Principles of Microeconomics
|
Economics 111
|
Mr. Beck
|
SUNY College at Oneonta
|
Review Questions for Chapter 9 Solutions
Homepage
Review Questions for Economics
111
1. Since total profits = total revenue
- total cost, we first must calculate total revenue (TR) by multiplying
P x Q across each row. This will yield an extra column in our table for
TR:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost
|
| $32 |
0 |
$0 |
$20
|
| $30 |
1 |
$30 |
$30
|
| $28 |
2 |
$56 |
$38
|
| $26 |
3 |
$78 |
$50
|
| $24 |
4 |
$96 |
$66
|
| $22 |
5 |
$110 |
$86
|
To determine total profits for each level of quantity,
we subtract total cost from total revenue. This is shown by the final column
in our table to the far right:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost (TC)
|
Total Profit = TR - TC |
| $32 |
0 |
$0 |
$20
|
$-20 |
| $30 |
1 |
$30 |
$30
|
$0 |
| $28 |
2 |
$56 |
$38
|
$18 |
| $26 |
3 |
$78 |
$50
|
$28 |
| $24 |
4 |
$96 |
$66
|
$30 |
| $22 |
5 |
$110 |
$86
|
$24 |
The maximum possible total profit ($30) is earned
when the firm produces 4
units of quantity. The correct answer is e.
Return to Question
1
2. Marginal Profit = DTotal
Profit/DQ. The marginal profit of the 3rd unit
of quantity is the additional profit earned by producing the 3rd unit;
that is, it is the difference in total profit between producing 2 units
of quantity and producing 3 units.
From the total profits column in the table above, we notice that total
profits of 3 units of quantity is $28 and total profits of 2 units of quantity
is $18.
Therefore, marginal profit of the 3rd unit of quantity
= $28 - $18 = $10.
Return to Question
2
3.
QB is the quantity at which total profits are maximized.
This is the profit-maximizing quantity because it is the quantity at which
marginal revenue (MR), the slope of the total revenue curve equals marginal
cost (MC), the slope of the total cost curve. Graphically, it is the quantity
at which total revenue exceeds total cost by the greatest $ amount (where
the vertical distance between the 2 curves is furthest apart).
QC is the quantity at which total revenue is maximized.
At this quantity, the slope of the total revenue curve (which is equal
to marginal revenue, MR) is 0.
From QB to QC, total profits
are decreasing (because QB is the profit-maximizing quantity). Therefore,
marginal
profit, the change in total profits is negative.
The correct choice is c.
Note that from QB to QC marginal
revenue (MR), choice a, is positive because MR is positive as long
as total revenue (TR) is increasing. And TR is increasing until QC where
it reaches its peak.
Note also that marginal cost
(MC), choice b, is always positive for all quantity because, as quantity
increases, total cost is increasing throughout. The total cost curve is
positively sloped for all quantity. Resources cost money and to produce
additional quantity requires additional resources.
Return to Question
3
4.
| Price |
Quantity |
| 60 |
0 |
| 55 |
1 |
| 48 |
2 |
| 38 |
3 |
To determine the marginal revenue (MR) of the 3rd
unit of quantity, we first must calculate total revenue (TR) by multiplying
P x Q across each row. This will yield an extra column in our table for
TR:
| Price |
Quantity |
Total Revenue = P x Q |
| 60 |
0 |
$0 |
| 55 |
1 |
$55 |
| 48 |
2 |
$96 |
| 38 |
3 |
$114 |
Marginal Revenue (MR) = DTotal
Revenue/DQ. The marginal revenue of the 3rd
unit of quantity is the additional revenue earned by producing the 3rd
unit; that is, it is the difference in total revenue between producing
2 units of quantity and producing 3 units.
From the total revenue column in the table above,
we notice that total revenue of 3 units of quantity is $114 and total revenue
of 2 units of quantity is $96.
Therefore, marginal revenue (MR) of the 3rd unit
of quantity = $114 - $96 = $18.
Return to Question
4
5.
From QA to QB total profits are positive but decreasing.
