Question 1

If output is increased beyond the point where total profit is maximized,
A) marginal profit will be zero.
B) marginal profit will be negative.
C) marginal profit will be positive.
D) MR > MC.

Accepted Answer

When output is increased beyond the point where total profit is maximized, marginal profit will be negative. This is because the marginal cost of producing each additional unit will be greater than the marginal revenue earned from selling that additional unit. As a result, the additional unit will reduce the overall profit of the firm. Therefore, it is not the best choice to continue producing beyond the point of maximizing total profit.

Question 2

Once the profit-maximizing output where MR = MC is determined, price is set by
A) adding a standard markup percentage to marginal cost.
B) the demand curve.
C) making it equal to MR = MC.
D) subtracting the marginal cost from total revenue.

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

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
A) 1,500.
B) 2,000.
C) 2,500.
D) 3,000.

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 4

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
A) reduce output to maximize total profit.
B) increase output until marginal profit falls to zero.
C) do whatever is necessary to increase marginal profit.
D) There is not enough information to make a decision.

Accepted Answer

If the firm is making an economic profit at an output of 4,000 units and marginal profit is positive, it means that the total revenue generated from selling an additional unit (marginal revenue) is greater than the cost of producing it (marginal cost). Therefore, increasing output will result in additional economic profit until marginal profit falls to zero (which is the profit-maximizing output level). Any output beyond this level would result in negative marginal profit, implying that the cost of producing an additional unit exceeds the revenue it generates, leading to a decrease in total profit. Therefore, the firm should increase output until marginal profit falls to zero to maximize its total profit.

Question 5

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
A) $7,000.
B) $2,500.
C) $1,500.
D) $250.

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 6

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?
A) 10,000
B) 9,000
C) 7,500
D) 6,000

Accepted Answer

When the price decreases from $20 to $15, the total revenue will decrease from $100,000 to $75,000. To hold total profit constant, the total cost must also decrease by $25,000. Since the marginal cost is constant at $5 per unit, the total cost will increase by $5 per additional unit sold. Therefore, Alexa must sell an additional 5,000 units to decrease the total cost by $25,000. This means she needs to sell a total of 10,000 units at $15 each to maintain her profit. 
Thus, the answer is (C) 7,500 is incorrect but closest to the correct answer.

Question 7

A profit-maximizing firm always
A) sells its output at P = MR.
B) produces at the output at which MR = 0.
C) hires labor until the MRP of labor = 0.
D) produces every unit of output for which MR > MC.

Accepted Answer

The profit-maximizing firm produces every unit of output for which MR > MC. This is because producing one more unit of output will add more to revenue (MR) than to cost (MC), therefore increasing profit. If MR < MC, then producing an additional unit of output would increase costs more than it would increase revenue, causing profit to decrease. Selling output at P = MR is only true for firms in perfectly competitive markets, and hiring labor until MRP of labor = 0 is not necessarily profit-maximizing as it may lead to underproduction or overproduction.

Question 8

A firm has positive fixed cost and positive variable cost.At its current level of output, marginal cost equals average cost.The firm must
A) not be producing at its profit-maximizing level of output.
B) be producing the quantity that minimizes average cost.
C) be operating at a point at which total variable cost equals total fixed cost.
D) be earning negative profit.

Accepted Answer

If marginal cost equals average cost at the current level of output, the firm is producing at its minimum average cost. Therefore, the firm must be producing the quantity that minimizes average cost, which is the output level where marginal cost intersects average cost.

Question 9

Total profit is maximized if the slope of the total profit curve is
A) positive.
B) negative.
C) increasing.
D) zero.

Accepted Answer

The slope of the total profit curve is the marginal profit, which is the additional profit earned from selling one additional unit. Total profit is maximized when marginal profit is zero, as to the left of this point, adding more units will increase profit, and to the right of this point, adding more units will decrease profit. Therefore, the correct choice is D, zero.

Question 10

When a firm's fixed cost rises, its total profit curve shifts
A) up at every output level.
B) down at every output level.
C) left at every profit level.
D) right at every profit level.

