d.
both a and c
c
Difficult
DISC: Marginal costs & benefits
United States – BPROG: Reflective Thinking – BPROG: Analysis
Marginal costs & benefits
Generalization: The Logic of Marginal Analysis and Maximization
Essay
166. According to the text, when management selects a price or quantity, it also selects the other. Explain why this is true.
means selecting the other.
Easy
DISC: Supply and demand
United States – BPROG: Analytic
Supply and demand
Price and Quantity: One Decision, Not Two
167. Given a demand curve, explain how total revenue may be calculated.
Easy
DISC: Supply and demand
United States – BPROG: Analytic
Supply and demand
Total Profit: Keep Your Eye on the Goal
168. A separate average revenue curve is not required when you have the demand curve for a firm. Explain.
Easy
169. Distinguish between the economist’s definition of profit and the accountant’s definition. Which is superior for
decision making?
170. Explain whether a firm’s decisions are optimal if economic profit is (a) positive, (b) zero, or (c) negative.
171. A firm has $200,000 to spend on either direct sales or advertising. Suppose further that if the $200,000 is spent on
direct sales, it will bring in an accounting profit of $40,000. Instead, the (accounting) profit it could obtain from a
$200,000 investment in advertising is $X. Compare the profitability of the two options if (a) X = 50,000, (b) X = 30,000,
or (c) X = 40,000.
172. What rule(s) should a firm follow in deciding optimum output for profit maximization?
173. Suppose that on a Saturday night at 10pm a large hotel has 300 vacant rooms, with little expectation of renting them
at such a late hour on a weekend. A traveler comes in the door, looking a bit down on his luck, and asks how much a room
will cost. Since he can’t afford the normal rate of $150, the night manager decides to let him stay in the room for only $40.
Is it likely that this decision reduced, or increased, the hotel’s profits? Explain your answer.
174. Tour companies and cruise lines often offer last minute fares that are far below the prices paid by customers who
have booked their trips far in advance. Use marginal analysis to explain this pricing tactic.
175. Using marginal analysis, explain why many restaurants and coffee shops offer low-cost refills on beverages (for
example, a shop may charge $1.50 for a cup of coffee and only $.50 for a refill).
176. Explain the rules for finding maximum profit using total revenue and total cost and marginal revenue and marginal
cost.
177. Michael Jordan averaged 35 points per game over a 100-game season. During the playoff round of 10 games, he
averaged 50 points, and in the five-game championship series, he led the Chicago Bulls to victory, averaging 40 points.
For the entire season, how many points did Jordan score, what was his average, and did the championship series pull his
previous average up or down?
178. “As long as total revenue slopes up, marginal revenue must slope up also.” Explain whether this statement is true or
false.
179. The state is considering adding a satellite campus to its major university. How can marginal analysis assist, even
though the university does not attempt to maximize profits?
180. The phone network says it loses money on local calls, because the $20 average monthly bill does not cover its
average cost of $30. It estimates that $18 of costs are directly related to local service, with $12 the share from overall
expenses (overhead). Why would the phone network be willing to operate if it is losing money?
181. What is the value of marginal profit at the profit-maximizing output?
182. The total cost of producing one unit of output is $200; two units cost $300, three units $450, and four units $800.
Fixed cost is $50. Draw the associated total cost, average cost, and marginal cost curves, placing total cost on one graph
and marginal and average cost on a second graph.
Table 8-3
Quantity
Price (dollars)
Total Cost (dollars)
1
10
5
2
9
8
3
8
12
4
7
17
5
6
23
183. Explain how much the firm shown in Table 8-3 should produce, first using total profit and then using marginal
analysis.
unit. Since MR of 4 is below MC of 5, so the firm should not produce a fourth unit.
1
Moderate
DISC: Reading and interpreting g – DISC: Reading and interpreting graphs
United States – BPROG: Analytic
Reading and interpreting graphs
Marginal Analysis and Maximization of Total Profit
184. Complete the following table and determine the point of profit maximization.
Total
Revenue
Marginal
Revenue
Marginal
Cost
Profit
500
_____
_____
_____
504.95
_____
_____
_____
509.85
_____
_____
_____
514.70
_____
_____
_____
519.50
_____
_____
_____
524.25
_____
_____
_____
528.95
_____
_____
_____
533.60
_____
_____
_____
538.20
_____
_____
_____
542.75
_____
_____
_____
547.25
_____
_____
_____
100
500
200
300
101
504.95
4.95
204.50
4.50
300.45
102
509.85
4.90
209.10
4.60
300.75
103
514.70
4.85
213.80
4.70
300.90
104
519.50
4.80
218.60
4.80
300.90
105
524.25
4.75
223.50
4.90
300.75
106
528.95
4.70
228.50
5.00
300.45
107
533.60
4.65
233.60
5.10
300
108
538.20
4.60
238.80
5.20
299.40
109
542.75
4.55
244.10
5.30
298.65
110
547.25
4.50
249.50
5.40
297.75
increase profits and would be a rational decision.
Difficult
United States – BPRPOG: Analysis
Marginal Analysis and Maximization of Total Profit
BLOOMS: Application
185. Assume that you have taken over management of a small concession stand on a local beach for the summer. Your
main product is iced water, popular on hot days. You’ve been selling 400 cups per day at 50 cents each. The cups cost 5
cents each. One of your customers suggests that you cut the price to 40 cents to make more money. For the customer to be
correct, how much must your sales increase?
Difficult
Models
United States – BPRPOG: Analysis
Understanding and applying econo – Understanding and applying economic models
Economic Profit and Optimal Decision Making
BLOOMS: Application
186. If a firm’s fixed cost (overhead) increases, what happens to its profit-maximizing price and output?
output level and marginal cost has not changed.
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Economic Profit and Optimal Decision Making
187. Define the following terms completely and concisely.
a.
marginal revenue
b.
average revenue
c.
optimal decision
d.
satisficing
e.
marginal profit
unit to total output. Marginal revenue, in geometrical terms, is the slope of the total
188. For a number of years, General Motors used a pricing strategy designed to maintain at least 40 percent of the
American car market. Does this strategy suggest that GM was maximizing profits or pursuing an alternative strategy?
189. Do firms really seek to maximize profits?
190. Why assume that firms maximize profit, when it is easy to find companies that pursue other goals such as saving rain
forests (Ben and Jerry’s) and sponsoring Mister Rogers (Sears)?
191. Some companies follow a strategy of sales maximization. They say that this puts them in close touch with their
customers and they can better track the market, responding to needs more quickly. However, this increases costs because
of the need to stock a wider variety of parts and sizes and colors, etc. What would make this strategy a profit-maximizing
one?
192. If your cumulative Grade Point Average (GPA) after two years of college is 3.0, and your grades for the current
semester average 3.5, what will happen to your cumulative GPA? Explain the similarity of this example to the case of
marginal cost and average cost.
193. Why is the total profit curve shaped like a hill?
194. Is it a good thing to go to a point where marginal profit is zero? Explain.