Question 1

Figure 8-4 
-In Figure 8-4 at output level 2,

Accepted Answer

At output level 2, the marginal cost is $15, while the marginal revenue is $20. Since MR > MC, the firm should increase production and sales to maximize profits.

Question 2

Thomas Edison once said that he began making real profit on light bulbs when he dumped his surplus on the European market at less than the "cost of production." From this we can deduce Edison

Accepted Answer

Edison's statement suggests that he was aware of the concept of marginal cost (the cost of producing one additional unit) and understood that he could still make a profit by selling his surplus at a price that was lower than the average cost of production for all the units he produced. This implies that he understood the importance of considering both marginal and average cost in setting prices and maximizing profit.

Question 3

Average cost equals

Accepted Answer

The average cost is simply the total cost divided by the quantity produced. This calculation takes into account both fixed and variable costs. Therefore, choice B is the correct answer.

Question 4

Bob goes to his favorite hot dog stand, which is offering one hot dog for $2.50 or two for $4.00.Bob's marginal cost of a second hot dog is

Accepted Answer

The marginal cost of the second hot dog is the additional cost Bob incurs by buying a second hot dog. Since one hot dog costs $2.50 and two cost $4.00, the additional cost for the second hot dog is $4.00 - $2.50 = $1.50.

Question 5

Whenever average cost exceeds marginal cost,

Accepted Answer

When average cost exceeds marginal cost, it means that the cost of producing one more unit is less than the average cost of production up to that point. This situation leads to a decrease in the average cost as more units are produced, indicating that average cost is falling.

Question 6

Marginal cost

Accepted Answer

Marginal cost is the increase in total cost resulting from a one-unit increase in output, which can be calculated as the slope of the total cost curve (change in total cost/change in quantity) or as the derivative of the total cost function. Therefore, all the choices are correct.

Question 7

Figure 8-1 
-Which graph in Figure 8-1 shows a typical firm's total revenue and total cost curves?

Accepted Answer

Option C is correct because it shows the total cost curve starting above the origin (indicating fixed costs) and increasing at an increasing rate, and the total revenue curve starting from the origin (indicating no revenue at zero output) and increasing linearly, which is typical for firms selling goods at a constant price.

Question 8

If the output of a firm is increased by one unit, the revenue addition is called

Accepted Answer

When the output of a firm is increased by one unit, the additional revenue earned from that unit is called marginal revenue. Marginal revenue is the change in total revenue when one additional unit is produced and sold.

Question 9

The total cost curve generally has

Accepted Answer

The total cost curve typically reflects increasing costs at an increasing rate as production expands, due to factors like diminishing returns. Initially, costs may rise at a decreasing rate due to efficiencies of scale, but as production continues to increase, costs start to rise more rapidly, reflecting the A option's description of slope values that first decrease and then increase rapidly.

Question 10

Figure 8-2 
-Figure 8-2 shows a manufacturer's total profit curve.To maximize total profit, the manufacturer should produce ____ units of output.

Accepted Answer

The answer of Figure 8-2 
-Figure 8-2 shows a manufacturer's...

Question 11

At its current level of output, a firm's average cost is $25 and its marginal cost is $20.If the firm increases output by one unit and marginal cost is $22, average cost will be

Accepted Answer

If the marginal cost is less than the average cost, then increasing output will decrease the average cost. Therefore, if the marginal cost of the additional unit is $22 and the current average cost is $25, the average cost will decrease and be less than $25. Therefore, the best choice is C: less than $25.

Question 12

Figure 8-3 
-A company draws its total cost curve and total revenue curve on the same graph.If the firm wishes to maximize profits, it will select the output at which the

Accepted Answer

The profit maximization point for a firm occurs where the vertical distance between the total revenue curve and the total cost curve is greatest. This is because profit is calculated as total revenue minus total cost, and the largest vertical distance represents the highest profit.

Question 13

A grocery store sells soup for $1.50 a can, or $2.50 for two cans.To a customer, the marginal cost of buying the second can of soup is

Accepted Answer

Buying one can of soup costs $1.50. Buying two cans of soup at $2.50 means each can costs $1.25 ($2.50/2). Therefore, the marginal cost of buying the second can is the difference between the price of the second can and the price of the first can, which is $1.25 - $1.50 = -$0.25. Since the marginal cost is negative, it means that the customer actually saves money by buying the second can, making it the best choice.

