Deck 8: How Firms Make Decisions: Profit Maximization

Question 1

Henry decides to quit his job (earning $50,000 per year),take his $60,000 in savings,and open a dry cleaning store.Figure 8-1 shows the revenues and expenditures for his first year of operation.If Henry could have earned $3,000 in interest on the money used to open the store,his accounting profit would have been

A)-$13,000
B)-$3,000
C)$20,000
D)$40,000
E)$37,000

Answer 1

$40,000

Question 2

The return to owners for innovation and risk taking is a firm's

A)economic profit after taxes
B)total revenue
C)total opportunity cost
D)total implicit cost
E)money profit after taxes

Answer 2

economic profit after taxes

Question 3

Henry decides to quit his job,take his $60,000 in savings,and open a dry cleaning store.Figure 8-1 shows the revenues and expenditures for his first year of operation.Which of the following items would be included in the calculation of the shop's economic profit and not included in the accounting profit?

A)the cost of raw materials
B)the earnings from the dry cleaning store
C)the lost interest from the $60,000 in savings
D)Henry's salary from the dry cleaning store
E)none,since all items included in economic profit are also included in accounting profit

Answer 3

the lost interest from the $60,000 in savings

Question 4

All of the following,except one,are included in the profit earned by a firm's owners.Which is the exception?

A)the reward for developing new products
B)the reward for moving an established business into new geographic markets
C)the reward for risk taking
D)salaries that compensate for the owners' time
E)dividend payments to the stockholders

Question 5

The behavior of firms is best understood by focusing on

A)money profit
B)economic profit
C)accounting profit
D)economic profit minus implicit costs
E)money profit minus explicit costs

Question 6

To develop a useful picture of a firm's behavior,economists assume that the

A)firm's goal is to maximize total revenue
B)firm's goal is to maximize profit
C)firm's goal is to minimize marginal cost
D)roles of owner,manager and worker are performed by the same individuals
E)roles of owner,manager and worker are interchangeable

Question 7

The difference between accounting profit and economic profit relates to

A)the manner in which revenues are defined
B)how total revenue is calculated
C)the market structure for the firm's industry
D)the price of the good in the market
E)the manner in which costs are defined

Question 8

Accounting profit is defined as

A)total revenue minus opportunity cost
B)total revenue minus all costs of production
C)total revenue minus explicit costs
D)the sum of marginal revenues received from all units produced
E)the difference between marginal revenue and marginal cost

Question 9

Henry decides to quit his job (earning $50,000 per year),take his $60,000 in savings,and open a dry cleaning store.Figure 8-1 shows the revenues and expenditures for his first year of operation.If Henry could have earned $3,000 in interest on the money used to open the store,his economic profit would have been

A)-$13,000
B)-$3,000
C)$40,000
D)$120,000
E)$37,000

Question 10

William quits his job where he earns an annual salary of $75,000 and opens a management consulting business,charging an hourly rate of $120.He works out of his home,converting a storeroom into an office.(Zoning restrictions prevent William from renting out the room. )Start-up costs are financed by selling $15,000 worth of bonds he inherited that were earning annual interest payments of $900.During his first year,William incurs expenses for supplies and utilities that total $3,500.If William bills 500 hours of consulting time in the first year,he earns an economic profit equal to

A)$55,600
B)-$15,000
C)-$19,400
D)-$34,400
E)$41,500

Question 11

William quits his job where he earns an annual salary of $75,000 and opens a management consulting business,charging an hourly rate of $120.He works out of his home,converting a storeroom into an office.(Zoning restrictions prevent William from renting out the room. )Start-up costs are financed by selling $15,000 worth of bonds he inherited that were earning annual interest payments of $900.During his first year,William incurs expenses for supplies and utilities that total $3,500.The total cost of production in the first year equals

A)$94,400
B)$79,400
C)$4,400
D)$3,500
E)$19,400

Question 12

When there are implicit costs of production,

A)accounting and economic profit are equal
B)opportunity costs of production are zero
C)explicit costs of production are small
D)accounting profit will exceed economic profit
E)economic profit will exceed accounting profit