If total profits are decreasing, then marginal profit, the change in total
profit, is negative.
Marginal profit = marginal revenue (MR) minus marginal
cost (MC). If marginal profit is negative, then marginal
revenue (MR) must be less than marginal cost (MC), choice d.
Return to Question
5
6.
| Quantity (Q) |
Marginal Profit |
| 1 |
+2 |
| 2 |
+4 |
| 3 |
+7 |
| 4 |
+3 |
| 5 |
+1 |
| 6 |
-2 |
The profit-maximizing rule is to increase quantity
as long as marginal profit >0 because as long as marginal profit is positive,
total profits are still increasing and additional quantity will add to
the firm's total profits.
In the above table, marginal profit is positive
through the 5th unit
of quantity. Producing each one of these units will continue to increase
the firm's total profits. The 6th unit of quantity should not be produced
because its production would decrease the firm's total profit by $2. The
correct answer is 5 units, e.
Return to Question
6
7. Demand for this firm's produce is inelastic because
the % change in quantity is less than the % change in price. Since demand
is inelastic, price and total revenue will vary in the same direction.
Therefore, the decrease in price will decrease total revenue. This is because
total revenue (TR) = P x Q and the decrease in price is relatively
greater than the increase in quantity.
Since total costs are always increasing as quantity
increases, it is never profitable to produce additional quantity if demand
is inelastic and total revenue is decreasing. The combination of increasing
total costs with decreasing total revenue will always result in decreasing
total profits. The correct answer is c,
the firm should not produce the 14th unit
of quantity.
Return to Question
7
8.
| Price |
Quantity |
Total Cost |
| $22 |
0 |
$10 |
| $20 |
1 |
$26 |
| $18 |
2 |
$36 |
| $16 |
3 |
$42 |
| $14 |
4 |
$49 |
| $12 |
5 |
$57 |
Since total profits = total revenue - total cost,
we first must calculate total revenue (TR) by multiplying P x Q across
each row. This will yield an extra column in our table for TR:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost |
| $22 |
0 |
$0 |
$10 |
| $20 |
1 |
$20 |
$26 |
| $18 |
2 |
$36 |
$36 |
| $16 |
3 |
$48 |
$42 |
| $14 |
4 |
$56 |
$49 |
| $12 |
5 |
$60 |
$57 |
To determine total profits for each level of quantity,
we subtract total cost from total revenue. This is shown by the final column
in our table to the far right:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost |
Total Profit = TR - TC |
| $22 |
0 |
$0 |
$10 |
$-10 |
| $20 |
1 |
$20 |
$26 |
$-6 |
| $18 |
2 |
$36 |
$36 |
$0 |
| $16 |
3 |
$48 |
$42 |
$6 |
| $14 |
4 |
$56 |
$49 |
$7 |
| $12 |
5 |
$60 |
$57 |
$3 |
The maximum possible total profit ($7) is earned when the firm produces
4
units of quantity. The correct answer is e.
Return to Question
8
9. All of the choices a-d are incorrect for the following
reason:
Choice a: Since total revenue is increasing, marginal
revenue, which represents the change in total revenue, is positive.
Choice b: Since total profits would decrease, marginal
profit, which represents the change in total profit, is negative. As marginal
profit is marginal revenue minus marginal cost, marginal revenue must be
less
than marginal cost.
Choice c: Since total
profits would decrease, marginal profit, which represents the change in
total profit, is negative.
Choice d: Marginal cost (MC)
is always positive
for all quantity because, as quantity increases, total cost is increasing
throughout. The total cost curve is positively sloped for all quantity.
Resources cost money and to produce additional quantity requires additional
resources.
The correct choice is e,
None
of the above can be concluded.
Return to Question
9
10.
As marginal profit is marginal revenue (MR) minus
marginal cost (MC), marginal revenue will be less than marginal cost when
marginal profit is negative. And marginal profit will be negative when
total profits are decreasing.
