Question 1

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

At the current level of output where the marginal cost equals average cost, the average cost is minimized. Therefore, the firm must be producing the quantity that minimizes average cost. If it were producing at its profit-maximizing level of output, the marginal cost would be equal to marginal revenue, which is not the case here. The firm's profit status is not indicated by this information. And the fact that the total variable cost equals total fixed cost is not necessarily related to the current level of output.

Question 2

If a firm has determined its optimal output level, where MR = MC, then price
A)is unchanged.
B)is set by statistical analysis of the market.
C)is equal to MC.
D)is determined by the market demand at that output.

Accepted Answer

At the optimal output level where marginal revenue (MR) equals marginal cost (MC), the price at which the firm sells its product is determined by the market demand for that product at that specific output level. This is because the firm's decision on how much to produce influences the price point at which the produced quantity can be sold in the market.

Question 3

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

If output is increased beyond the point of profit maximization, the marginal cost will exceed the marginal revenue, resulting in a negative marginal profit. Therefore, it is not an optimal choice for the firm to produce beyond the point of profit maximization.

Question 4

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

Accepted Answer

The total profit is maximized at the point where the slope of the total profit curve is zero, which means that the marginal profit (the additional profit earned from producing one more unit) is equal to zero. At this point, the firm is producing the optimal level of output where the cost of producing an additional unit equals the revenue earned from that unit, and any deviation from this level would result in lower total profit.

Question 5

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 6

A firm's fixed cost
A)does not vary with output.
B)does not change between the short run and the long run.
C)is generally a higher percentage of its total cost at high output quantities than at low output quantities.
D)All of the above are true.

Accepted Answer

Fixed cost is a cost that does not vary with output, meaning it remains constant regardless of the level of production. Choices B and C are incorrect because fixed cost can change between the short and long run, and its percentage of total cost can vary depending on the level of output.

Question 7

When a firm's fixed cost increases,
A)the firm needs to adjust its price and quantity to restore the profit maximum.
B)it would not need to change output.
C)marginal cost increases.
D)variable cost increases.

Accepted Answer

An increase in fixed costs does not affect the marginal cost or variable cost, so the firm does not need to change its output to restore profit maximization.

Question 8

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 9

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

To maintain the same total profit, the decrease in price must be offset by an increase in quantity sold. Initially, profit per copy is $15 ($20 - $5), and total profit is $75,000 (5,000 copies * $15). At $15 per copy, profit per copy is $10 ($15 - $5). To maintain $75,000 profit, she must sell 7,500 copies ($75,000 / $10).

Question 10

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 ability to increase output with a relatively small increase in production cost suggests that the marginal cost (the cost of producing one more unit) was below the average cost (total cost divided by the number of units produced) but still less than the marginal revenue (the revenue from selling one more unit). This scenario allows for profit on additional units sold, even at a lower price, as long as the price covers the marginal cost.

Question 11

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 responses are correct.

Accepted Answer

All of the responses are correct. Maximizing total profit requires producing at a level where marginal revenue (MR) equals marginal cost (MC). At this level, marginal profit is zero, indicating that producing an additional unit would neither increase nor decrease total profit. Additionally, the slope of the marginal profit curve is zero at the profit maximizing level of output. Therefore, all of the responses listed are necessary conditions for maximizing total profit.

Question 12

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

A profit-maximizing firm produces every unit of output for which MR > MC because producing additional units beyond this point would result in a decrease in profit. This is known as the profit maximization rule, and it ensures that the firm is producing the optimal quantity of output to maximize its profits. Choices A, B, and C are not always true for a profit-maximizing firm, as they depend on the specific market conditions and production function of the firm.

Question 13

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 fixed costs increase, the total cost curve shifts upward by the amount of the increase. This means that at every output level, the firm's costs are higher, reducing the total profit the firm earns. Therefore, the total profit curve will shift downward at every output level.

Question 14

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 responses are correct.

Accepted Answer

All the responses correctly describe actions that a firm can take to maximize profit depending on the relationship between marginal revenue (MR) and marginal cost (MC). Increasing output when MR > MC, decreasing output when MC > MR, and adjusting output to where the slopes of total revenue (TR) and total cost (TC) are equal (which implies MR = MC) are all strategies to maximize profit.

Question 15

If output is increased beyond the point where total profit is maximized,
A)total profits stay constant.
B)total profits will decline.
C)marginal profit will be positive.
D)MR will be increasing.

Accepted Answer

When output is increased beyond the point of maximum profit, the cost of producing each additional unit may increase (due to diminishing returns or increased costs). This means that the marginal profit (the additional profit gained from producing one more unit) will decrease. If marginal profit is less than zero, total profits will decline.

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, it means that each additional unit produced is costing more than the revenue it generates. Therefore, the marginal profit is negative. The best choice in this situation is to decrease output or stop producing altogether, as continuing to produce will lead to further losses.

Question 17

A profit-maximizing firm always
A)sells its output at P = MC.
B)produces at the output at which MR is maximized.
C)hires labor until the MRP of labor < 0.
D)finds the output where marginal profit is zero.

Accepted Answer

Marginal profit is the additional profit from producing one more unit, and it becomes zero at the profit-maximizing level of output because at this point, marginal cost (MC) equals marginal revenue (MR). This is the condition for profit maximization in perfectly competitive markets.

Question 18

A firm is producing 2,500 units at its optimal output, with average variable cost per unit of $4 and average fixed cost per unit of $2.50.If sells its output at $8 per unit, total profit is
A)$10,000.
B)$3,750.
C)$1,500.
D)$20,000

Accepted Answer

Total cost per unit = Average variable cost + Average fixed cost = $4 + $2.50 = $6.50
Total revenue per unit = Selling price per unit = $8
Profit per unit = Total revenue per unit - Total cost per unit = $8 - $6.50 = $1.50
Total profit = Profit per unit * Number of units = $1.50 * 2,500 = $3,750.
Therefore, the answer is B.

Question 19

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

A decrease in fixed costs does not affect marginal costs or production levels but increases average profit per widget as total costs decrease.

Question 20

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.

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

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

If a firm has determined its optimal output level, where MR = MC, then price

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

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

If fixed cost rises,

A firm's fixed cost

When a firm's fixed cost increases,

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

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?

Total profit is maximized where

A profit-maximizing firm always

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

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

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

When marginal cost exceeds marginal revenue,

A profit-maximizing firm always

A firm is producing 2,500 units at its optimal output, with average variable cost per unit of $4 and average fixed cost per unit of $2.50.If sells its output at $8 per unit, total profit is

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

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