Preview Extract
CHAPTER 8—HOW FIRMS MAKE DECISIONS: PROFIT MAXIMIZATION
MULTIPLE CHOICE
1) Economists assume that the goal of the firm is to
a. maximize total revenue
b. maximize profits
c. minimize costs
d. equate total revenue and total cost
e. break even in the long run
Answer: B
2) To develop a useful picture of a firm's behavior, economists assume that the
a. firm's goal is to maximize total revenue
b. firm's goal is to maximize profit
c. firm’s goal is to minimize marginal cost
d. roles of owner, manager and worker are performed by the same individuals
e. roles of owner, manager and worker are interchangeable
Answer: B
3) The behavior of firms is best understood by focusing on
a. money profit
b. economic profit
c. accounting profit
d. economic profit minus implicit costs
e. money profit minus explicit costs
Answer: B
4) Economic profit is another name for accounting profit.
a. True
b. False
Answer: B
5) Accounting profit is defined as
a. total revenue minus opportunity cost
b. total revenue minus all costs of production
c. total revenue minus explicit costs
d. the sum of marginal revenues received from all units produced
e. the difference between marginal revenue and marginal cost
Answer: C
6) The difference between accounting profit and economic profit relates to
a. the manner in which revenues are defined
b. how total revenue is calculated
c. the market structure for the firm's industry
d. the price of the good in the market
e. the manner in which costs are defined
Answer: E
7) When there are implicit costs of production,
a. accounting and economic profit are equal
b. opportunity costs of production are zero
c. explicit costs of production are small
d. accounting profit will exceed economic profit
e. economic profit will exceed accounting profit
Answer: D
8) Myron worked at a factory where he earned $20,000 per year. One day, he quit his job and
opened a bumper sticker business. After one year, his business earned $60,000 in sales
revenue and he incurred $30,000 in direct business expenses. If he received no salary from
the new business, what is his economic profit?
a. $10,000
b. $30,000
c. $60,000
d. $20,000
e. $50,000
Answer: A
9) Myron worked at a factory where he earned $20,000 per year. He quit his job and opened a
bumper sticker business. After one year, his business earned $60,000 in sales revenue and he
incurred $30,000 in direct business expenses. If he received no salary from the new business,
what is his accounting profit?
a. $10,000
b. $20,000
c. $40,000
d. $30,000
e. $60,000
Answer: D
10) If a firm has an accounting profit of $2,350,000 and implicit costs totaling $150,000, then
its economic profit equals
a. $2,350,000
b. $2,500,000
c. $2,200,000
d. $150,000
e. $2,000,000
Answer: C
11) William quits his job where he earns an annual salary of $75,000 and opens a
management consulting business, charging an hourly rate of $120. He works out of his home,
converting a storeroom into an office. (Zoning restrictions prevent William from renting out
the room.) Start-up costs are financed by selling $15,000 worth of bonds he inherited that
were earning annual interest payments of $900. During his first year, William incurs
expenses for supplies and utilities that total $3,500. The total cost of production in the first
year equals
a. $94,400
b. $79,400
c. $4,400
d. $3,500
e. $19,400
Answer: B
12) William quits his job where he earns an annual salary of $75,000 and opens a
management consulting business, charging an hourly rate of $120. He works out of his home,
converting a storeroom into an office. (Zoning restrictions prevent William from renting out
the room.) Start-up costs are financed by selling $15,000 worth of bonds he inherited that
were earning annual interest payments of $900. During his first year, William incurs
expenses for supplies and utilities that total $3,500. If William bills 500 hours of consulting
time in the first year, he earns an economic profit equal to
a. $55,600
b. -$15,000
c. -$19,400
d. -$34,400
e. $41,500
Answer: C
13) All of the following, except one, are included in the profit earned by a firm's owners.
