Measure Profit Maximization (Chapter 14)

You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $12 value on reading a book. -You should stay and watch the remainder of the show. -You should go home and watch TV. -You should go home and read a book. -You should go home and either watch TV or read a book.

You should go home and read a book. > This is because reading a book has the greatest value ($12 vs. $10). The price you paid for the play ($30) has already been spent so it is a "sunk cost" and should have no influence on what you do next.

Scenario 14-3 Suppose a certain competitive firm is producing Q=500 units of output. The marginal cost of the 500th unit is $17, and the average total cost of producing 500 units is $12. The firm sells its output for $20. Refer to Scenario 14-3. At Q=500, the firm's profits equal -$1,000. -$4,000. -$7,000. -$10,000.

$4,000.

Scenario 14-2 Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $20 and its average total cost equals $25. The firm sells its output for $30 per unit. Refer to Scenario 14-2. At Q = 1,000, the firm's profits equal -$-5,000. -$2,500. -$5,000. -$10,000.

$5,000.

Figure 14-3 Suppose a firm operating in a competitive market has the following cost curves: Refer to Figure 14-3. The firm will earn zero economic profit if the market price is -$0 -$6 -$7 -$10

$6.

The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which -total revenue is equal to variable cost. -total revenue is equal to fixed cost. -total revenue is equal to total cost. -profit is maximized.

profit is maximized.

Figure 14-5 Suppose a firm operating in a competitive market has the following cost curves: Refer to Figure 14-5. When market price is P7, a profit-maximizing firm's short-run profits can be represented by the area -P7 ´ Q5. -P7 ´ Q3. -(P7 - P5) ´ Q3. -We are unable to determine the firm's profits because the quantity that the firm would produce is not labeled on the graph.

(P7 - P5) ´ Q3.

Comparing marginal revenue to marginal cost (i)reveals the contribution of the last unit of production to total profit.(ii)is helpful in making profit-maximizing production decisions. (iii)tells a firm whether its fixed costs are too high. -(i) only. -(i) and (ii) only. -(ii) and (iii) only. -(i) and (iii) only.

(i) and (ii) only.

Which of the following statements best expresses a firm's profit-maximizing decision rule? -If marginal revenue is greater than marginal cost, the firm should increase its output. -If marginal revenue is less than marginal cost, the firm should decrease its output. -If marginal revenue equals marginal cost, the firm should continue producing its current level of output. -All of the above are correct.

All of the above are correct.

If a competitive firm is selling 1,000 units of its product at a price of $9 per unit and earning a positive profit, then -its total cost is less than $9,000. -its marginal revenue is less than $9. -its average revenue is greater than $9. -the firm cannot be a competitive firm because competitive firms cannot earn positive profits.

its total cost is less than $9,000.

Figure 14-2 Suppose a firm operating in a competitive market has the following cost curves: Refer to Figure 14-2. If the market price is P4, in the short run the firm will earn -positive economic profits. -negative economic profits but will try to remain open. -negative economic profits and will shut down. -zero economic profits.

negative economic profits and will shut down.