Question 1

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, this means that a change in price will not have a significant impact on the quantity demanded by consumers. As a result, the firm cannot increase revenue by increasing the price, as demand is not responsive to price changes. In this scenario, if the firm were to increase the price, it would lead to a decrease in quantity demanded, resulting in a negative marginal revenue.

Question 2

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

Input demand functions calculated from profit functions assume that output is set at its profit-maximizing level, which means that the firm is producing at a level where the marginal revenue equals the marginal cost. This differs from input demand functions calculated from cost functions, which assume cost-minimization without taking into account the profit-maximizing level of output. Therefore, option D is the correct choice.

Question 3

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 marginal revenue is below marginal cost, this means that the firm is not earning enough revenue from each additional unit of production to cover the cost of producing it. In this case, increasing production will only exacerbate the problem, as each additional unit produced will add to the overall losses. Therefore, profits are likely to decrease.

Question 4

If a price-taking firm's production function is given by $q = \sqrt { l }$ ,its profit function is given by
A) $p / 2 w$ .
B) $p ^ { 2 } / 2 w$ .
C) $p / 2 w ^ { 2 }$ .
D) $p ^ { 2 } / 4 w$ .

Accepted Answer

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

Question 5

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 6

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 refers to the additional revenue generated by selling one more unit of output.

Question 7

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 up to the point where marginal revenue (MR) is zero. This is because, in economic theory, total revenue increases as long as MR is positive and starts to decrease when MR becomes negative. Producing where MR is zero means the firm has reached the point of maximum total revenue.

Question 8

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 result in a proportionately larger change in the quantity demanded. Therefore, selling one less unit of output will result in a decrease in revenue since the firm will not be able to compensate for the loss of unit sales with increased revenue from price increases.

Question 9

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 seek to maximize profits.
II.That the margnal cost curve be positively sloped.
III.That price exceed average variable cost.
IV.That price exceed 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 and II only.
E)I,II and III,but not IV.

Accepted Answer

For a perfectly competitive firm's supply curve to be its marginal cost curve, the firm must seek to maximize profits (I), the marginal cost curve should be positively sloped (II), and the price must exceed average variable cost (III) to ensure the firm covers its variable costs and continues production in the short run. It is not necessary for the price to exceed average total cost (IV) for the supply curve to be the marginal cost curve.

Question 10

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

When the demand curve a firm faces shifts to the right, the marginal revenue curve shifts to the right as well. This is because a higher demand for the firm's product leads to higher revenue at each level of output, causing the marginal revenue curve to shift to the right.

Question 11

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

If price is equal to short-run average variable cost, the firm is generating just enough revenue to cover its variable costs but not its fixed costs. At this point, the firm would not be making any profit, but would not be incurring any losses either. If the price were to fall below this point, the firm would not even be able to cover its variable costs and would need to shut down operations in the short run. Therefore, the firm is at the shutdown point.

Question 12

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

Marginal revenue equals marginal cost at the profit maximizing output level. At this output level, the additional revenue generated from producing one more unit is equal to the additional cost of producing that unit, thus maximizing profit.

Question 13

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 prices because if all input prices are multiplied by a certain factor k, the revenue and cost functions both increase by a factor of k, resulting in a profit increase of k as well. However, profit functions are not necessarily homogeneous of degree one in output prices, as increasing output prices may not necessarily result in a proportional increase in profits.

Question 14

Short-run producer surplus can be caluculated by integration as (where q* is the firm's profit maximizing output level and MC(q)is its marginal cost function)
A) $\int _ { 0 } ^ { q ^ { *  } } M C ( q ) d q - p$ .
B) $\int _ { 0 } ^ { q ^ { * } } [ M C ( q ) - p q ] d q$ .
C) $\int _ { 0 } ^ { q ^ { * } } p q - M C ( q ) d q$ .
D) $\int _ { 0 } ^ { q ^ { * } } [ p - M C ( q ) ] d q$ .

Accepted Answer

Producer surplus is the area above the marginal cost curve and below the price level, which is calculated by integrating the difference between price and marginal cost over the quantity produced.

Question 15

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 is derived from the demand for capital.

Accepted Answer

The demand for labor is said to be derived because it is based on the demand for the goods or services that labor can produce. In other words, firms hire workers to produce output, and the amount of labor demanded depends on how much output the firm can sell. The wage rate is determined by the market for labor, but the demand itself is derived from the demand for the firm's output.

Question 16

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 answer of A profit-maximizing firm's demand function for labor...

Question 17

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

A price taker firm cannot influence the market price and must accept the price at which it can sell its output. Therefore, the marginal revenue for a price taker is equal to the market price.

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

The answer of One implication of the fact that profit...

Question 19

If a price-taking firm's production function is given by $q = \sqrt { l }$ ,its supply function is given by
A)q = 2pw.
B)q = p/2w.
C)q = 2p/w.
D)q = 2w/p.

Accepted Answer

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

Question 20

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 elasticity of demand facing the firm is -3.When the elasticity of demand facing the firm is less than -1, the marginal revenue curve will be below the marginal cost curve, and the profit-maximizing firm will not produce any output.

Quiz 9: Profit Maximization

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

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

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

If a price-taking firm's production function is given by $q = \sqrt { l }$ ,its profit function is given by

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

A firm's marginal revenue is defined as

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

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

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

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

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

Profit functions are homogeneous of degree

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

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

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

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

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

If a price-taking firm's production function is given by $q = \sqrt { l }$ ,its supply function is given by

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?