Since QB represents the quantity corresponding to
maximum total profit (where MR=MC), all quantity greater than QB will exhibit
decreasing total profits. Therefore, from QB to QC,
choice c, would
represent a range in which marginal revenue will be less than marginal
cost.
Return to Question
10
11. If, by producing the 41st unit of quantity, the
firm's total profits would increase, then marginal profit is positive.
Since marginal profit equals marginal revenue (MR) minus marginal cost
(MC), a positive marginal profit means that marginal
revenue (MR) is greater than marginal cost (MC), choice d.
Return to Question
11
12. For all units of quantity from 0 to QA, total
profits is negative (below 0) but increasing.
Since the firm's total profits are increasing, then marginal profit is
positive. Since marginal profit equals marginal revenue (MR) minus marginal
cost (MC), a positive marginal profit means that marginal
revenue (MR) is greater than marginal cost (MC), choice b.
Return to Question
12
13. From QB to QC, total profits are
positive (above 0). Since total profits equals total revenue (TR) minus
total cost (TC), positive total profits implies that total revenue is greater
than total cost.
From QB to QC, total profits are increasing (the
total profit curve is positively sloped in this range). Since marginal
profit represents the change in total profit, increasing profits imply
a positive change so that marginal profit is positive.
The correct choice is e,
None
of the above answers is correct.
All of the above statements are
true.
Return to Question
13
14. From QB to QC total profits are decreasing because
QB represents the quantity corresponding to maximum total profit (where
MR=MC). If total profits are decreasing, marginal profit, the change in
total profit, is negative. As marginal profit is marginal revenue minus
marginal cost, marginal revenue must be less
than marginal cost, choice a.
Return to Question
14
15. Since QB represents the quantity corresponding to maximum
total profit, producing all quantity up until QB represent an increase
in total profits. Since marginal profit represents the change in total
profit, increasing profits imply a positive change so that marginal profit
is positive. Since marginal profit equals marginal revenue (MR) minus marginal
cost (MC), a positive marginal profit means that marginal
revenue (MR) is greater than marginal cost (MC), choice a.
Return to Question
15
16.
| Quantity (Q) |
Marginal Profit |
| 1 |
+3 |
| 2 |
+3 |
| 3 |
+5 |
| 4 |
+2 |
| 5 |
+1 |
| 6 |
-4 |
The profit-maximizing rule is to increase quantity
as long as marginal profit >0 because as long as marginal profit is positive,
total profits are still increasing and additional quantity will add to
the firm's total profits.
In the above table, marginal profit is positive
through the 5th unit
of quantity. Producing each one of these units will continue to increase
the firm's total profits. The 6th unit of quantity should not be produced
because its production would decrease the firm's total profit by $4. The
correct answer is 5 units, e.
Return to Question
16
17.
| Price |
Quantity |
Total Cost |
| $22 |
0 |
$10 |
| $20 |
1 |
$18 |
| $18 |
2 |
$24 |
| $16 |
3 |
$31 |
| $14 |
4 |
$40 |
| $12 |
5 |
$50 |
Since total profits = total revenue - total cost,
we first must calculate total revenue (TR) by multiplying P x Q across
each row. This will yield an extra column in our table for TR:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost |
| $22 |
0 |
$0 |
$10 |
| $20 |
1 |
$20 |
$18 |
| $18 |
2 |
$36 |
$24 |
| $16 |
3 |
$48 |
$31 |
| $14 |
4 |
56 |
$40 |
| $12 |
5 |
$60 |
$50 |
To determine total profits for each level of quantity, we subtract total
cost from total revenue. This is shown by the final column in our table
to the far right:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost |
Total Profit = TR - TC |
| $22 |
0 |
$0 |
$10 |
$-10 |
| $20 |
1 |
$20 |
$18 |
$2 |
| $18 |
2 |
$36 |
$24 |
$12 |
| $16 |
3 |
$48 |
$31 |
$17 |
| $14 |
4 |
$56 |
$40 |
$16 |
| $12 |
5 |
$60 |
$50 |
$10 |
The maximum possible total profit ($17) is earned when the firm produces
3
units of quantity. The correct answer is d.
