d.
6,000
c
Difficult
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Marginal costs & benefits
Marginal Analysis and Maximization of Total Profit
BLOOMS: Application
133. Thomas Edison once complained that he was not making a profit selling light bulbs because his plants were
operating 25 percent below capacity. He estimated that he could increase output 25 percent with a 2 percent increase in
the cost of production. He sold the 25 percent on the foreign market at a price below what he called the “cost of
production.” We can deduce that Edison really meant
a.
Marginal cost was below average cost but less than marginal revenue.
b.
Average cost exceeded variable cost, which exceeded marginal revenue.
c.
Variable cost exceeded fixed cost but was less than marginal revenue.
d.
Marginal cost was above average cost but greater than marginal revenue.
a
Difficult
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Marginal costs & benefits
Marginal Analysis and Maximization of Total Profit
134. A profit-maximizing firm always
a.
sells its output at P = MR.
b.
produces at the output at which MR = 0.
c.
hires labor until the MRP of labor = 0.
d.
produces every unit of output for which MR > MC.
Moderate
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Marginal costs & benefits
Marginal Analysis and Maximization of Total Profit
135. If output is increased beyond the point where total profit is maximized,
a.
marginal profit will be zero.
b.
marginal profit will be negative.
c.
marginal profit will be positive.
d.
MR > MC.
136. Total profit is maximized where
a.
MR = MC.
b.
marginal profit is zero.
c.
the slope of the marginal profit curve is zero.
d.
All of the above are correct.
137. When marginal cost exceeds marginal revenue,
a.
marginal profit < 0.
b.
the firm should increase output.
c.
marginal profit + marginal cost > marginal revenue.
d.
marginal cost < marginal revenue − marginal profit.
138. If marginal revenue and marginal cost are not equal, profit can be maximized by
a.
increasing output if MR > MC.
b.
decreasing output if MC > MR.
c.
moving to the output where the slopes of TR and TC are equal.
d.
All of the above are correct.
139. Once the profit-maximizing output where MR = MC is determined, price is set by
a.
adding a standard markup percentage to marginal cost.
b.
the demand curve.
c.
making it equal to MR = MC.
d.
subtracting the marginal cost from total revenue.
140. If fixed cost rises,
a.
the profit maximizing level of output would decrease.
b.
the profit maximizing level of output would not change.
c.
marginal cost rises.
d.
variable cost falls.
141. When a firm’s fixed cost rises, its total profit curve shifts
a.
up at every output level.
b.
down at every output level.
c.
left at every profit level.
d.
right at every profit level.
142. If a profit-maximizing firm’s fixed cost of producing widgets falls,
a.
its total cost curve is unaffected.
b.
its marginal cost curve shifts down.
c.
the firm will produce more widgets.
d.
the firm’s average profit per widget produced rises.
143. A firm has positive fixed cost and positive variable cost. At its current level of output, marginal cost equals average
cost. The firm must
a.
not be producing at its profit-maximizing level of output.
b.
be producing the quantity that minimizes average cost.
c.
be operating at a point at which total variable cost equals total fixed cost.
d.
be earning negative profit.
DISC: Marginal costs & benefits
United States – BPROG: Reflective Thinking – BPROG: Analysis
Marginal costs & benefits
Generalization: The Logic of Marginal Analysis and Maximization
144. A firm’s fixed cost
a.
does not vary with output.
b.
does not change between the short run and the long run.
c.
is generally a higher percentage of its total cost at high output quantities than at low output quantities.
d.
All of the above are true.
145. The federal government, in order to fund expanded health care, imposes a lump-sum tax on all business property.
Profit-maximizing firms that stay in business will respond by
a.
raising prices to pay the tax.
b.
cutting output to reduce costs.
c.
lowering prices to stimulate demand.
d.
doing nothing.
Table 8-1
Output (units)
0
1
2
3
4
5
Total Revenue ($)
0
9
16
21
27
31
Total Cost ($)
10
12
15
19
26
35
146. To maximize its profits, the firm described in Table 8-1 should produce ____ unit(s) of output.
a.
1
b.
2
c.
3
d.
4
1
DISC: Reading and interpreting g – DISC: Reading and interpreting graphs
United States – BPROG: Analytic
Reading and interpreting graphs
Generalization: The Logic of Marginal Analysis and Maximization
BLOOMS: Application
147. The firm described in Table 8-1 has a fixed cost of ____ at its optimal level of output.
a.
2
b.
6
c.
10
d.
26
c
Difficult
DISC: Reading and interpreting g – DISC: Reading and interpreting graphs
United States – BPROG: Analytic
Reading and interpreting graphs
Generalization: The Logic of Marginal Analysis and Maximization
BLOOMS: Application
148. At optimal output, the firm described in Table 8-1 sells its output at a price of
a.
$5.40.
b.
$6.25.
c.
$7.
d.
$8.
c
Easy
DISC: Reading and interpreting g – DISC: Reading and interpreting graphs
United States – BPROG: Analytic
Reading and interpreting graphs
Generalization: The Logic of Marginal Analysis and Maximization
BLOOMS: Application
149. At optimal output, the firm described in Table 8-1 earns a profit of
a.
$1 per unit of output.
b.
$2 per unit of output.
c.