Question 13

Innovations that generate profit for a firm's owners include developing

A)both c and d
B)all of the following
C)markets in new locations
D)new products
E)new production processes and distribution methods

Question 14

If a firm has an accounting profit of $2,350,000 and implicit costs totaling $150,000,then its economic profit equals

A)$2,350,000
B)$2,500,000
C)$2,200,000
D)$150,000
E)$2,000,000

Question 15

The demand curve facing a firm

A)indicates the quantity of output that customers will purchase from that firm,at various prices
B)shows the minimum cost of producing any level of output
C)is drawn assuming that the firm is operating in the short run
D)indicates how much output a profit-maximizing firm will produce,at various prices
E)is downward sloping because consumers have less money to spend,the more output they purchase

Question 16

Economic profit is another name for accounting profit.

Question 17

Economists assume that the goal of the firm is to

A)maximize total revenue
B)maximize profits
C)minimize costs
D)equate total revenue and total cost
E)break even in the long run

Question 18

Myron worked at a factory where he earned $20,000 per year.One day,he quit his job and opened a bumper sticker business.After one year,his business earned $60,000 in sales revenue and he incurred $30,000 in direct business expenses.If he received no salary from the new business,what is his economic profit?

A)$10,000
B)$30,000
C)$60,000
D)$20,000
E)$50,000

Question 19

Myron worked at a factory where he earned $20,000 per year.He quit his job and opened a bumper sticker business.After one year,his business earned $60,000 in sales revenue and he incurred $30,000 in direct business expenses.If he received no salary from the new business,what is his accounting profit?

A)$10,000
B)$20,000
C)$40,000
D)$30,000
E)$60,000

Question 20

Every firm is constrained by the demand curve for the product it produces.

Question 21

The demand curve facing a firm

A)indicates the amount of raw materials and other inputs the firm will purchase,at various prices
B)indicates the amount of the good demanded from that firm by a particular consumer,at various prices
C)indicates the amount of output that customers will purchase from the firm,at various prices
D)shows the minimum price at which the firm can sell any given quantity of output
E)is horizontal in the long run,but upward sloping in the short run

Question 22

If the demand curve facing a firm shifts outward,then

A)there is a decline in the maximum price the firm can charge at each quantity it may want to sell
B)there is an increase in the maximum price the firm can charge at each quantity it may want to sell
C)the firm would need to increase the quantity it wants to sell in order to generate a rise in the price
D)the firm would need to decrease the quantity it wants to sell in order to generate a rise in the price
E)there is a decrease in the maximum quantity the firm can sell at each price it may want to charge

Question 23

If average fixed cost exceeds average variable cost,a firm should shut down in the short run.

Question 24

A profit-maximizing firm will never increase production if doing so causes total revenue to decrease.

Question 25

In the short run,profit maximization typically occurs where total revenue is at its maximum.

Question 26

The demand curve facing a firm shows the

A)maximum price the firm can charge and still sell any given amount of output
B)minimum price the firm can charge and still sell any given amount of output
C)minimum price at which the firm will demand any given quantity of output
D)maximum price at which the firm will demand any given quantity of output
E)minimum quantity of output the firm can sell at any given price

Question 27

The demand curve facing the firm has been estimated as follows:


Which of the following statements about the firm's total revenue is correct?

A)If the firm sold 3 units of output,it would have revenues totaling $540.
B)If the firm sold 7 units of output,it would have revenues totaling $980.
C)If the firm increased output from 2 units to 3 units,total revenue would increase.
D)If the firm increased output from 6 units to 7 units,total revenue would increase.
E)If the firm decreased output from 6 units to 5 units,total revenue would decline.

Question 28

The demand curve facing a firm acts as a constraint by

A)shifting to the left and right as suppliers vary their quantities
B)showing the maximum price that could be charged to sell a specific output level
C)showing the minimum quantity of output that a firm needs to produce at a specific price
D)limiting sales to those who are first in line when the product is distributed
E)relating the actions and decisions of buyers and sellers in the market

Question 29

A firm's total cost of production

A)always increases as it produces more output
B)can increase or decrease as it produces more output
C)increases at a decreasing rate as long as it produces more output
D)is fixed in the short run,because inputs are fixed in the short run
E)can be minimized by producing where the firm's demand curve crosses the horizontal axis

Question 30

In order to maximize profits,a firm should decrease output whenever total cost exceeds total revenue.