Return to Question
17
18. Since demand is inelastic, price and total revenue
will vary in the same direction. Therefore, the decrease in price necessary
to sell the 24th unit of quantity will decrease total revenue. This is
because total revenue (TR) = P x Q and inelastic demand means that
the % increase in quantity is less than the % decrease in price .
Since total costs are always increasing as quantity
increases, it is never profitable to produce additional quantity if demand
is inelastic and total revenue is decreasing. The combination of increasing
total costs with decreasing total revenue will always result in decreasing
total profits. The correct answer is c,
the firm should not produce the 14th unit
of quantity.
Return to Question
18
19.
From QA to QB total profits are increasing throughout,
from a negative (below 0) amount to a positive amount. The total profit
curve is positively sloped within this range. Since the firm's total profits
are increasing, then marginal profit, the
change in total profits and the slope of the total profits curve,
is positive. The correct choice is b.
Return to Question
19
20. If total profits would increase as quantity increases,
then marginal profit, the change in total profits, is positive. Since marginal
profit equals marginal revenue (MR) minus marginal cost (MC), a positive
marginal profit means that marginal revenue (MR)
is greater than marginal cost (MC), choice d.
Note that choice "a" cannot
be concluded because, although total profits are increasing, total profits
are not necessarily positive. Only if it were known that total profits
were positive could it be concluded that total revenue (TR) is greater
than total cost (TC).
Return to Question
20
21.
As indicated directly above the 2 curves, at QB the slope of the total
revenue (TR) curve equals the slope of the total cost (TC) curve. Therefore,
QB is the point where marginal revenue (MR) = marginal cost (MC). Since
marginal profit equals marginal revenue minus marginal cost, if MR = MC,
then marginal profit (the difference) will
equal
0. This is why QB is the profit-maximizing quantity. The correct
answer is d.
Return to Question
21
22. Since the % increase in quantity would be greater than the
% decrease in price, demand is elastic. If demand is elastic, then, as
price decreases and quantity increases, total revenue must be increasing.
This is because if demand is elastic, price and total revenue vary in opposite
directions. If total revenue is increasing, marginal
revenue (MR) is positive, choice d.
Return to Question
22
23.
| Price |
Quantity |
Total Cost |
| $11 |
0 |
$ 9 |
| $10 |
1 |
$12 |
| $ 9 |
2 |
$13 |
| $ 8 |
3 |
$15 |
Marginal profit of the 3rd unit of quantity is the difference between total
profits when Q =3 and when Q =2.
Since total profits = total revenue - total cost, we first must calculate
total revenue (TR) by multiplying P x Q across each row. This will yield
an extra column in our table for TR:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost
|
| $ 9 |
2 |
$18 |
$13
|
| $ 8 |
3 |
$24 |
$15
|
To determine total profits for for both Q = 2 and Q =3, we subtract total
cost from total revenue. This is shown by the final column in our table
to the far right:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost (TC)
|
TR - TC = Total Profit |
| $ 9 |
2 |
$18 |
$13
|
$18 - $13 = $5 |
| $ 8 |
3 |
$24 |
$15
|
$24 - $15 = $9 |
Marginal Profit = DTotal Profit/DQ.
The marginal profit of the 3rd unit of quantity is the additional profit
earned by producing the 3rd unit; that is, it is the difference in total
profit between producing 2 units of quantity and producing 3 units.
From the total profits column in the table above, we notice that total
profits of 3 units of quantity is $9 and total profits of 2 units of quantity
is $5.
Therefore, marginal profit of the 3rd unit of quantity
= $9 - $5 = $4.
Return to Question
23
24.
As quantity increases from QA to QB, total profits are decreasing,
although total profits are still positive.
All of the 5 choices provided are incorrect. The correct answer is
None
of the above statements is correct, choice f.
Let's examine why each choice is incorrect:
a. Since total profits are decreasing, marginal profit is negative.
b. Since total profits are still positive, TR is greater than
TC.
c. Since, as quantity increases, total cost always increases, marginal
cost (MC) is always positive.
d. Since total profits are decreasing, MR is less than MC.
e. Total cost is never negative.