Question 14

A firm can always increase its output by one unit at a marginal cost of $10.Its marginal cost curve is

Accepted Answer

A horizontal line is the characteristic shape of the marginal cost curve for a constant marginal cost. Since the marginal cost of increasing output by one unit is always $10, the marginal cost curve is a horizontal line at $10.

Question 15

Average cost

Accepted Answer

The average cost initially declines as the fixed costs are spread over a larger number of units produced. However, as output increases beyond a certain point, the variable costs begin to increase, and the average cost increases as well. Marginal cost, on the other hand, is the cost of producing an additional unit and can be either greater than or less than the average cost depending on the stage of production. Therefore, option B is correct. Options A, C, and D are incorrect.

Question 16

Average cost

Accepted Answer

Average cost is equal to marginal cost at its minimum point. This is a fundamental principle in economics, indicating the point at which producing one more unit of a good or service will start to increase the average cost of production.

Question 17

Joe and Ed go to a diner that sells hamburgers for $5 and hot dogs for $3.They agree to split the lunch bill evenly.Ed chooses a hot dog.The marginal cost to Joe if he orders a hamburger, instead of a hot dog, is

Accepted Answer

The marginal cost to Joe for choosing a hamburger over a hot dog is the difference in price between the two, which is $5 - $3 = $2. Since they split the bill evenly, Joe's share of the additional cost is $2/2 = $1.

Question 18

Figure 8-3 
-Figure 8-3 shows a firm's total profit function.At an output of 40, the firm's total profit equals ____.

Accepted Answer

The answer of Figure 8-3 
-Figure 8-3 shows a firm's...

Question 19

Figure 8-3 
-If a company plots its total profit curve, it would show

Accepted Answer

The total profit curve typically increases as sales increase, reaches a maximum (where the slope is zero), and then decreases as costs rise faster than revenues, making the slope negative.

Question 20

Average revenue is equal to

Accepted Answer

Average revenue is defined as total revenue divided by the quantity of output sold. Therefore, option A, TR/Q, accurately represents average revenue. Option B, (P x Q)/P, simplifies to just Q, which is not a correct representation of average revenue. Option C, TR x Q, is not a valid representation of average revenue as it does not take into account the quantity of output sold. Therefore, the correct choice is A.

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

Figure 8-4 -In Figure 8-4 at output level 2,

Thomas Edison once said that he began making real profit on light bulbs when he dumped his surplus on the European market at less than the "cost of production." From this we can deduce Edison

Average cost equals

Bob goes to his favorite hot dog stand, which is offering one hot dog for $2.50 or two for $4.00.Bob's marginal cost of a second hot dog is

Whenever average cost exceeds marginal cost,

Marginal cost

Figure 8-1 -Which graph in Figure 8-1 shows a typical firm's total revenue and total cost curves?

If the output of a firm is increased by one unit, the revenue addition is called

The total cost curve generally has

Figure 8-2 -Figure 8-2 shows a manufacturer's total profit curve.To maximize total profit, the manufacturer should produce ____ units of output.

At its current level of output, a firm's average cost is $25 and its marginal cost is $20.If the firm increases output by one unit and marginal cost is $22, average cost will be

Figure 8-3 -A company draws its total cost curve and total revenue curve on the same graph.If the firm wishes to maximize profits, it will select the output at which the

A grocery store sells soup for $1.50 a can, or $2.50 for two cans.To a customer, the marginal cost of buying the second can of soup is

A firm can always increase its output by one unit at a marginal cost of $10.Its marginal cost curve is

Average cost

Average cost

Joe and Ed go to a diner that sells hamburgers for $5 and hot dogs for $3.They agree to split the lunch bill evenly.Ed chooses a hot dog.The marginal cost to Joe if he orders a hamburger, instead of a hot dog, is

Figure 8-3 -Figure 8-3 shows a firm's total profit function.At an output of 40, the firm's total profit equals ____.

Figure 8-3 -If a company plots its total profit curve, it would show

Average revenue is equal to