Which is the exception?
a. the reward for developing new products
b. the reward for moving an established business into new geographic markets
c. the reward for risk taking
d. salaries that compensate for the owners' time
e. dividend payments to the stockholders
Answer: D
14) Henry decides to quit his job (earning $50,000 per year), take his $60,000 in savings, and
open a dry cleaning store. Figure 8-1 shows the revenues and expenditures for his first year of
operation. If Henry could have earned $3,000 in interest on the money used to open the store,
his accounting profit would have been
a. -$13,000
b. -$3,000
c. $20,000
d. $40,000
e. $37,000
Answer: D
15) Henry decides to quit his job (earning $50,000 per year), take his $60,000 in savings, and
open a dry cleaning store. Figure 8-1 shows the revenues and expenditures for his first year of
operation. If Henry could have earned $3,000 in interest on the money used to open the store,
his economic profit would have been
a. -$13,000
b. -$3,000
c. $40,000
d. $120,000
e. $37,000
Answer: A
16) Henry decides to quit his job, take his $60,000 in savings, and open a dry cleaning store.
Figure 8-1 shows the revenues and expenditures for his first year of operation. Which of the
following items would be included in the calculation of the shop's economic profit and not
included in the accounting profit?
a. the cost of raw materials
b. the earnings from the dry cleaning store
c. the lost interest from the $60,000 in savings
d. Henry's salary from the dry cleaning store
e. none, since all items included in economic profit are also included in accounting profit
Answer: C
17) The return to owners for innovation and risk taking is a firm's
a. economic profit after taxes
b. total revenue
c. total opportunity cost
d. total implicit cost
e. money profit after taxes
Answer: A
18) Innovations that generate profit for a firm's owners include developing
a. both c and d
b. all of the following
c. markets in new locations
d. new products
e. new production processes and distribution methods
Answer: B
19) Every firm is constrained by the demand curve for the product it produces.
a. True
b. False
Answer: A
20) The demand curve facing a firm
a. indicates the quantity of output that customers will purchase from that firm, at various
prices
b. shows the minimum cost of producing any level of output
c. is drawn assuming that the firm is operating in the short run
d. indicates how much output a profit-maximizing firm will produce, at various prices
e. is downward sloping because consumers have less money to spend, the more output they
purchase
Answer: A
21) The demand curve facing a firm
a. indicates the amount of raw materials and other inputs the firm will purchase, at various
prices
b. indicates the amount of the good demanded from that firm by a particular consumer, at
various prices
c. indicates the amount of output that customers will purchase from the firm, at various prices
d. shows the minimum price at which the firm can sell any given quantity of output
e. is horizontal in the long run, but upward sloping in the short run
Answer: C
22) The demand curve facing a firm shows the
a. maximum price the firm can charge and still sell any given amount of output
b. minimum price the firm can charge and still sell any given amount of output
c. minimum price at which the firm will demand any given quantity of output
d. maximum price at which the firm will demand any given quantity of output
e. minimum quantity of output the firm can sell at any given price
Answer: A
23) The demand curve facing a firm acts as a constraint by
a. shifting to the left and right as suppliers vary their quantities
b. showing the maximum price that could be charged to sell a specific output level
c. showing the minimum quantity of output that a firm needs to produce at a specific price
d. limiting sales to those who are first in line when the product is distributed
e. relating the actions and decisions of buyers and sellers in the market
Answer: B
24) Which of the following determines the maximum price a firm may charge for a particular
quantity of output?
