Question 1

Profit is the difference between
A) marginal revenue and marginal cost.
B) total revenue and variable cost.
C) total revenue and total explicit cost.
D) total revenue and total cost.

Accepted Answer

Profit is equal to total revenue minus total cost.

Question 2

A perfectly competitive firm earns a profit when price is
A) equal to minimum average total cost.
B) above minimum average total cost.
C) equal to minimum average variable cost.
D) equal to minimum average fixed cost.

Accepted Answer

A perfectly competitive firm will continue to produce as long as the price of the good is above the minimum point of the average variable cost curve. In the long run, the firm's profits will be zero, but in the short run, it can earn a profit if the price is above its average total cost. Therefore, the firm earns a profit only when the price is above minimum average total cost.

Question 3

Figure 7-4  Figure 7-4 shows the cost and demand curves for a profit-maximising firm in a perfectly competitive market.
-Refer to Figure 7-4.If the market price is $30,should the firm represented in the diagram continue to stay in business?
A) No, it should shut down because it is incurring a loss.
B) No, it should shut down because it cannot cover its variable cost.
C) Yes, because it is covering part of its fixed cost.
D) Yes, because it is making a profit.

Accepted Answer

If the market price is $30, the firm's quantity supplied is 80 units, which is less than its minimum efficient scale (MES) of 100 units. Therefore, it incurs a loss equal to $3 per unit times 80 units, which is $240. However, this loss is less than its fixed cost of $300, so the firm should continue to stay in business to cover part of its fixed cost. Therefore, the best choice is C.

Question 4

Table 7-2
  Arnie sells basketballs in a perfectly competitive market. Table 7-2 summarises Arnie's output per day (Q), total cost (TC), average total cost (ATC) and marginal cost (MC).
-Refer to Table 7-2.What price (P)will Arnie charge and how much profit will he earn if the market price of basketballs is $12.50?
A) Price and profit cannot be determined from the information given.
B) P = $12.50; profit = $52.50
C) P = $12.50; profit = $22.50
D) P = $20; profit = $75.00.

Accepted Answer

In a perfectly competitive market, firms are price takers, meaning they must accept the prevailing market price. Since the market price of basketballs is $12.50, Arnie will charge this price as well. To determine his profit, we need to calculate his total revenue (TR) and subtract his total cost (TC). Arnie's output at a price of $12.50 is 9 units (see Table 7-2). Therefore, his total revenue is $112.50 (9 x $12.50). Arnie's total cost at an output of 9 units is $90 (see Table 7-2). Therefore, his profit is $22.50 ($112.50 - $90 = $22.50). So, the answer is C.

Question 5

Letters are used to represent the terms used to answer this question: price (P),quantity of output (Q),total cost (TC)and average total cost (ATC).Which of the following equations is equal to a firm's profit?
A) P - ATC
B) (P × Q) - TC
C) (P × Q) - (P × ATC)
D) P - TC

Accepted Answer

Profit equals the revenue earned from selling the output (P × Q) minus the total cost (TC) of producing that output. Therefore, option B, (P × Q) - TC, is the equation that represents a firm's profit.

Question 6

Figure 7-5  Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 7-5.What is the amount of the firm's fixed cost of production?
A) $5400
B) $6750
C) $8100
D) It cannot be determined.

Accepted Answer

Fixed cost is the cost that does not change with the level of output. In this case, the fixed cost is $5400.

Question 7

Table 7-2
  Arnie sells basketballs in a perfectly competitive market. Table 7-2 summarises Arnie's output per day (Q), total cost (TC), average total cost (ATC) and marginal cost (MC).
-Refer to Table 7-2.What will Arnie's output be and how much profit will he earn if the market price of basketballs is $5.00?
A) Q = 1; profit = -$10.
B) Q = 3; profit = -$7.50
C) Q = 0; profit = -$10.00
D) Price and profit cannot be determined from the information given.

Accepted Answer

At a market price of $5.00, Arnie will produce where MC = MR (price), which occurs at a quantity of 3. At this output level, his total cost is $22.50 and his average total cost is $7.50. Therefore, his revenue is $15 (from selling 3 basketballs at $5 each) and his profit is -$7.50 (total revenue of $15 minus total cost of $22.50). Option B is the only choice that matches this output and profit level.

