Question 1

According to the marginal approach to profit maximization,

Accepted Answer

Firms should take any action that increases revenue more than costs, as this will increase profit. This aligns with the marginal approach to profit maximization, where firms equate marginal revenue and marginal cost to determine the optimal output level.

Question 2

A firm is currently selling its output for $30 per unit.If the firm reduces the price to $29 in order to boost sales,marginal revenue will

Accepted Answer

When the firm reduces the price to $29, it will have to lower the price for all units sold, not just the additional ones. As a result, the marginal revenue for each additional unit sold will be less than $29, since the firm is earning less revenue per unit. Therefore, the marginal revenue will be less than $29.

Question 3

-Consider the marginal revenue and marginal cost curves shown in Figure 8-12.Assume that the firm represented is able to cover its variable costs if it operates in the short run.What is the firm's optimal output level?

Accepted Answer

The firm's optimal output level is where marginal revenue equals marginal cost. If the curves intersect at 80 units, that is the optimal output level.

Question 4

A firm will continue to produce if total revenue is greater than total variable cost even if total revenue is less than fixed cost.

Accepted Answer

This is because if total revenue is greater than total variable cost, the firm is still able to cover its variable costs and some of its fixed costs. If the firm stops production when total revenue is less than fixed cost, it would not be covering any of its fixed costs, which could lead to even greater losses in the long run.

Question 5

Leugers Custom Cabinetmakers is currently operating at a profit while producing four custom cabinets per week.At that output level,marginal cost exceeds marginal revenue.In order to maximize profit,Leugers should

Accepted Answer

Since Leugers Custom Cabinetmakers is currently operating at a profit but experiencing a situation where marginal cost exceeds marginal revenue, it would be best to reduce output to increase profitability. This is because at the current output level, the cost of producing an additional cabinet exceeds the revenue received from selling one additional cabinet. By decreasing output, Leugers can reduce costs and increase profitability. Therefore, choice A is the best option.

Question 6

The change in total profit when a firm increases its output by one unit equals

Accepted Answer

The change in total profit when a firm increases its output by one unit is the difference between the additional revenue generated (marginal revenue) and the additional cost incurred (marginal cost). Therefore, the correct choice is C, which is the difference between marginal revenue and marginal cost. Option A (total revenue minus total cost), Option B (total revenue minus marginal revenue), Option D (total revenue minus marginal cost), and Option E (marginal revenue plus marginal cost) do not represent the change in total profit when output is increased by one unit, therefore they are incorrect.

Question 7

A firm that is suffering a loss should shut down immediately if total revenue (TR)is less than total variable cost (TVC).

Accepted Answer

If a firm's total revenue is less than its total variable cost, it cannot cover its variable costs, and continuing operations would increase its losses. Therefore, it should shut down immediately to minimize losses.

Question 8

If a firm is able to cover its variable costs by operating in the short run then,at its best output level,the

Accepted Answer

If a firm is able to cover its variable costs, it means that it is generating sufficient revenue to cover its variable costs and some portion of its fixed costs. Therefore, the best output level that a firm can produce will be the point where its marginal revenue (MR) is equal to its marginal cost (MC), as this will enable the firm to generate the highest possible profits in the short run. At this point, the firm will be able to cover both its variable and fixed costs and make some surplus profits as well. Hence, choice A is the correct answer. The other answer choices are incorrect as they do not directly relate to the given scenario.

Question 9

A firm may find it optimal to stay in business in the short run even if total revenue does not cover total cost.

Accepted Answer

In the short run, a firm may continue to operate even if the total revenue is less than the total cost, as long as the firm is able to cover its variable costs and make some contribution towards its fixed costs. This is because shutting down the business in the short run may lead to further losses due to fixed costs that cannot be recovered.

Question 10

Whenever marginal cost exceeds marginal revenue,

Accepted Answer

When marginal cost exceeds marginal revenue, producing additional units will decrease profit, so profit declines if the firm increases output.