a. the firm's supply curve
b. opportunity costs
c. explicit and implicit costs of production
d. the minimum point of the average total cost curve
e. the demand curve facing the firm
Answer: E
25) If the price of gasoline rises at the Exxon gas station at a busy intersection, the Mobil
station at the same intersection will experience
a. an outward shift of the demand curve it faces
b. an inward shift of the demand curve it faces
c. a rightward movement along the same demand curve it faces
d. a leftward movement along the same demand curve it faces
e. neither a shift in nor a movement along the demand curve it faces
Answer: A
26) A firm's total revenue
a. is the profit it earns by producing and selling a particular quantity of output
b. varies as output varies along the demand curve the firm faces
c. is constant at all points along a fixed demand curve
d. is determined by subtracting total profit from total cost
e. always decreases as its output increases, because costs rise
Answer: B
27) A firm's total revenue
a. can be read off the demand curve it faces, but only if we know total cost of production
b. can be read off the demand curve it faces, but only if we know how must output the firm
sells
c. is found by multiplying price per unit by the number of units produced and sold
d. is equal to profit when inputs are fixed in the short run
e. will be positive at any level of output
Answer: C
28) If the demand curve facing a firm shifts outward, then
a. there is a decline in the maximum price the firm can charge at each quantity it may want to
sell
b. there is an increase in the maximum price the firm can charge at each quantity it may want
to sell
c. the firm would need to increase the quantity it wants to sell in order to generate a rise in the
price
d. the firm would need to decrease the quantity it wants to sell in order to generate a rise in
the price
e. there is a decrease in the maximum quantity the firm can sell at each price it may want to
charge
Answer: B
29) The demand curve facing the firm has been estimated as follows:
Which of the following statements about the firm's total revenue is correct?
a. If the firm sold 3 units of output, it would have revenues totaling $540.
b. If the firm sold 7 units of output, it would have revenues totaling $980.
c. If the firm increased output from 2 units to 3 units, total revenue would decline.
d. If the firm increased output from 6 units to 7 units, total revenue would decline.
e. If the firm decreased output from 6 units to 5 units, total revenue would decline.
Answer: D
30) The demand curve facing the firm has been estimated as follows:
Which of the following statements about the firm's total revenue is correct?
a. If the firm sold 3 units of output, it would have revenues totaling $540.
b. If the firm sold 7 units of output, it would have revenues totaling $980.
c. If the firm increased output from 2 units to 3 units, total revenue would increase.
d. If the firm increased output from 6 units to 7 units, total revenue would increase.
e. If the firm decreased output from 6 units to 5 units, total revenue would decline.
Answer: D
31) The demand curve facing the firm has been estimated as follows:
Which of the following statements about the firm's total revenue is correct?
a. If the firm sold 3 units of output, it would have revenues totaling $540.
b. If the firm sold 7 units of output, it would have revenues totaling $560.
c. If the firm increased output from 2 units to 3 units, total revenue would decline.
d. If the firm decreased output from 7 units to 6 units, total revenue would decline.
e. If the firm decreased output from 6 units to 5 units, total revenue would decline.
Answer: B
32) What can be said about the firm shown in Figure 8-2?
a. the firm faces a perfectly elastic demand curve
b. the firm will maximize profits at the point where the TR and TC curves intersect
c. if price rises, the TC curve will shift upward
d. if fixed costs rise, the TR curve will pivot upward
e. the firm faces a downward-sloping demand curve
Answer: A
33) A firm's total cost of production
a. always increases as it produces more output
b. can increase or decrease as it produces more output
c. increases at a decreasing rate as long as it produces more output
d. is fixed in the short run, because inputs are fixed in the short run
e. can be minimized by producing where the firm's demand curve crosses the horizontal axis
Answer: A
34) A profit-maximizing firm will never increase production if doing so causes total revenue
to decrease.
a. True
b. False
Answer: A
35) In order to maximize profits, a firm should decrease output whenever total cost exceeds
total revenue.
a. True
b. False
Answer: B
36) In order to maximize profits, a firm should decrease output whenever total cost exceeds
total revenue.
a. True
b. False
Answer: B
37) If average fixed cost exceeds average variable cost, a firm should shut down in the short
run.
a. True
b. False
Answer: B
38) In the short run, profit maximization typically occurs where total revenue is at its
maximum.