Accepted Answer

When a firm's fixed cost increases, it will require a larger amount of revenue to cover its costs and achieve the same level of profit. As a result, the firm's total profit curve will shift downward at every output level.

Question 11

If a profit-maximizing firm's fixed cost of producing widgets falls,
A) its total cost curve is unaffected.
B) its marginal cost curve shifts down.
C) the firm will produce more widgets.
D) the firm's average profit per widget produced rises.

Accepted Answer

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

Question 12

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
A) Marginal cost was below average cost but less than marginal revenue.
B) Average cost exceeded variable cost, which exceeded marginal revenue.
C) Variable cost exceeded fixed cost but was less than marginal revenue.
D) Marginal cost was above average cost but greater than marginal revenue.

Accepted Answer

Edison's statement about selling below cost of production suggests that he was willing to produce and sell additional units at a price lower than what it cost to produce them. This indicates that his marginal cost was below his average cost, but his marginal revenue was also relatively low. By increasing production and accepting a slight increase in cost, he was able to sell additional units at a lower price and still make a profit. This aligns with option A, where marginal cost is below average cost but less than marginal revenue.

Question 13

If fixed cost rises,
A) the profit maximizing level of output would decrease.
B) the profit maximizing level of output would not change.
C) marginal cost rises.
D) variable cost falls.

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 14

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?
A) Zero, the deficit cannot be eliminated by giving more scholarships.
B) 25
C) 50
D) 100

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 15

If the marginal profit from increasing output by one unit is negative, then to attain an optimum the firm should
A) increase output until marginal profit equals zero.
B) reduce output until marginal profit equals zero.
C) increase output until marginal profit is maximized.
D) reduce output until marginal profit is maximized.

Accepted Answer

When the marginal profit from increasing output by one unit is negative, it means the firm is experiencing diminishing returns. As output increases, the additional units produced are becoming less profitable. Therefore, the firm should reduce output until the marginal profit equals zero to attain the optimum level of production. At this point, the firm is producing the quantity of output that maximizes profits.

Question 16

When marginal cost exceeds marginal revenue,
A) marginal profit < 0.
B) the firm should increase output.
C) marginal profit + marginal cost > marginal revenue.
D) marginal cost < marginal revenue - marginal profit.

Accepted Answer

When marginal cost exceeds marginal revenue, the firm is no longer generating a profit on each additional unit produced, and in fact may be incurring a loss. This means that marginal profit is negative, and therefore choice A is the best answer. The firm should consider reducing output or raising prices in order to improve its profitability. B is not the best choice because increasing output would further increase the firm's marginal cost and exacerbate the problem. C and D are also not the best choices because they do not accurately reflect the relationship between marginal cost and marginal revenue, and do not provide guidance on how the firm should respond to this situation.

Question 17

If marginal revenue and marginal cost are not equal, profit can be maximized by
A) increasing output if MR > MC.
B) decreasing output if MC > MR.
C) moving to the output where the slopes of TR and TC are equal.
D) All of the above are correct.

Accepted Answer

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

Question 18

Total profit is maximized where
A) MR = MC.
B) marginal profit is zero.
C) the slope of the marginal profit curve is zero.
D) All of the above are correct.

Accepted Answer

The answer of Total profit is maximized where
A) MR =...

Question 19

The typical total profit graphical presentation is shown as
A) a square.
B) a rectangle.
C) a hill, or mound.
D) an S curve.

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 20

At a profit-maximizing output level,
A) marginal revenue minus marginal cost equals zero.
B) marginal profit equals zero.
C) the slope of the total profit curve is zero.
D) All of the above are true.

Accepted Answer

The answer of At a profit-maximizing output level,
A) marginal revenue...

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

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

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

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

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

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

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?

A profit-maximizing firm always

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

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

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

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

If fixed cost rises,

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

When marginal cost exceeds marginal revenue,

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

Total profit is maximized where

The typical total profit graphical presentation is shown as

At a profit-maximizing output level,