Question 1

Economists assume that business firms have many goals, and profit maximization is just one of them.

Accepted Answer

False

Question 2

A firm that is earning zero economic profit should go out of business.

Accepted Answer

A firm earning zero economic profit is still covering its costs, including opportunity cost of capital. It may be worthwhile for the firm to continue operating in the short run, especially if market conditions are expected to improve in the future.

Question 3

A firm's demand curve can be used to determine average revenue.

Accepted Answer

Average revenue is equal to the total revenue divided by the quantity of goods sold. In a firm's demand curve, the price that consumers are willing to pay for the quantity of goods sold is indicated. Thus, by calculating the total revenue at each quantity sold and dividing by that quantity, we can determine the firm's average revenue at each level of output.

Question 4

Price and output decisions are two aspects of the same choice.

Accepted Answer

Price and output decisions are interdependent and go hand in hand. The price of a product will affect the demand for it, which in turn will affect the optimal output level of the firm. Similarly, the output level will affect the cost of production, which will influence the price that the firm can charge. Therefore, price and output decisions are two sides of the same coin, and a firm must consider both in order to make optimal decisions.

Question 5

A small business owner who is earning a positive economic profit, no matter how small, is doing better than if he or she sold his or her business and went to work for another firm.

Accepted Answer

A positive economic profit means that the revenue earned by the business is more than the cost of production, including the opportunity cost of the owner's time and resources. Therefore, the owner is better off running the business than working for another firm, even if the profit is small.

Question 6

Economists assume that business firms attempt to maximize their profits.

Accepted Answer

This is a fundamental assumption of the economic theory of the firm. According to this assumption, firms make decisions and take actions with the goal of increasing their profits, both in the short-term and long-term.

Question 7

Economists and accountants use the same definition of profit.

Accepted Answer

Economists consider both explicit and implicit costs, including opportunity costs, when calculating economic profit, while accountants focus on explicit costs to determine accounting profit.

Question 8

It can be shown that average revenue and price are always equal.

Accepted Answer

Average revenue is the total revenue divided by the quantity sold, while price is the amount paid per unit. Since total revenue equals price multiplied by quantity, it follows that average revenue and price are equal.

Question 9

Total revenue cannot be derived from the demand curve or a demand schedule.

Accepted Answer

Total revenue can be derived from the demand curve or a demand schedule by multiplying the price at which goods are sold by the quantity of goods sold at that price.

Question 10

Economists and accountants have very different definitions of profit.

Accepted Answer

Economists define profit as total revenue minus total cost, while accountants define profit as revenue minus expenses.

Question 11

The average revenue curve can also be described as the demand curve.

Accepted Answer

The average revenue curve and the demand curve are identical in a perfectly competitive market. In other types of markets, the average revenue curve will be less elastic than the demand curve.

Question 12

Accounting profit differs from economic profit by the amount of the explicit costs faced by a firm.

Accepted Answer

Accounting profit differs from economic profit because economic profit subtracts both explicit and implicit costs from total revenue, while accounting profit only subtracts explicit costs.

Question 13

A firm's total profit is the difference between its sales and what it pays out in costs.

Accepted Answer

Total profit is calculated by subtracting the total costs from the total sales revenue of a firm.

Question 14

Total revenue is equal to quantity multiplied by average revenue.

Accepted Answer

This is because average revenue is the total revenue divided by quantity, and so multiplying average revenue by quantity simply gives the total revenue. Therefore, total revenue equals quantity times average revenue.

Question 15

Average revenue is slightly higher than price.

Accepted Answer

Average revenue is equal to the price of the good, as it is calculated by dividing the total revenue by the quantity sold.

Question 16

Over the range of most of a firm's output, average revenue is greater than price.

Accepted Answer

Average revenue is equal to price in a perfectly competitive market, as average revenue is calculated by dividing total revenue by quantity sold, which simplifies to the price of the good.

Question 17

A firm's total revenue is simply the price of its product multiplied by the quantity sold.

Accepted Answer

This is the definition of total revenue, which is calculated by multiplying price per unit by the number of units sold.

Question 18

Once a firm has selected a price for its product, quantity is decided by consumers and their demand curves.

Accepted Answer

Quantity is determined by the intersection of the firm's price and the consumers' demand curve. The firm cannot dictate the quantity demanded by consumers; it can only influence it through pricing strategies.

Question 19

Accounting profit is usually larger than economic profit.

Accepted Answer

Accounting profit only takes into account explicit costs, while economic profit takes into account both explicit and implicit costs. Therefore, economic profit is usually smaller than accounting profit.

Question 20

Accounting profit is usually smaller than economic profit.

Accepted Answer

Accounting profit only considers explicit costs (actual cash outflows), while economic profit also includes implicit costs (opportunity costs). Therefore, economic profit is usually smaller than accounting profit because it accounts for a broader range of costs.

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