a. True
b. False
Answer: B
39) Under the total revenue and total cost approach to profit maximization,
a. firms equate total cost and total revenue in order to maximize profit
b. the profit-maximizing output level is equivalent to the total revenue-maximizing output
level
c. when total costs are minimized, profits are maximized
d. firms choose the output level where TR - TC is greatest
e. total cost must always exceed total revenue in the long run
Answer: D
40) Under the total revenue and total cost approach to profit maximization,
a. firms equate total variable cost to total revenue in order to maximize profit
b. profit is maximized when fixed cost falls to zero
c. firms choose the level of output at which total revenue is the greatest distance above total
cost when the firm earns an economic profit
d. firms choose the level of output at which the changes in revenue and cost both equal zero
e. total revenue is maximized when profit is zero
Answer: C
41) Figure 8-3 shows the total revenue and total cost for a firm at selected output levels.
Which is the profit-maximizing level of output for this firm?
a. 100 units
b. 200 units
c. 500 units
d. 300 units
e. 400 units
Answer: D
42) Figure 8-3 shows the total revenue and total cost for a firm at selected output levels.
Which is the highest possible level of profit for this firm over this output range?
a. $500
b. $2,100
c. $1,600
d. -$500
e. $300
Answer: A
43) Figure 8-4 indicates data for the total cost curve and the demand curve facing Jonathan's
Riding Mower Shop. The quantities indicated are potential daily sales. Jonathan's profitmaximizing sales level is
a. 8 or 9 units
b. 5 units
c. 10 units
d. 6 units
e. 7 units
Answer: D
44) Figure 8-4 indicates data for the total cost curve and the demand curve facing Jonathan's
Riding Mower Shop. The quantities indicated are potential daily sales. Jonathan's maximum
profit is
a. $2,150
b. $3,600
c. $550
d. $2,050
e. $1,750
Answer: A
45) Figure 8-4 indicates data for the total cost curve and the demand curve facing Jonathan's
Riding Mower Shop. The quantities indicated are potential daily sales. If Jonathan sells 5
riding mowers per day, he will earn an economic profit of
a. $3,000
b. $1,750
c. $2,150
d. $1,850
e. $2,050
Answer: E
46) Figure 8-4 indicates data for the total cost curve and the demand curve facing Jonathan's
Riding Mower Shop. The quantities indicated are potential daily sales. If Jonathan sells 10
riding mowers per day, he will earn an economic profit of
a. $0
b. $150
c. $350
d. $500
e. $550
Answer: E
47) If a firm's managers inappropriately decide to operate where total revenue is maximized,
they will continue to increase output
a. as long as marginal revenue exceeds marginal cost
b. as long as marginal cost exceeds marginal revenue
c. as long as the total revenue curve is above zero
d. as long as the marginal revenue curve is above the horizontal axis
e. until the total revenue curve intersects the total cost curve
Answer: D
48) In Figure 8-5, which of the five output levels corresponds to the highest level of total
revenue?
a. level A
b. level B
c. level C
d. level D
e. level E
Answer: E
49) In Figure 8-5, which of the five output levels corresponds to the highest level of profit?
a. level A
b. level B
c. level C
d. level D
e. level E
Answer: C
50) In Figure 8-5, at which of the five output levels is profit equal to zero?
a. level A
b. level B
c. level C
d. level D
e. level E
Answer: D
51) In Figure 8-5, which of the following is true at point B?
a. total revenue is smaller than total cost
b. marginal revenue exceeds marginal cost
c. marginal revenue equals marginal cost
d. marginal revenue is smaller than marginal cost
e. total revenue equals total cost
Answer: B
52) If a firm is producing the level of output at which the total cost curve intersects the total
revenue curve,
a. profit is positive
b. profit is maximized
c. profit is zero
d. costs are minimized
e. average revenue is maximized
Answer: C
53) What is true only at the output level where price equals average total cost?
a. Marginal cost equals marginal revenue.
b. Profit is maximized.
c. Losses are minimized.
d. Profit is zero.
e. Cost is minimized.