Question 8

Figure 7-5  Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 7-5.If the market price is $20,what is the amount of the firm's profit?
A) $5400
B) $6750
C) $8100
D) $16 200

Accepted Answer

To find the firm's profit, we need to determine the firm's quantity of output at a market price of $20. From the demand curve, we can see that at a price of $20, the quantity demanded is 225 units. From the MC curve, we can find that at a quantity of 225, the marginal cost is $20. Therefore, the firm will produce 225 units and earn a profit equal to total revenue minus total cost. Total revenue is price times quantity, or $20 x 225 = $4,500. Total cost is average total cost times quantity, or $15 x 225 = $3,375. Profit is total revenue minus total cost, or $4,500 - $3,375 = $1,125. However, this profit calculation only includes explicit costs, and we need to calculate economic profit by subtracting implicit costs (in this case, the opportunity cost of the owner's time and capital). Without more information, we can assume that economic profit is equal to accounting profit, which is $1,125 x 6 (the number of firms in the industry) = $6,750.

Question 9

What is always true at the quantity where a firm's average total cost equals average revenue?
A) The firm's revenue is maximised.
B) The firm's profit is maximised.
C) The firm breaks even.
D) Marginal cost equals marginal revenue.

Accepted Answer

At the point where a firm's average total cost equals average revenue, the firm is producing at its breakeven point, meaning that its total revenue is equal to its total cost. This does not necessarily mean that the firm's profit is maximised, as profit is maximised at the point where marginal revenue equals marginal cost. Therefore, option A and D are incorrect.

Question 10

Letters are used to represent the terms used to answer this question: price (P),quantity of output (Q),total cost (TC)and average total cost (ATC).Which of the following equations is equal to a firm's average profit?
A) P - ATC
B) (P - ATC) × Q
C) (P × Q) - TC
D) P - TC

Accepted Answer

Average profit is equal to the difference between price and average total cost per unit (P - ATC).

Question 11

Figure 7-5  Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 7-5.What is the minimum price the firm requires to produce output?
A) $20
B) $14
C) $5
D) It cannot be determined.

Accepted Answer

The minimum price the firm requires to produce output is equal to the minimum point on the long-run average cost (LRAC) curve, which is $5 in this case. At this price, the firm would earn zero economic profit, but would still be able to cover its production costs. Therefore, the best choice for the firm would be to produce where marginal cost equals price, which is also at the $5 price level.

Question 12

Figure 7-5  Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 7-5.If the market price is $20,what is the average profit at the profit-maximising quantity?
A) $5
B) $6
C) $9
D) $20

Accepted Answer

The average profit is calculated as (Market Price - Average Total Cost). If the market price is $20 and the average total cost at the profit-maximizing quantity is $15, then the average profit is $5.

Question 13

Figure 7-5  Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 7-5.If the firm's fixed cost increases by $1000 due to a new environmental regulation,what happens in the diagram above?
A) All the cost curves shift upward.
B) Only the average variable cost and average total cost curves shift upward; marginal cost is not affected.
C) Only the average total cost curve shifts upward; the marginal cost and average variable cost curves are not affected.
D) None of the curves shift; only the fixed cost curve, which is not shown here, is affected.

Accepted Answer

When fixed cost increases due to a new environmental regulation, it does not affect variable costs or marginal cost. Therefore only the average total cost curve would shift upward, as it represents the sum of variable cost and fixed cost per unit of output. Average variable cost and marginal cost would remain the same.

Question 14

Figure 7-5  Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 7-5.If the market price is $20,what is the firm's profit-maximising output?
A) 750 units
B) 1100 units
C) 1350 units
D) 1800 units

Accepted Answer

To find the profit-maximizing output of the firm, we need to look at where the MC curve intersects the MR curve, which is at point E. From here, we can draw a vertical line down to the X-axis to find the corresponding quantity, which is approximately 1350 units. At this level of output, the firm's marginal cost is equal to the market price, so it will maximize its profit.

