Eco 3100 all chapters

310




TEST BANK FOR CHAPTER 8: Profit Maximization and Supply
MULTIPLE CHOICE

1. In general, microeconomic theory assumes that firms attempt to maximize the difference
between
a. total revenue and accounting costs.
b. price and marginal cost.
c. total revenues and economic costs.
d. economic costs and average cost.
ANS: c

2. A firm’s total revenue is equal to
a. total quantity produced times marginal cost.
b. total quantity produced times market price.
c. marginal revenue times total quantity produced.
d. market price divided by total quantity produced.
ANS: b

3. A firm’s marginal revenue is defined as
a. the ratio of total revenue to total quantity produced.
b. the additional output produced by lowering price.
c. the additional revenue received due to technical innovation.
d. the additional revenue received when selling one more unit of output.
ANS: d

4. In order to maximize profits, a firm should produce at the output level for which
a. average cost is minimized.
b. marginal revenue equals marginal cost.
c. marginal cost is minimized.
d. price minus average cost is as large as possible.
ANS: b

5. If demand is inelastic, marginal revenue will be
a. positive. c. negative.
b. zero. d. constant.
ANS: c

6. If a firm wished to maximize total revenues it should produce where
a. marginal cost is zero.
b. marginal revenue is zero.
c. marginal revenue is equal to marginal cost.
d. marginal revenue is equal to price.
ANS: b

7. In order to maximize profits, a firm that can sell all it wants without affecting price should
produce
a. where average variable costs are minimized.
b. where marginal cost is equal to average variable costs.
c. where marginal cost is equal to price.
d. where marginal cost is a minimum.



1

,2 Chapter 8: Profit Maximization and Supply


ANS: c

8. If a firm is a price taker, its marginal revenue is
a. equal to market price.
b. less than market price.
c. greater than market price.
d. a multiple of market price that may be either greater than or less than one.
ANS: a


9. If a firm’s marginal revenue is below its marginal cost, an increase in production will usually
a. increase profits.
b. leave profits unchanged.
c. decrease profits.
d. increase marginal revenue.
ANS: c


10. If the demand faced by a firm is inelastic, selling one more unit of output will
a. increase revenues.
b. decrease revenues.
c. keep revenues constant.
d. increase profits.
ANS: b


11. If the demand faced by a firm is elastic, selling one less unit of output will
a. increase revenue.
b. decrease revenue.
c. keep revenues constant.
d. decrease price.
ANS: b


12. If the demand curve a firm faces shifts to the right, usually
a. it would be impossible to tell whether the marginal revenue curve shifts.
b. the marginal revenue curve would shift to the left.
c. the marginal revenue curve would shift to the right.
d. the marginal revenue curve would not shift.
ANS: c


13. A firm that sought to “maximize market share” would choose to produce an output level for
which marginal revenue was equal to
a. marginal cost
b. average cost.
c. price.
d. zero.
ANS: d

, Chapter 8: Profit Maximization and Supply 3


14. The markup pricing technique involves determining the selling price of a good by adding a
profit markup to minimum average cost. This would result in maximum profits only if
a. average cost were constant.
b. the markup were zero.
c. the markup varied with the elasticity of demand.
d. demand were inelastic.
ANS: c

15. It is usually assumed that a perfectly competitive firm’s supply curve is given by its marginal
cost curve. In order for this to be true, which of the following additional assumptions are
necessary?
I. That the firm seek to maximize profits.
II. That the marginal cost curve be positively sloped.
III. That price exceeds average variable cost.
IV. That price exceeds average total cost.

a. I and II only.
b. I and II but not III and IV.
c. I and III but not II and IV.
d. I, II and III, but not IV.
ANS: d

16. Which of the following conditions would result in the short run marginal cost curve not
correctly reflecting the supply behavior of a profit maximizing firm?
a. The firm is a price taker.
b. Price exceeds average total cost.
c. The elasticity of demand facing the firm is –3.
d. the firm can vary several inputs in the short run.
ANS: c

17. If price is equal to short-run average variable cost, the firm is at the point known as
a. the break even point.
b. the profit maximizing point.
c. the shutdown point.
d. the revenue maximizing point.
ANS: c

18. Suppose a farmer is a price taker (MR = P = 6) in soybeans with cost functions given by
TC = .1q2 + 2q + 100
MC = .2q + 2
The firm’s supply curve is given by
a. q = 5P - 10
b. q = .2P +2
c. q = 10P - 2
d. q = 2P - 5
ANS: a

, 4 Chapter 8: Profit Maximization and Supply


19. Suppose a farmer is a price taker (MR = P = 6) in soybeans with cost functions given by
TC = .1q2 + 2q + 30
MC = .2q + 2
The level of output is
a. 10
b. 20
c. 40
d. 80
ANS: b

20. Suppose a farmer is a price taker (MR = P = 6) in soybeans with cost functions given by
TC = .1q2 + 2q + 30
MC = .2q + 2
The level of profits is
a. 10
b. 20
c. 30
d. -10
ANS: a

21. Suppose a farmer is a price taker (MR = P = 10) in soybeans with cost functions given by
TC = .1q2 + 2q + 30
MC = .2q + 2
The profit maximizing level of output is
a. 0
b. 30
c. 40
d. 50
ANS: c


22. Suppose a farmer is a price taker in soybeans with cost functions given by
TC = .1q2 + 2q + 100
MC = .2q + 2
Suppose the farmer has to purchase a license for $50, the new marginal cost function is
a. still MC = .2q + 2
b. MC = .2q + 50
c. MC = .2q + 52
d. MC = 50
ANS: a

23. Suppose a farmer is a price taker in soybeans with cost functions given by
TC = .1q2 + 2q + 30
MC = .2q + 2
Suppose the farmer has to purchase a license for $50, the new total cost function is
a. still TC = .1q2 + 2
b. TC = .1q2 + .2q + 80
c. TC = .1q2 + 2q + 50
d. TC = 50
ANS: b