Return to Question
24
25.
|
Quantity (Q)
|
Marginal Revenue (MR)
|
Marginal Cost (MC)
|
|
1
|
$50
|
$12
|
|
2
|
$40
|
$8
|
|
3
|
$30
|
$11
|
|
4
|
$20
|
$18
|
|
5
|
$10
|
$30
|
The profit-maximizing rule is to increase quantity as long as MR>MC. This
is true for each of the first 4 units of quantity, but not for the 5th
unit. The correct choice is d, the profit-maximizing
level of quantity is 4 units of quantity.
Return to Question
25
26. Since the firm's total profits would decrease, the additional revenue
(MR) of the 35th unit of quantity must be less than the additional
cost (MC) of producing this 35th unit of quantity. The correct choice is
b,
marginal revenue (MR) is less than marginal cost
(MC).
Return to Question
26
27.
| Price |
Quantity |
Total Cost |
| $40 |
0 |
$ 7 |
| $35 |
1 |
$11 |
| $30 |
2 |
$14 |
| $25 |
3 |
$21 |
| $20 |
4 |
$33 |
| $15 |
5 |
$50 |
Since total profits = total revenue - total cost, we first must calculate
total revenue (TR) by multiplying P x Q across each row. This will yield
an extra column in our table for TR:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost
|
| $40 |
0 |
$0 |
$ 7
|
| $35 |
1 |
$35 |
$11
|
| $30 |
2 |
$60 |
$14
|
| $25 |
3 |
$75 |
$21
|
| $20 |
4 |
$80 |
$33
|
| $15 |
5 |
$75 |
$50
|
To determine total profits for each level of quantity, we subtract total
cost from total revenue. This is shown by the final column in our table
to the far right:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost
|
TR - TC = Total Profit |
| $40 |
0 |
$0 |
$ 7
|
$0 - $7 = $-7 |
| $35 |
1 |
$35 |
$11
|
$35 - $11 = $24 |
| $30 |
2 |
$60 |
$14
|
$60 - $14 = $46 |
| $25 |
3 |
$75 |
$21
|
$75 - $21 = $54 |
| $20 |
4 |
$80 |
$33
|
$80 - $33 = $47 |
| $15 |
5 |
$75 |
$50
|
$75 - $50 = $25 |
The maximum possible total profit ($54) is earned when the firm produces
3
units of quantity. The correct answer is d.
Return to Question
27
28. Total profit = Total revenue (TR) - Total cost (TC).
Since total profit is positive, then TR must be greater than TC. (TC
will not have the highest $ value.)
Total profit will always be less than TR as long as TC is positive.
(Total profit will not have the highest $ value.)
Total cost is always greater than total variable cost because total
cost includes variable plus fixed costs. (TVC will not have the
highest $ value.)
Price is greater than Average cost because the firm is earning a positive
total profit. (AC will not have the highest $ value.)
Total revenue is 100 times greater than price because TR = P x Q and
Q is 100. (Price will not have the highest $ value.)
Therefore, when total profit is positive, total
revenue (TR) will have the highest
$ value. The correct choice is a.
Return to Question
28
29.
QB represents the quantity at which total profits are maximized. At
QB, marginal revenue (MR), the slope of the TR curve equals marginal cost
(MC), the slope of the TC curve. The profit-maximizing point occurs where
MR = MC.
For all quantity greater than QB, total profits must be decreasing.
Therefore, from QB to QC total profits are decreasing (although they are
still positive because TR remains above TC). If total profits are decreasing,
then marginal profit (the slope of total profit) must be negative. The
correct choice is e.
Return to Question
29
30. If total revenue is decreasing, then marginal revenue (MR) must
be negative because MR is the slope of TR. If, as quantity increases (and
price decreases) total revenue is decreasing, then demand is inelastic
because price and total revenue are varying in the same direction. (If
MR is negative, demand must be inelastic.)