Question 15

If price = marginal cost at the output produced by a perfectly competitive firm and the firm is earning an economic profit,then
A) marginal revenue is less than price.
B) average total cost is at a minimum.
C) total revenue equals total cost.
D) price exceeds average total cost.

Accepted Answer

In a perfectly competitive market, price is equal to marginal cost in the long run equilibrium. If a firm is earning an economic profit, it means that price exceeds its average total cost, since otherwise it would be operating at a loss. Therefore, the correct choice is D.

Question 16

Figure 7-5  Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 7-5.The firm's manager suggests that the firm's goal should be to maximise average profit.In that case,what is the output level and what is the average profit that will achieve the manager's goal?
A) Q = 1350 units; average profit = $5
B) Q = 1100 units; average profit = $6
C) Q = 1350 units; average profit = $9
D) Q = 1800 units; average profit = $20

Accepted Answer

To maximize average profit, the firm should produce at the output level where marginal cost equals marginal revenue, which is where the demand curve intersects the marginal cost curve. In this case, the intersection point is at Q = 1100 units. The average profit at this output level can be found by subtracting average total cost from the price at Q = 1100, which gives us $6. Therefore, the correct answer is B: Q = 1100 units; average profit = $6.

Question 17

A firm will break even when
A) P = ATC.
B) P > ATC.
C) P < AVC.
D) P = AVC.

Accepted Answer

The answer of A firm will break even when
A) P...

Question 18

All of the following can be used to compute average profit except
A) marginal profit minus marginal cost.
B) total profit divided by quantity.
C) average revenue minus average total cost.
D) price minus average total cost.

Accepted Answer

Option A provides the formula for computing marginal profit, not average profit. The other options all provide formulas for computing average profit.

Question 19

Figure 7-5  Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 7-5.The firm's manager suggests that the firm's goal should be to maximise average profit.If the firm does this,what is the amount of profit that it will earn?
A) $6600
B) $6750
C) $12 150
D) $36 000

Accepted Answer

Maximizing average profit means maximizing profit per unit, which occurs where average profit is highest. The correct choice is $6600, as it represents the maximum average profit achievable by the firm.

Question 20

Figure 7-5  Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 7-5.The figure shows the cost structure of a firm in a perfectly competitive market.If the firm's fixed cost increases by $1000 due to a new environmental regulation,what happens to its profit-maximising output level?
A) It increases.
B) It decreases.
C) It remains the same.
D) It could increase, decrease or remain constant, depending on whether the firm is able to cut costs somewhere else.

Accepted Answer

The answer of Figure 7-5  Figure 7-5 shows cost...

Quiz 7: Consumer Choice and Elasticity

Profit is the difference between

A perfectly competitive firm earns a profit when price is

Figure 7-4 Figure 7-4 shows the cost and demand curves for a profit-maximising firm in a perfectly competitive market. -Refer to Figure 7-4.If the market price is $30,should the firm represented in the diagram continue to stay in business?

Letters are used to represent the terms used to answer this question: price (P) ,quantity of output (Q) ,total cost (TC) and average total cost (ATC) .Which of the following equations is equal to a firm's profit?

Figure 7-5 Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry. -Refer to Figure 7-5.What is the amount of the firm's fixed cost of production?

Figure 7-5 Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry. -Refer to Figure 7-5.If the market price is $20,what is the amount of the firm's profit?

What is always true at the quantity where a firm's average total cost equals average revenue?

Letters are used to represent the terms used to answer this question: price (P) ,quantity of output (Q) ,total cost (TC) and average total cost (ATC) .Which of the following equations is equal to a firm's average profit?

Figure 7-5 Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry. -Refer to Figure 7-5.What is the minimum price the firm requires to produce output?

Figure 7-5 Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry. -Refer to Figure 7-5.If the market price is $20,what is the average profit at the profit-maximising quantity?

Figure 7-5 Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry. -Refer to Figure 7-5.If the firm's fixed cost increases by $1000 due to a new environmental regulation,what happens in the diagram above?

Figure 7-5 Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry. -Refer to Figure 7-5.If the market price is $20,what is the firm's profit-maximising output?

If price = marginal cost at the output produced by a perfectly competitive firm and the firm is earning an economic profit,then

A firm will break even when

All of the following can be used to compute average profit except