Question 31

A firm's total revenue

A)is the profit it earns by producing and selling a particular quantity of output
B)varies as output varies along the demand curve the firm faces
C)is constant at all points along a fixed demand curve
D)is determined by subtracting total profit from total cost
E)always decreases as its output increases,because costs rise

Question 32

The demand curve facing the firm has been estimated as follows:


Which of the following statements about the firm's total revenue is correct?

A)If the firm sold 3 units of output,it would have revenues totaling $540.
B)If the firm sold 7 units of output,it would have revenues totaling $560.
C)If the firm increased output from 2 units to 3 units,total revenue would decline.
D)If the firm decreased output from 7 units to 6 units,total revenue would decline.
E)If the firm decreased output from 6 units to 5 units,total revenue would decline.

Question 33

In order to maximize profits,a firm should decrease output whenever total cost exceeds total revenue.

Question 34

A firm's total revenue

A)can be read off the demand curve it faces,but only if we know total cost of production
B)can be read off the demand curve it faces,but only if we know how must output the firm sells
C)is found by multiplying price per unit by the number of units produced and sold
D)is equal to profit when inputs are fixed in the short run
E)will be positive at any level of output

Question 35

Which of the following determines the maximum price a firm may charge for a particular quantity of output?

A)the firm's supply curve
B)opportunity costs
C)explicit and implicit costs of production
D)the minimum point of the average total cost curve
E)the demand curve facing the firm

Question 36

The demand curve facing the firm has been estimated as follows:


Which of the following statements about the firm's total revenue is correct?

A)If the firm sold 3 units of output,it would have revenues totaling $540.
B)If the firm sold 7 units of output,it would have revenues totaling $980.
C)If the firm increased output from 2 units to 3 units,total revenue would decline.
D)If the firm increased output from 6 units to 7 units,total revenue would decline.
E)If the firm decreased output from 6 units to 5 units,total revenue would decline.

Question 37

Under the total revenue and total cost approach to profit maximization,

A)firms equate total cost and total revenue in order to maximize profit
B)the profit-maximizing output level is equivalent to the total revenue-maximizing output level
C)when total costs are minimized,profits are maximized
D)firms choose the output level where TR - TC is greatest
E)total cost must always exceed total revenue in the long run

Question 38

What can be said about the firm shown in Figure 8-2?

A)the firm faces a perfectly elastic demand curve
B)the firm will maximize profits at the point where the TR and TC curves intersect
C)if price rises,the TC curve will shift upward
D)if fixed costs rise,the TR curve will pivot upward
E)the firm faces a downward-sloping demand curve

Question 39

Under the total revenue and total cost approach to profit maximization,

A)firms equate total variable cost to total revenue in order to maximize profit
B)profit is maximized when fixed cost falls to zero
C)firms choose the level of output at which total revenue is the greatest distance above total cost when the firm earns an economic profit
D)firms choose the level of output at which the changes in revenue and cost both equal zero
E)total revenue is maximized when profit is zero

Question 40

If the price of gasoline rises at the Exxon gas station at a busy intersection,the Mobil station at the same intersection will experience

A)an outward shift of the demand curve it faces
B)an inward shift of the demand curve it faces
C)a rightward movement along the same demand curve it faces
D)a leftward movement along the same demand curve it faces
E)neither a shift in nor a movement along the demand curve it faces

Question 41

When marginal revenue is positive,total revenue must rise as output increases.

Question 42

What is true only at the output level where price equals average total cost?

A)Marginal cost equals marginal revenue.
B)Profit is maximized.
C)Losses are minimized.
D)Profit is zero.
E)Cost is minimized.