Answer: D
54) Consider the firm shown in Figure 8-6. If there is an increase in fixed cost, then
a. the TR curve will rotate upward
b. the TR curve will shift to the right
c. the TR curve will be unaffected
d. the TC curve will shift downward
e. profits will rise
Answer: C
55) Assume all of a firm's costs are positive and consider the total revenue curve depicted in
Figure 8-7. In order to maximize profit, or minimize loss, the firm
a. should produce 100 units of output
b. should produce 200 units of output
c. should produce less than 100 units of output
d. should produce between 100 and 200 units of output
e. cannot close
Answer: C
56) Using a TR-TC graph, a firm maximizes profit by producing the output level where the
greatest
a. vertical distance occurs between the MR and MC curves
b. vertical distance occurs between the TR and TC curves, and the TR curve is above the TC
curve
c. total revenue occurs
d. horizontal distance occurs between the TR and TC curves, and the TR curve is above the
TC curve
e. horizontal distance occurs between the MR and MC curves, and the MR curve is rising
Answer: B
57) If marginal revenue for a firm is negative,
a. marginal cost must also be negative
b. total revenue will decrease if the firm sells more output
c. total revenue must also be negative
d. the firm should shut down in the short run
e. the lost revenue from having to lower its price is less than the additional revenue from
higher sales
Answer: B
58) When marginal revenue is positive, total revenue must rise as output increases.
a. True
b. False
Answer: A
59) If a firm enjoys a revenue of $500 from two units of output and $600 from three units of
output, then its marginal revenue must be rising.
a. True
b. False
Answer: B
60) Profit maximization occurs at the quantity where marginal cost equals marginal revenue.
a. True
b. False
Answer: A
61) According to the marginal approach to profit maximization, firms should increase output
as long as total revenue is rising.
a. True
b. False
Answer: B
62) The additional revenue received by a firm from selling one more unit of output is known
as
a. total revenue
b. price
c. average revenue
d. marginal cost
e. marginal revenue
Answer: E
63) Marginal revenue is defined as the
a. total revenue minus total cost
b. change in total revenue divided by the change in the quantity of output
c. price minus average total cost
d. total revenue over the quantity of output
e. quantity times price
Answer: B
64) When a firm faces a downward-sloping demand curve, marginal revenue
a. is constant regardless of how much output the firm produces
b. is less than price
c. increases as the firm produces more output
d. decreases if the firm produces less output
e. is equal to the price per unit of output
Answer: B
65) If a firm faces a horizontal demand curve, marginal revenue
a. is constant regardless of how much output the firm produces
b. decreases as the firm produces more output
c. increases as the firm produces more output
d. decreases if the firm produces less output
e. is less than price at most possible output levels
Answer: A
66) Marginal revenue is
a. the change in total revenue divided by total output
b. total revenue divided by total output
c. total revenue minus total cost then divided by total output
d. the change in total revenue divided by the change in price of output
e. the change in total revenue divided by the change in total output
Answer: E
67) If total revenue falls as more output is produced,
a. marginal revenue is negative
b. marginal revenue is positive
c. marginal cost is negative
d. average revenue is negative
e. total costs exceed total revenue
Answer: A
68) In Figure 8-8, the marginal revenue from adding the third unit of output is
a. $240
b. $80
c. $90
d. $40
e. $60
Answer: E
69) In Figure 8-8, the marginal revenue from adding the fifth unit of output is
a. $300
b. $40
c. $60
d. $20
e. $10
Answer: D
70) Figure 8-9 shows the demand schedule faced by an artist for reproductions of his
paintings. What is the marginal revenue from expanding from selling reproductions to 400?