$1 total.
d.
$2 total.
Easy
DISC: Reading and interpreting g – DISC: Reading and interpreting graphs
United States – BPROG: Analytic
Reading and interpreting graphs
Generalization: The Logic of Marginal Analysis and Maximization
BLOOMS: Application
150. An airline is considering adding a flight from Chicago to Sioux Falls. Total cost of the flight is $5,500. Variable cost
is $2,000. Revenue from the flight is expected to be $3,000. Should the flight be added?
a.
No, the revenue ($3,000) is below the cost ($5,500.)
b.
No, the addition to profit is very small and not worth the effort.
c.
Yes, profit increases by $1,000 ($3,000 − $2,000.)
d.
Yes, profit increases by $3,000.
c
Moderate
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Marginal costs & benefits
Generalization: The Logic of Marginal Analysis and Maximization
BLOOMS: Application
Table 8-2
Price
Quantity
Total Cost
$22
6
$ 60
20
10
100
18
16
160
16
21
210
14
28
280
151. In Table 8-2, the profit-maximizing level of output is
a.
6.
b.
10.
c.
16.
d.
21.
d
1
Difficult
DISC: Reading and interpreting g – DISC: Reading and interpreting graphs
United States – BPROG: Analytic
Reading and interpreting graphs
Generalization: The Logic of Marginal Analysis and Maximization
BLOOMS: Application
152. Many large universities rent out parts of their campuses to conference groups during the summer because such
groups cause little damage, require little staff attention, and bring in large amounts of income. A university’s decision to
rent its campus to a conference group is most clearly based on
a.
the idea that price and quantity selection is a single decision.
b.
the principle of decreasing returns to scale.
c.
marginal analysis.
d.
average cost considerations.
153. In 1984, British Prime Minister Margaret Thatcher decided to shut down so-called “uneconomic” coal mines owned
by the government. The National Union of Mineworkers protested, asserting that there was enough coal in the mines to
continue current levels of production for years. Thatcher implicitly argued that her decision was economically sound
because, at any practical level of output, for each “uneconomic” mine,
a.
MC > AC.
b.
for every input, MPP > APP.
c.
MC > MR.
d.
AC > MC.
154. An airline can profit by offering standby customers an unsold seat at a substantial discount just before takeoff
because
a.
additional passengers are needed to balance the load.
b.
the marginal cost of additional passengers is very small.
c.
additional passengers add little to fixed costs.
d.
such passengers add more to profits than do those with reserved seats.
155. In the case study in the text involving calculator production, the fact that each calculator produced added $10.30 to
cost and $12 to revenue made clear the value of ____ in determining whether or not to suspend production.
a.
average fixed cost
b.
cost saving
c.
marginal analysis
d.
the level of fixed cost
156. Firms may reasonably make a decision to cut prices if
a.
profits are not likely to decline.
b.
marginal profit is not negative.
c.
MR > MC.
d.
All of the above are correct.
157. Optimal decisions are made on the basis of
a.
rate of growth in total profit.
b.
average cost and average revenue figures.
c.
impact on market share.
d.
marginal cost and marginal revenue figures.
DISC: Marginal costs & benefits
United States – BPROG: Analytic
Marginal costs & benefits
Conclusion: The Fundamental Role of Marginal Analysis
158. “Satisficing” rather than “maximizing” primarily emerges under conditions where
a.
information is costly.
b.
management lacks ambition.
c.
profit maximization is rejected on moral grounds.
d.
risk is minimal.
159. By definition, a firm that practices satisficing
a.
maximizes its sales, not its profits.
b.
makes acceptable decisions, though not necessarily optimal ones.
c.
satisfies government guidelines instead of consumer demands.
d.
minimizes the cost of gathering enough information to make an optimal decision.
160. In reality, decisions made by firms may not always produce maximum total profit because some executives
a.
are more motivated by altruism.
b.
are more interested in market share than profits.
c.
may push research and development to the point that profits decline.
d.
All of the above are correct.
161. Herbert Simon has concluded that decision making in industry is often best described as
a.
optimizing behavior.
b.
profit maximizing.
c.
satisficing.
d.
saturating.
162. The term “satisficing” for decision-making behavior by many firms was coined by
a.
Milton Friedman.
b.
Adam Smith.
c.
Herbert Simon.
d.
Alan Greenspan.
163. If a person who weighs 100 lbs. is riding in an elevator and is joined by a person weighing 120 lbs., what happens to
the average weight of persons on the elevator?
a.
It falls.
b.
It rises.
c.
It stays the same.
164. Regarding the relationship between marginal profit and average profit, which of the following statements is NOT
true?
a.
If the average profit is rising, the marginal profit figure must be rising.
b.
If marginal profit is lower than average profit, then average profit must decrease when profit increases.
c.
If marginal profit is below average profit, the average profit decreases.
d.
All of these statements are true.
DISC: Marginal costs & benefits
United States – BPRPOG: Analysis
Marginal costs & benefits
Appendix The Relationships among Total, Average, and Marginal Data
165. The optimal number of units to produce is best expressed when:
a.
marginal benefit exceeds marginal cost
b.
marginal cost exceeds marginal benefit
c.
marginal benefit and marginal cost are close to equal