should not reduce output to maximize total profit. Additionally, there is not enough information to determine if doing whatever is necessary to increase marginal profit is the best option.

Question 2

Once the profit-maximizing output where MR = MC is determined,price is set by

Accepted Answer

Price is determined by the demand curve because it determines the maximum price that consumers are willing to pay for a given quantity of output. Once the profit-maximizing output is determined where MR = MC, the price can be set at the corresponding point on the demand curve. Choosing A or D would result in a price that may not reflect the demand for the product, and choosing C would simply lead to the same result as finding the profit-maximizing output, without accounting for consumer willingness to pay.

Question 3

If the marginal profit from increasing output by one unit is negative,then to attain an optimum the firm should

Accepted Answer

If the marginal profit from increasing output by one unit is negative, it means that the cost of producing an additional unit exceeds the revenue earned from selling that unit. In this case, the firm should reduce output until the point where the marginal cost of producing one more unit (which is the same as the cost of reducing output) equals the marginal revenue from selling that unit. This point is where marginal profit equals zero, which is the optimum for the firm in terms of maximizing profit. Therefore, the best choice is option B, i.e. reduce output until marginal profit equals zero.

Question 4

If at optimum output of 1,000 units,the firm is incurring average variable cost per unit of $3,average fixed cost per unit of $1.50,and selling its output at $7 per unit,total profit is

Accepted Answer

Total profit can be calculated by subtracting total cost from total revenue. Total revenue is price per unit times quantity sold, which is $7 * 1,000 = $7,000. Total cost is the sum of total variable cost and total fixed cost. Average variable cost per unit is $3, so total variable cost is $3 * 1,000 = $3,000. Average fixed cost per unit is $1.50, so total fixed cost is $1.50 * 1,000 = $1,500. Therefore, total cost is $3,000 + $1,500 = $4,500. Subtracting total cost from total revenue gives a profit of $7,000 - $4,500 = $2,500.

Question 5

Total profit is maximized if the slope of the total profit curve is

Accepted Answer

The slope of the total profit curve represents the marginal profit, which is the additional profit gained by producing one more unit of output. Total profit is maximized when marginal profit is equal to zero. Therefore, the slope (marginal profit) should be zero for maximum total profit.

Question 6

Thomas Edison once complained that he was not making a profit selling light bulbs because his plants were operating 25 percent below capacity.He estimated that he could increase output 25 percent with a 2 percent increase in the cost of production.He sold the 25 percent on the foreign market at a price below what he called the "cost of production." We can deduce that Edison really meant

Accepted Answer

Edison's comment about selling the 25 percent on the foreign market at a price below the "cost of production" suggests that he was willing to sell at a price that was lower than the average cost of production. However, since he estimated that he could increase his output by 25 percent with only a 2 percent increase in production costs, we can infer that his marginal cost was lower than his average cost. Additionally, since Edison was not making a profit selling light bulbs, we can infer that his marginal revenue was also lower than his average cost. Therefore, option A is the best choice as it reflects the relationship between Edison's marginal cost, average cost, and marginal revenue.

Question 7

Total profit is maximized where

Accepted Answer

Total profit is maximized where marginal revenue (MR) equals marginal cost (MC) because this is where the additional revenue from producing one more unit is exactly equal to the additional cost of producing that unit. This ensures that the firm is not wasting resources on producing units that generate less revenue than their cost. Additionally, when marginal profit is zero, the firm is still making a profit on each unit sold, but is not increasing overall profit by producing more units. Lastly, if the slope of the marginal profit curve is zero, the marginal profit is not changing, which means that the firm is producing the optimal quantity to maximize profit. Therefore, all of the above choices are correct.

Question 8

The typical total profit graphical presentation is shown as

Accepted Answer

The typical total profit graphical presentation is often shown as a hill or mound. This is because profits typically increase to a point as sales increase, but after reaching a peak, they start to decrease due to increased costs, market saturation, or other factors.

Question 9

If a profit-maximizing firm's fixed cost of producing widgets falls,

Accepted Answer

The answer of If a profit-maximizing firm's fixed cost of...

Question 10

If marginal revenue and marginal cost are not equal,profit can be maximized by

Accepted Answer

The answer of If marginal revenue and marginal cost are...

Question 11

If fixed cost rises,

Accepted Answer

The profit-maximizing level of output is determined by the point where marginal cost equals marginal revenue, which is not directly affected by changes in fixed costs. Fixed costs do not vary with the level of output, so they do not influence the decision about the quantity to produce for profit maximization.