The correct choice is f, marginal
revenue (MR) is negative and demand is inelastic.
Return to Question
30
31. If the price elasticity of demand = 1 (unitary elasticity),
then total revenue (TR) remains constant. However, to increase quantity
from 9 to 10, total cost must be increasing since TC always increases as
quantity increases.
Total profits = TR - TC. Since TR is not increasing and TC is
increasing as quantity increases from 9 to 10, total profits must be decreasing.
The profit-maximizing firm should definitely not produce the 10th
unit of quantity, choice d.
Return to Question
31
32. As the question asks about the $ amount of marginal revenue
of the 3rd unit of quantity (increasing quantity from 2 to 3 units), the
only information necessary is to calculate the total revenue of 3 units
of quantity and subtract from it the total revenue of 2 units of quantity.
This is illustrated in the table below:
| Price |
Quantity |
Total Revenue (TR) = P x Q |
Marginal Revenue (MR) = DTR/DQ |
| $300 |
0 |
|
|
| $270 |
1 |
|
|
| $240 |
2 |
$480 |
|
| $210 |
3 |
$630 |
$630 - $480 = $150 |
Return to Question
32
33. If the increase in total revenue is greater than the increase in
total cost, then marginal revenue (MR) is greater than marginal cost (MC)
for the 43rd unit of quantity.
Since Marginal Profit is MR - MC, if MR is
greater than MC then Marginal Profit is positive,
choice c.
Return to Question
33
34. Total Revenue (TR) is price x quantity while total cost (TC) =
Average cost (AC) x quantity. If price is greater than average cost, then
TR will be greater than TC.
Profits = TR - TC. Since TC is always positive,
Profits will always be less than TR.
Note that since Total Cost (TC) = Total Variable Cost (TVC) + Total
Fixed Cost (TFC), Total Fixed Cost alone will be less than total cost.
The correct choice is f,
total revenue (TR) will
have the highest $ value in this example.
Return to Question
34
35.
| Quantity (Q) |
Marginal Profit |
| 1 |
+4 |
| 2 |
+5 |
| 3 |
+3 |
| 4 |
+2 |
| 5 |
-3 |
| 6 |
-5 |
The profit-maximizing rule is to increase quantity as long as marginal
profit >0 because as long as marginal profit is positive, total profits
are still increasing and additional quantity will add to the firm's total
profits.
In the above table, marginal profit is positive
through the 4th unit
of quantity. Producing each one of these units will continue to increase
the firm's total profits. The 5th unit of quantity should not be produced
because its production would decrease the firm's total profit by $3. The
correct answer is 4 units, d.
Return to Question
35
36.
At QA, total profits are zero. Therefore, TR = TC and P = AC. However,
at QA, the slope of the total profit curve is positive; that is, marginal
profit is positive. Since Marginal Profit is MR - MC, if marginal
profit is positive, then MR is greater than MC at QA. Therefore, choice
c which states that
marginal revenue (MR) equals marginal cost (MC) at QA is not true.
Return to Question
36
37.
| Price |
Quantity |
Total Cost |
| $100 |
0 |
$20 |
| $ 90 |
1 |
$70 |
| $ 80 |
2 |
$135 |
| $ 70 |
3 |
$210 |
| $ 60 |
4 |
$290 |
| $ 50 |
5 |
$400 |
Since total profits = total revenue - total cost, we
first must calculate total revenue (TR) by multiplying P x Q across each
row. This will yield an extra column in our table for TR:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost |
| $100 |
0 |
$0 |
$20 |
| $90 |
1 |
$90 |
$70 |
| $80 |
2 |
$160 |
$135 |
| $70 |
3 |
$210 |
$210 |
| $60 |
4 |
$240 |
$290 |
| $50 |
5 |
$250 |
$400 |
To determine total profits for each level of quantity, we subtract total
cost from total revenue. This is shown by the final column in our table
to the far right:
| Price |
Quantity |
Total Revenue = P x Q |
Total Cost |
Total Profit = TR - TC |
| $100 |
0 |
$0 |
$20 |
$-20 |
| $90 |
1 |
$90 |
$70 |
$20 |
| $80 |
2 |
$160 |
$135 |
$25 |
| $70 |
3 |
$210 |
$210 |
$0 |
| $60 |
4 |
$240 |
$290 |
$-50 |
| $50 |
5 |
$250 |
$400 |
$-150 |
The maximum possible total profit ($25) is earned when the firm produces
2
units of quantity. The correct answer is c.
