Profit Maximization Practice

Which of the following best describes a firm’s profit maximization rule?A. produce the quantity where price exceeds average variable cost by the greatest amount.B. produce the quantity where price is equal to the average total costC. produce the quantity where marginal cost equals marginal revenueD. produce the quantity where marginal revenue exceeds marginal cost by the greatest amount.E. produce the quantity where average variable cost equals average total cost

Reason: As long as the additional revenue a firm gets from selling a good is more than what that good cost to produce, a firm should expand its output. The opportunity to increase profits is only exhausted when marginal cost equals marginal revenue, and the firm should no longer increase output at that point.

Which of the following mathematical statements must be true if a firm is maximizing profit?A. MC (Q) = ATC (Q)B. MR (Q) = MC(Q)C. MR (Q) = ATC (Q)D. P < AVC (Q)E. P= ATC (Q)

Reason: A firm maximizes its profit when it produces the quantity where marginal revenue and marginal cost are equal. If marginal revenue is greater than marginal cost, producing more output will increase its profit. If marginal revenue is less than marginal cost, producing less output will increase its profit.

If a firm is earning a positive economic profit, and it is maximizing that profit, what must be true?A. P= ATC(Q) and MR (Q) > MC (Q)B. P>ATC(Q) and MR (Q) = MC (Q)C. P< ATC(Q) and MR (Q) = MC (Q)D. P< ATC(Q) and MR (Q) < MC (Q)E. P> ATC(Q) and MR (Q) > MC (Q)

Reason: If the price is greater than average total cost, a firm is earning a profit. If marginal revenue equals marginal cost, that profit is maximized.

If profit is as high as possible and normal economic profits are being earned, which of the following is true?A. P= ATC(Q) and MR (Q) = MC (Q)B. P>ATC(Q) and MR (Q) = MC (Q)C. P< ATC(Q) and MR (Q) < MC (Q)D. P> ATC(Q) and MR (Q) > MC (Q)E. P= ATC(Q) and MR (Q) > MC (Q)

Reason: The term normal economic profit means a firm is earning zero profit, and a firm earns zero profit when price equals average total cost. Profit is maximized when marginal cost equals marginal revenue. This means that any other quantity would earn a negative profit

Blammo produces and sells greeting cards. The marginal cost of producing different quantities of greeting cards, as well as the marginal revenue earned, is given in the table below.

How many greeting cards should this firm produce to make the highest possible profit?A. 5000B. 2000C. 3000D. 7000E. 9000

Reason: Profit is maximized when the marginal cost of a quantity equals the marginal revenue earned by that quantity. At 5000 greeting cards, the marginal cost is $3.00, and the marginal revenue is $3.00.

Use the graph below to answer questions ____ and ____.The average total cost and marginal cost curves for Blammo Enterprises are shown in this figure:

At what price will this firm be willing to sell 11 units?A. $34B. $38C. $58D. $89E. $60

Reason: The profit-maximizing choice of quantity is where marginal revenue equals marginal cost. At a price of $89, the marginal revenue is $89and the marginal cost of the 11th unit is $89

If this firm is willing to produce exactly 10 units, what must be true?A. The price is $65B. The price is $179C. The firm is making a profitD. The firm is making a loss.E. The price is $32

Reason: If the price is $65 then the marginal revenue is $65. A firm produces the quantity where marginal revenue equals marginal cost, and marginal cost and marginal revenue are both $65 at a quantity of 10.

If the firm’s objective is profit maximization, at what price will this firm be willing to sell 6 units?A. $34B. $41C. $60D. $4E. $58

Reason: The profit-maximizing choice of quantity is where marginal revenue equals marginal cost. At a price of $4 the marginal revenue is $4 and the marginal cost of the 6 unit is $4.

Eliza’s Doggie Delights is a producer of dog treats. The marginal cost of producing each dog treat is given in the table below. Assume that only whole dog treats can be produced and sold.

If Eliza’s Doggie Delights wants to maximize profits, how many dog treats should it produce?A. 4B. 3C. 2D. 5E. 0

Reason: Profit is maximized when the marginal cost of a quantity equals the marginal revenue earned by that quantity. If there isn’t a quantity where marginal cost equals marginal revenue as in this case, a firm should produce the quantity where they are as close as possible, but marginal cost is less than marginal revenue.