Question 12

At a profit-maximizing output level,

Accepted Answer

The answer of At a profit-maximizing output level,
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Question 13

If output is increased beyond the point where total profit is maximized,

Accepted Answer

If output is increased beyond the point where total profit is maximized, it means that the marginal cost of producing an additional unit of output is higher than the marginal revenue received from selling that unit. As a result, the marginal profit will become negative. Therefore, the best choice would be option B, as marginal profit will be negative. options A, C, and D are not correct as they do not accurately describe the situation where output is increased beyond the point where total profit is maximized.

Question 14

A computer manufacturer sells 1,000 units per month at $500 each.A price cut to $400 is being considered.His marginal cost is constant at $300 per unit.To maintain profits,quantity sold must increase to at least

Accepted Answer

Before the price cut, the total revenue was 1,000 x $500 = $500,000 per month.
After the price cut, the total revenue would be 1,500 x $400 = $600,000 per month.
To maintain profits, the total cost should not exceed $500,000 per month:
$500,000 - ($300 x Quantity) = $600,000
($300 x Quantity) = $100,000
Quantity = 2,000
Therefore, to maintain profits, the quantity sold must increase to at least 2,000 units per month.

Question 15

When a firm's fixed cost rises,its total profit curve shifts

Accepted Answer

An increase in fixed cost will decrease a firm's profit at every level of output, as the firm needs to sell more units to cover the higher fixed cost and reach the break-even point. Therefore, the total profit curve will shift downwards.

Question 16

A firm has positive fixed cost and positive variable cost.At its current level of output,marginal cost equals average cost.The firm must

Accepted Answer

If at the current level of output, marginal cost equals average cost, this means that the firm is producing at the minimum point of its average cost curve. At this point, average cost is minimized, and therefore the firm is producing the quantity that minimizes average cost. This is also the profit-maximizing level of output, as long as price is equal to or greater than average cost. Therefore, option A is incorrect. Total variable cost equaling total fixed cost is not necessarily related to the given information, so option C can be eliminated. And finally, we cannot determine from the given information whether the firm is earning positive or negative profit, so option D is also incorrect.

Question 17

A profit-maximizing firm always

Accepted Answer

A profit-maximizing firm produces every unit of output for which MR > MC, because producing any additional units beyond that point would result in diminishing returns and lower profits.

Question 18

Dunston Military Academy has an annual deficit of $250,000.Its 1,000 students pay tuition of $10,000 each per year.The economics faculty has recommended solving the problem by recruiting additional athletes with $5,000 scholarships.Each additional athlete will cost the school $2,500 (equipment,etc.).Assuming the academy agrees,how many athletes are needed to eliminate the deficit?

Accepted Answer

Each new athlete brings in $10,000 in tuition but receives a $5,000 scholarship, netting the academy $5,000. Additionally, there's a cost of $2,500 per athlete, leaving a net gain of $2,500 per athlete. To cover a $250,000 deficit, 100 athletes ($250,000 / $2,500) are needed.

Question 19

The marginal cost of Alexa's Guide to Street People and Their Pets is constant at $5.Alexa sells 5,000 copies per year at $20 per copy.She would like to increase readership and hold total profit constant.If the price goes to $15,how many copies must she sell?

Accepted Answer

First, let's find Alexa's current total profit:

- Revenue: 5,000 copies * $20 per copy = $100,000 
- Cost: 5,000 copies * $5 marginal cost per copy = $25,000 
- Profit: $100,000 - $25,000 = $75,000

If Alexa drops the price to $15 per copy, her new revenue per copy will be $15 and her new profit per copy will be:

- Profit per copy = $15 - $5 (marginal cost) = $10

To hold total profit constant, Alexa needs to sell:

- New profit ÷ Old profit = 7500 ÷ (75000 ÷ 10) = 1,000 copies more than 5,000 
- Total copies sold at $15 price = 5,000 + 1,000 = 6,000 copies

Therefore, the best choice is C) 7,500.

Question 20

When marginal cost exceeds marginal revenue,

Accepted Answer

When marginal cost exceeds marginal revenue, it means that the cost of producing one additional unit of output is more than the revenue earned from producing and selling that additional unit. This results in a marginal profit that is negative, meaning that producing and selling that additional unit will lead to a loss. Therefore, the best choice in this scenario is to not produce the additional unit and reduce output to a level where marginal cost equals marginal revenue, ensuring that the firm is maximizing its profits.

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