a. $3,000
b. $1
c. $0
d. -$1,000
e. -$3,000
Answer: D
71) Figure 8-9 shows the demand schedule faced by an artist for reproductions of one of his
paintings. His marginal revenue falls as output rises because
a. marginal cost is rising
b. the artist must lower the price on all reproductions in order to sell a larger quantity
c. total revenue is increasing at an increasing rate
d. the price is equal to marginal revenue
e. the artist works in a perfectly competitive market for art
Answer: B
72) If a firm faces a downward-sloping demand curve, its marginal revenue is
a. less than its marginal cost
b. greater than price
c. less than price
d. equal to price
e. equal to its total revenue
Answer: C
73) If marginal cost exceeds marginal revenue,
a. the firm can increase profits by increasing output
b. the firm will lower profits by increasing output
c. the firm is maximizing profits
d. total cost exceeds total revenue
e. average cost equals average revenue
Answer: B
74) If a firm chooses to produce output at the point where MR equals MC,
a. then TR - TC will be maximized if there is a profit
b. economic profits will be zero
c. there will be positive accounting profits
d. there will be positive economic profits
e. average cost must equal average revenue
Answer: A
75) Consider the firm in Figure 8-10. The marginal cost of producing the fifth unit of output
is
a. $300
b. $1,500
c. $50
d. $40
e. $60
Answer: C
76) Consider the firm in Figure 8-10. The marginal revenue from selling the fifth unit of
output is
a. $90
b. $70
c. $50
d. $30
e. $10
Answer: E
77) To maximize profits or minimize losses in the short run, the firm in Figure 8-10 should
produce an output of
a. 0
b. 1
c. 2
d. 3
e. 4
Answer: D
78) If the firm in Figure 8-10 sells five units of output, then the price must equal
a. $60
b. $10
c. $250
d. $90
e. $50
Answer: E
79) Hannah's Harmonicas sells 1,000 harmonicas each month at a price of $10.00 each. (She
could sell as many as she wishes at that price.) If the marginal cost of producing an additional
harmonica is $9.60, then
a. Hannah should produce additional harmonicas
b. Hannah could possibly reduce her profits by producing one additional harmonica
c. Hannah must currently be maximizing her profits
d. too many harmonicas are being produced, from society's point of view
e. Hannah's total economic profit is $400 per month
Answer: A
80) Economic analysis assumes that, for each output level, the firm
a. operates at minimum point of its average total cost curve
b. operates at minimum point of its long-run average total cost curve
c. seeks lowest possible cost of producing that quantity of output
d. produces at maximum point of its total revenue curve
e. produces at maximum point of its total product curve
Answer: C
81) According to the marginal approach to profit maximization,
a. firms should equate total revenue and marginal cost when choosing the optimal output
level
b. firms should take any action that increases revenue more than costs
c. economic profit is zero in the long run
d. marginal cost declines until it reaches marginal revenue at the profit-maximizing output
level
e. marginal costs eventually diminish as more output is produced
Answer: B
82) 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
a. $7
b. $11
c. $48
d. $55
e. $65
Answer: A
83) 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
a. 2 manicures per day
b. 3 manicures per day
c. 4 manicures per day
d. 5 manicures per day
e. 6 manicures per day
Answer: A
84) 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
a. equal $30
b. equal $29
c. be between $30 and $29
d. be less than $29
e. exceed $30
Answer: D
85) If a firm's total cost rises as output rises, then
a. marginal cost is positive
b. profit cannot be maximized
c. total cost is minimized
d. marginal cost equals marginal revenue
e. the firm should shut down in the short run
Answer: A
86) 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.