Question 43

Figure 8-4 indicates data for the total cost curve and the demand curve facing Jonathan's Riding Mower Shop.The quantities indicated are potential daily sales.If Jonathan sells 5 riding mowers per day,he will earn an economic profit of

A)$3,000
B)$1,750
C)$2,150
D)$1,850
E)$2,050

Question 44

If a firm's managers inappropriately decide to operate where total revenue is maximized,they will continue to increase output

A)as long as marginal revenue exceeds marginal cost
B)as long as marginal cost exceeds marginal revenue
C)as long as the total revenue curve is above zero
D)as long as the marginal revenue curve is above the horizontal axis
E)until the total revenue curve intersects the total cost curve

Question 45

If a firm enjoys a revenue of $500 from two units of output and $600 from three units of output,then its marginal revenue must be rising.

Question 46

If marginal revenue for a firm is negative,

A)marginal cost must also be negative
B)total revenue will decrease if the firm sells more output
C)total revenue must also be negative
D)the firm should shut down in the short run
E)the lost revenue from having to lower its price is less than the additional revenue from higher sales

Question 47

Assume all of a firm's costs are positive and consider the total revenue curve depicted in Figure 8-7.In order to maximize profit,or minimize loss,the firm

A)should produce 100 units of output
B)should produce 200 units of output
C)should produce less than 100 units of output
D)should produce between 100 and 200 units of output
E)cannot close

Question 48

Figure 8-3 shows the total revenue and total cost for a firm at selected output levels.Which is the highest possible level of profit for this firm over this output range?

A)$500
B)$2,100
C)$1,600
D)-$500
E)$300

Question 49

Figure 8-4 indicates data for the total cost curve and the demand curve facing Jonathan's Riding Mower Shop.The quantities indicated are potential daily sales.Jonathan's profit-maximizing sales level is

A)8 or 9 units
B)5 units
C)10 units
D)6 units
E)7 units

Question 50

Figure 8-3 shows the total revenue and total cost for a firm at selected output levels.Which is the profit-maximizing level of output for this firm?

A)100 units
B)200 units
C)500 units
D)300 units
E)400 units

Question 51

If a firm is producing the level of output at which the total cost curve intersects the total revenue curve,

A)profit is positive
B)profit is maximized
C)profit is zero
D)costs are minimized
E)average revenue is maximized

Question 52

Profit maximization occurs at the quantity where marginal cost equals marginal revenue.

Question 53

Using a TR-TC graph,a firm maximizes profit by producing the output level where the greatest

A)vertical distance occurs between the MR and MC curves
B)vertical distance occurs between the TR and TC curves,and the TR curve is above the TC curve
C)total revenue occurs
D)horizontal distance occurs between the TR and TC curves,and the TR curve is above the TC curve
E)horizontal distance occurs between the MR and MC curves,and the MR curve is rising

Question 54

Figure 8-4 indicates data for the total cost curve and the demand curve facing Jonathan's Riding Mower Shop.The quantities indicated are potential daily sales.If Jonathan sells 10 riding mowers per day,he will earn an economic profit of

A)$0
B)$150
C)$350
D)$500
E)$550

Question 55

In Figure 8-5,which of the five output levels corresponds to the highest level of profit?

A)level A
B)level B
C)level C
D)level D
E)level E

Question 56

Consider the firm shown in Figure 8-6.If there is an increase in fixed cost,then

A)the TR curve will rotate upward
B)the TR curve will shift to the right
C)the TR curve will be unaffected
D)the TC curve will shift downward
E)profits will rise

Question 57

Figure 8-4 indicates data for the total cost curve and the demand curve facing Jonathan's Riding Mower Shop.The quantities indicated are potential daily sales.Jonathan's maximum profit is

A)$2,150
B)$3,600
C)$550
D)$2,050
E)$1,750

Question 58

In Figure 8-5,which of the five output levels corresponds to the highest level of total revenue?

A)level A
B)level B
C)level C
D)level D
E)level E

Question 59

In Figure 8-5,which of the following is true at point B?

A)total revenue is smaller than total cost
B)marginal revenue exceeds marginal cost
C)marginal revenue equals marginal cost
D)marginal revenue is smaller than marginal cost
E)total revenue equals total cost

Question 60

In Figure 8-5,at which of the five output levels is profit equal to zero?