Question 11

Suppose that Carla's Candy Shop finds that at the current level of output,marginal revenue is below marginal cost and average variable cost is below price.If the market price is held constant,Carla's Candy Shop should __________ in order to maximize profits.

Accepted Answer

When marginal revenue is below marginal cost, the firm should reduce output to maximize profits, as producing more would increase costs more than revenue. Since average variable cost is below price, the firm is covering its variable costs and should not shut down.

Question 12

Which of the following rules is most consistent with profit maximization?

Accepted Answer

The rule that is most consistent with profit maximization is to expand output when marginal revenue (MR) is greater than marginal cost (MC). This is because when MR is greater than MC, the additional revenue earned from producing one more unit is greater than the additional cost incurred in producing that unit, which results in an increase in total profit. Therefore, choice E - expand output when MR > MC - is the best choice for profit maximization.

Question 13

If the marginal cost and marginal revenue curves intersect at two different points,then maximum profit occurs at

Accepted Answer

Maximum profit occurs where the marginal cost (MC) curve crosses the marginal revenue (MR) curve from below, indicating that the cost of producing an additional unit is less than the revenue it generates, up to the point where they are equal.

Question 14

-Figure 8-11 indicates the prices at which Lorine's Hair Salon is able to sell various quantities of manicures.If the marginal cost of a manicure is constant at $12.50,then the hair salon's profit on manicures is maximized at

Accepted Answer

The answer of 
-Figure 8-11 indicates the prices at which...

Question 15

-Figure 8-11 indicates the prices at which Lorine's Hair Salon is able to sell various quantities of manicures.If the salon initially provides 4 manicures per day and then increases to 5 manicures per day,the increased sales will generate a marginal revenue equal to

Accepted Answer

The marginal revenue is the change in total revenue from selling one more unit. If the price for 4 manicures is $55 each and for 5 manicures is $48 each, the marginal revenue is the difference in total revenue: (5 x $48) - (4 x $55) = $240 - $220 = $20. The marginal revenue per additional manicure is $20/1 = $7.

Question 16

As long as the marginal revenue curve lies above the horizontal axis,

Accepted Answer

The answer of As long as the marginal revenue curve...

Question 17

In order to maximize its profit in the short run,an airline should offer an additional flight whenever

Accepted Answer

In order to maximize profit in the short run, an airline should offer an additional flight if the additional revenue it earns exceeds the additional costs it incurs. This is because in the short run, the airline is unable to adjust its fixed costs (such as the cost of buying new planes or building a new terminal), so it must make decisions based on its variable costs (such as fuel, labor, and maintenance costs). By offering an additional flight, the airline incurs additional variable costs but also earns additional revenue from selling tickets, and it should only do so if the additional revenue exceeds the additional costs. Options A, B, C, and D all involve comparing revenue or prices to different types of costs, but they don't take into account the fact that the airline needs to cover its variable costs in order to make a profit in the short run.

Question 18

Whenever a decrease in output leads to an increase in profit,the

Accepted Answer

When a decrease in output leads to an increase in profit, the marginal cost curve lies above the marginal revenue curve, indicating that reducing output reduces costs more than it reduces revenue, thus increasing profit.

Question 19

If a firm's total cost rises as output rises,then

Accepted Answer

If a firm's total cost rises as output rises, it means that the firm is facing increasing marginal costs, which indicates that the cost of producing an additional unit of output is higher than the cost of the previous unit. Therefore, the answer is A, as it implies that the marginal cost is positive.

Question 20

For every firm that faces a downward-sloping demand curve for its output,

Accepted Answer

For a firm with a downward-sloping demand curve, it must lower the price on all units sold to sell more. This means that marginal revenue (the revenue generated by selling one more unit) will be less than the price of the last unit sold since the firm had to lower the price of all units sold to sell that last unit. Marginal cost, on the other hand, is the additional cost of producing one more unit, and it may or may not exceed the price of the last unit sold depending on the specific cost structure of the firm.

Quiz 8: How Firms Make Decisions: Profit Maximization