a. raise output
b. reduce its price
c. reduce output
d. close down
e. maintain its current output level
Answer: C
87) The change in total profit when a firm increases its output by one unit equals
a. total revenue minus total cost
b. total revenue minus marginal revenue
c. marginal revenue minus marginal cost
d. total revenue minus marginal cost
e. marginal revenue plus marginal cost
Answer: C
88) Whenever marginal cost exceeds marginal revenue,
a. profit declines if the firm reduces output
b. profit increases if the firm increases output
c. the firm should shut down
d. losses decrease if the firm increases output
e. profit declines if the firm increases output
Answer: E
89) For every firm that faces a downward-sloping demand curve for its output,
a. marginal cost exceeds marginal revenue at all output levels
b. marginal revenue equals the price of the last unit sold
c. marginal revenue is less than the price of the last unit sold
d. marginal revenue exceeds the price of the last unit sold
e. marginal cost exceeds the price of the last unit sold
Answer: C
90) 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
a. decrease output
b. increase output
c. leave output at four cabinets per week
d. either increase or decrease output, depending on its level of fixed costs
e. either increase or decrease output, depending on its level of variable costs
Answer: A
91) As long as the marginal revenue curve lies above the horizontal axis,
a. total revenue must exceed total cost
b. the total revenue curve must have a positive slope
c. marginal revenue must exceed marginal cost
d. profit must be rising
e. the firm must be earning a profit
Answer: B
92) Whenever a decrease in output leads to an increase in profit, the
a. marginal revenue curve lies above the marginal cost curve
b. total cost curve intersects the total revenue curve
c. marginal cost curve is parallel to the marginal revenue curve
d. marginal cost curve lies above the marginal revenue curve
e. total cost curve lies above the total revenue curve
Answer: D
93) If the marginal cost and marginal revenue curves intersect at two different points, then
maximum profit occurs at
a. the output level where the MC curve crosses the MR curve from below
b. the output level where the MC curve crosses the MR curve from above
c. both points
d. an output level between the two points
e. an output level beyond the second point
Answer: A
94) Which of the following rules is most consistent with profit maximization?
a. expand output when MR MC
c. expand output when TR > TC
d. reduce output when TR > TC
e. expand output when MR > MC
Answer: E
95) 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?
a. 150 units
b. 80 units
c. 50 units
d. less than 50 units
e. between 50 and 80 units
Answer: B
96) If a firm is able to cover its variable costs by operating in the short run then, at its best
output level, the
a. marginal revenue is equal to marginal cost
b. vertical distance between MR and MC is maximized
c. vertical distance between TR and TC is minimized
d. marginal cost curve lies above the marginal revenue curve
e. marginal cost curve is minimized
Answer: A
97) In order to maximize its profit in the short run, an airline should offer an additional flight
whenever
a. its marginal revenue exceeds its sunk costs
b. it marginal revenue exceeds its average total cost
c. the average seat price exceeds its sunk costs
d. the average seat price exceeds its average total cost
e. the additional revenue exceeds the additional costs
Answer: E
98) A firm may find it optimal to stay in business in the short run even if total revenue does
not cover total cost.
a. True
b. False
Answer: A
99) A firm that is suffering a loss should shut down immediately if total revenue (TR) is less
than total variable cost (TVC).
a. True
b. False
Answer: A
100) A firm will continue to produce if total revenue is greater than total variable cost even if
total revenue is less than fixed cost.
a. True
b. False
Answer: A
101) Many gift shops along the ocean shut down during the winter because
a. revenues cannot cover fixed costs
b. marginal revenue does not equal marginal cost
c. costs are minimized by shutting down
d. revenues are maximized by shutting down
e. revenues cannot cover variable costs
Answer: E
102) When a firm incurs losses in the short run, the most important consideration in
determining whether to continue producing is whether
a. marginal cost equals marginal revenue
b. average total cost is at its minimum
c. average variable cost is at its minimum
d. revenues cover some of its fixed costs and all of its variable cost
e. total revenue exceeds total cost
Answer: D
103) If a firm shuts down in the short run,
a. it exits the industry
b. losses would equal its variable costs
c. losses would equal its fixed costs
d. profits would be zero
e. losses would equal to zero
Answer: C
104) If a firm minimizes its losses by shutting down in the short run, then at all other output
levels,
a. variable cost would exceed total revenue
b. total revenue exceeds total cost
c. marginal revenue exceeds marginal cost
d. total cost is zero
e. total revenue is zero
Answer: A
105) Which of the following does not apply to a firm that has shut down in the short run?
a. Variable cost is zero.
b. Total revenue is zero.
c. Total cost exceeds total revenue.
d. Total cost is zero.
e. Fixed cost is positive.
