Maximizing Profit
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1. Most economists assume the primary goal of every firm is to maximize
a. marginal revenue.
b. average revenue.
c. total revenue.
d. all of the above.
e. none of the above.
2. Economic profit is defined as
a. price minus fixed and marginal costs.
b. total revenue minus total implicit cost.
c. total revenue minus average total cost.
d. total revenue minus total implicit and explicit costs.
e. consumer surplus minus total explicit costs.
3. Total revenue is
a. average revenue times the number of units.
b. quantity times price.
c. marginal revenue times the number of units.
d. a and b.
e. b and c.
4. Marginal revenue is defined as
a. total revenue divided by the number of units.
b. the average revenue of the last unit sold.
c. the change in total revenue generated by the sale of one more unit.
d. all of the above.
e. none of the above.
5. In the short run, which factor is
not
relevant in profit-maximizing output decisions?
a. wage rates
b. raw material costs
c. mortgage costs
d. energy costs
e. market price
6. If product price is fixed at a certain level,
a. Price = Marginal Revenue = Average Revenue.
b. Marginal Revenue = Marginal Cost = Average Cost.
c. Total Revenue = Total Cost = 0.
d. Total Revenue - Total Cost = 0.
e. Average Cost = Marginal Cost = Total Cost.
7. The point of maximum profit for a business firm is where
a. Price = Average Cost.
b. Total Revenue = Total Cost.
c. Marginal Revenue = Average Revenue.
d. Marginal Revenue = Marginal Cost.
e. Total Revenue = Marginal Revenue.
8. Price - ATC would be a measure of the firm's
a. total profit.
b. profit per unit of output.
c. marginal profit.
d. total revenue.
e. average variable cost.
9. If product price = $20, output = 20, AVC = $10, and AFC = $8, the firm is incurring a
a. loss of $10.
b. profit of $10.
c. profit of $20.
d. profit of $40.
e. loss of $40.
10. Suppose product price is fixed at $24; MR = MC at Q = 200; AFC = $6; AVC = $25. What do you advise this firm to do?
a. Increase output.
b. Decrease output.
c. Shut down operations.
d. Stay at the current output; the firm is earning a profit of $1,400.
e. Stay at the current output; the firm is losing $1,400.
11. If a firm is earning a normal financial profit at the point where MR = MC, the firm should
a. shut down.
b. increase output and decrease price.
c. increase output and increase price.
d. decrease output and increase price.
e. remain at its current level of output.
12. A business firm can accept losses
a. only in the short run.
b. only for 1 year.
c. only in the long run.
d. no longer than 10 years.
e. never.
13. If a firm shuts down in the short run, it will
a. incur losses equal to its fixed costs.
b. produce at the output level where MC = MR.
c. reduce its losses to zero.
d. do this because P > AVC.
e. have total revenue greater than total fixed costs.
14. A doorknob manufacturer sells 400 doorknobs at a price of $10 each. It has total costs of $4,500, of which $700 are fixed costs. This means the firm
a. has an economic profit of $500.
b. should produce in the short run at a loss.
c. should shut down in the short run.
d. has total variable costs of $500.
e. has price less than average variable costs.
15. A fishing boat owner brings 50,000 fish to market and the market price is $4 per fish. Her average variable cost at 50,000 fish is $1 and the fixed cost of the boat is $100,000. What is her profit per fish?
a. $1
b. $500
c. $5,000
d. $25,000
e. $500,000
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