A)level A
B)level B
C)level C
D)level D
E)level E

Question 61

Consider the firm in Figure 8-10.The marginal cost of producing the fifth unit of output is

A)$300
B)$1,500
C)$50
D)$40
E)$60

Question 62

Economic analysis assumes that,for each output level,the firm

A)operates at minimum point of its average total cost curve
B)operates at minimum point of its long-run average total cost curve
C)seeks lowest possible cost of producing that quantity of output
D)produces at maximum point of its total revenue curve
E)produces at maximum point of its total product curve

Question 63

In Figure 8-8,the marginal revenue from adding the third unit of output is

A)$240
B)$80
C)$90
D)$40
E)$60

Question 64

Figure 8-9 shows the demand schedule faced by an artist for reproductions of his paintings.What is the marginal revenue from expanding from selling reproductions to 400?

A)$3,000
B)$1
C)$0
D)-$1,000
E)-$3,000

Question 65

To maximize profits or minimize losses in the short run,the firm in Figure 8-10 should produce an output of

A)0
B)1
C)2
D)3
E)4

Question 66

The additional revenue received by a firm from selling one more unit of output is known as

A)total revenue
B)price
C)average revenue
D)marginal cost
E)marginal revenue

Question 67

Consider the firm in Figure 8-10.The marginal revenue from selling the fifth unit of output is

A)$90
B)$70
C)$50
D)$30
E)$10

Question 68

If marginal cost exceeds marginal revenue,

A)the firm can increase profits by increasing output
B)the firm will lower profits by increasing output
C)the firm is maximizing profits
D)total cost exceeds total revenue
E)average cost equals average revenue

Question 69

Hannah's Harmonicas sells 1,000 harmonicas each month at a price of $10.00 each.(She could sell as many as she wishes at that price. )If the marginal cost of producing an additional harmonica is $9.60,then

A)Hannah should produce additional harmonicas
B)Hannah could possibly reduce her profits by producing one additional harmonica
C)Hannah must currently be maximizing her profits
D)too many harmonicas are being produced,from society's point of view
E)Hannah's total economic profit is $400 per month

Question 70

When a firm faces a downward-sloping demand curve,marginal revenue

A)is constant regardless of how much output the firm produces
B)is less than price
C)increases as the firm produces more output
D)decreases if the firm produces less output
E)is equal to the price per unit of output

Question 71

Marginal revenue is

A)the change in total revenue divided by total output
B)total revenue divided by total output
C)total revenue minus total cost then divided by total output
D)the change in total revenue divided by the change in price of output
E)the change in total revenue divided by the change in total output

Question 72

If the firm in Figure 8-10 sells five units of output,then the price must equal

A)$60
B)$10
C)$250
D)$90
E)$50

Question 73

Marginal revenue is defined as the

A)total revenue minus total cost
B)change in total revenue divided by the change in the quantity of output
C)price minus average total cost
D)total revenue over the quantity of output
E)quantity times price

Question 74

Figure 8-9 shows the demand schedule faced by an artist for reproductions of one of his paintings.His marginal revenue falls as output rises because

A)marginal cost is rising
B)the artist must lower the price on all reproductions in order to sell a larger quantity
C)total revenue is increasing at an increasing rate
D)the price is equal to marginal revenue
E)the artist works in a perfectly competitive market for art

Question 75

If a firm faces a downward-sloping demand curve,its marginal revenue is

A)less than its marginal cost
B)greater than price
C)less than price
D)equal to price
E)equal to its total revenue

Question 76

If a firm faces a horizontal demand curve,marginal revenue

A)is constant regardless of how much output the firm produces
B)decreases as the firm produces more output
C)increases as the firm produces more output
D)decreases if the firm produces less output
E)is less than price at most possible output levels

Question 77

According to the marginal approach to profit maximization,firms should increase output as long as total revenue is rising.

Question 78

If total revenue falls as more output is produced,

A)marginal revenue is negative
B)marginal revenue is positive
C)marginal cost is negative
D)average revenue is negative
E)total costs exceed total revenue

Question 79

In Figure 8-8,the marginal revenue from adding the fifth unit of output is

A)$300
B)$40
C)$60
D)$20
E)$10

Question 80

If a firm chooses to produce output at the point where MR equals MC,

A)then TR - TC will be maximized if there is a profit
B)economic profits will be zero
C)there will be positive accounting profits
D)there will be positive economic profits
E)average cost must equal average revenue