Answer: D
106) Assume that a firm is able to cover its variable costs if it operates in the short run. If
marginal cost equals $0 for all output levels, then the firm's profit-maximizing output level
occurs where
a. total cost is minimized
b. marginal revenue is maximized
c. marginal revenue is minimized
d. marginal revenue equals $0
e. total revenue is minimized
Answer: D
107) A firm is indifferent between staying in business and shutting down in the short run
when, at the loss-minimizing level of output,
a. total revenue equals total cost
b. average total cost is at its minimum
c. total revenue exceeds total cost
d. total revenue equals total variable cost
e. total variable cost equals total cost
Answer: D
108) If a firm is experiencing an economic loss in the long run, then
a. it must be experiencing an accounting loss
b. it should stay in business if it can cover its fixed costs
c. the market must be too large
d. it should exit from the industry
e. price exceeds marginal cost
Answer: D
109) In the long run, if a firm's total cost exceeds its total revenue at all output levels, it
should
a. always exit the industry
b. always continue operating
c. increase the amount of its fixed inputs
d. increase the proportion of its total cost that is fixed
e. maximize the difference between its marginal revenue and its marginal cost
Answer: A
110) If Carol's Crayon Factory's price exceeds its average total cost in the short run, then
a. it should shut down
b. it is earning a profit
c. profits are being maximized
d. it should increase output
e. it should decrease output
Answer: B
111) If a firm shuts down in the short run, then
a. total revenue and total cost drop to zero
b. total revenue drops to zero, but the firm must still pay its fixed cost
c. total revenue drops to zero, but the firm must still pay some variable cost
d. total cost drops to zero, but the firm still earns some residual revenues
e. neither total revenue nor total cost drops to zero
Answer: B
112) If a firm's short-run total cost curve lies above its total revenue curve at all output levels,
the goal of the firm should be to
a. minimize total cost
b. maximize total revenue
c. minimize its loss
d. minimize marginal cost
e. maximize marginal revenue
Answer: C
113) If a firm's short-run total cost curve lies above its total revenue curve at all output levels,
the firm should
a. always shut down in the short run
b. always operate in the short run
c. operate in the short run if the maximum operating loss is less than its total fixed cost
d. operate in the short run if the minimum operating loss is less than its total fixed cost
e. operate in the short run if the average operating loss is less than its total fixed cost
Answer: D
114) In the short run, if a firm's total variable cost curve lies everywhere above its total
revenue curve, the firm should produce
a. the output level that minimizes average total cost
b. the output level that minimizes average variable cost
c. the output level that minimizes the distance between marginal cost and marginal revenue
d. the output level that maximizes the distance between marginal cost and marginal revenue
e. no output
Answer: E
115) In the short run, if a firm's total variable cost curve lies above its total revenue curve at
all possible output levels, the firm's minimum short-run loss
a. equals its total fixed cost
b. equals zero
c. occurs at the maximum point of the total revenue curve
d. occurs at the maximum point of its marginal revenue curve
e. occurs at the minimum point of its marginal cost curve
Answer: A
116) Figure 8-13 shows a firm's total variable cost and total revenue curves. In the short run,
this firm
a. should shut down
b. should produce all units of output for which marginal cost exceeds marginal revenue
c. should produce at the output level where the marginal cost curve crosses the marginal
revenue curve from below
d. should produce at the output level where the marginal cost curve crosses the marginal
revenue curve from above
e. needs additional information in order to decide whether to operate
Answer: A
117) The two important contributions of entrepreneurs are
a. innovation and independent wealth
b. good management skills and honesty
c. risk taking and honesty
d. good management skills and independent wealth
e. innovation and risk taking
Answer: E
118) Profit is the payment for
a. land and labor
b. risk taking and innovation
c. capital and labor
d. risk taking and capital
e. all of the factors of production
Answer: B
Test Bank for Microeconomics: Principles and Applications
Robert E. Hall, Marc Lieberman
9781111822569, 9781478405238, 9781478498056