Return to Question
37
38.
At QA, total profits are positive and they are at their peak. The slope
of the total profit curve (which is marginal profit) at its peak, QA, is
0. Since Marginal Profit is MR - MC, if marginal profit is zero,
then MR equals MC at QA, choice d.
Return to Question
38
39.
QB represents the quantity at which total profits are maximized.
QC represents the quantity at which total revenue (TR) is maximized.
The correct choice is f, None of
the statements is true. Let's examine why each one, in turn, is false:
a) Since total revenue (TR) increases from QB to QC, marginal revenue
(MR) is positive.
b) Marginal cost (MC) is never negative, since, as quantity increases,
total cost (TC) always increases.
c) Since QB represents the quantity at which total profits are maximized,
as quantity increases from QB to QC, total profits are decreasing. If total
profits decrease, marginal revenue (MR) is less than marginal cost
(MC).
d) Since total revenue (TR) is increasing from QB to QC, demand is elastic.
e) Since QB represents the quantity at which total profits are maximized,
as quantity increases from QB to QC, total profits are decreasing.
Return to Question
39
40. If demand is inelastic, then, as a firm lowers the price (P) and
sells additional units of quantity, total revenue (TR) will decrease. If
demand is inelastic, P & TR vary in the same direction. If total
revenue is decreasing, then total profits must also be decreasing because
total cost (TC) is always increasing as quantity increases.
Since marginal profit represents the change in total
profit, then, if total profits are decreasing, marginal
profit is negative, choice a.
Return to Question
40
41.
| Price |
Quantity |
Total Cost |
| $70 |
0 |
$30 |
| $60 |
1 |
$50 |
| $50 |
2 |
$60 |
| $40 |
3 |
$78 |
Marginal profit represents the change in total profit. We must calculate
total profit at 3 units of quantity and subtract from that value the amount
of total profit at 2 units of quantity. The difference will yield the marginal
profit of the 3rd unit of quantity.
Since total profit = total revenue (TR) minus total cost (TC), we must
calculate the total revenue for Q = 2 and Q =3 to enable us to determine
the total profit levels. This is shown on the table below:
| Price |
Quantity |
Total Revenue (TR) = P x Q |
Total Cost (TC) |
Total Profit = TR - TC |
| $70 |
0 |
|
$30 |
|
| $60 |
1 |
|
$50 |
|
| $50 |
2 |
$100 |
$60 |
$100 - $60 = $40 |
| $40 |
3 |
$120 |
$78 |
$120 - $78 = $42 |
The marginal profit of the 3rd unit of quantity is $42 - $40 = $2.
Return to Question
41
42. Average cost (AC) is greater than either Average Variable Cost
(AVC) or Average Fixed Cost (AFC) alone because average cost (AC) is the
sum of AVC + AFC.
Since profits per unit of quantity are positive, then price must be
greater than average cost because profits per unit of quantity equal price
(P) minus average cost (AC).
Price (which represents revenue per unit of quantity) is always greater
than profits per unit of quantity because revenue is always greater than
profits as costs are always positive.
The highest $ value in this example will be price,
choice b.
Return to Question
42
43.
The profit-maximizing rule is to increase quantity as long as MR>MC.
From the graph above, marginal revenue (MR) is greater than (above) marginal
cost (MC) for each of the first 5 units. However, for the 6th unit of quantity,
MR is less than (below) MC, so the 6th unit of quantity should not be produced
as it will decrease the firm's total profits.
The profit-maximizing level of quantity is 5
units of quantity, choice e.
Return to Question
43
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