Profit-maximizing Output Chapter 10

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Profit-maximizing Output Chapter 10 - Quiz

Questions and Answers
  • 1. 

    Which of the following is not a characteristic of pure competition? 

    • A.

      Price strategies by firms.

    • B.

      A standardized product.

    • C.

      No barriers to entry.

    • D.

      A larger number of sellers.

    Correct Answer
    A. Price strategies by firms.
    Explanation
    Pure competition is a market structure where there are a large number of sellers offering a standardized product with no barriers to entry. In this type of market, firms do not have the ability to set prices as they are price takers, meaning they must accept the prevailing market price. Therefore, price strategies by firms are not a characteristic of pure competition.

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  • 2. 

    In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.Refer to the information. For a purely competitive firm, total revenue graphs as a:

    • A.

      Straight, upsloping line.

    • B.

      Straight line, parallel to the vertical axis.

    • C.

      Straight line, parallel to the horizontal axis.

    • D.

      Straight, downsloping line.

    Correct Answer
    A. Straight, upsloping line.
    Explanation
    A purely competitive firm is a price taker, meaning it has no control over the price of its product. The firm takes the market price as given and can sell as much as it wants at that price. As a result, the total revenue for a purely competitive firm increases linearly with the quantity of output sold. This linear relationship is represented by a straight, upsloping line on a graph, where the vertical axis represents dollars (total revenue) and the horizontal axis represents output.

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  • 3. 

    A purely competitive seller is:

    • A.

      Both a "price maker" and a "price taker."

    • B.

      Neither a "price maker" nor a "price taker."

    • C.

      A "price taker."

    • D.

      A "price maker."

    Correct Answer
    C. A "price taker."
    Explanation
    A purely competitive seller is considered a "price taker" because they have no control over the price of the product or service they are selling. In a perfectly competitive market, there are many buyers and sellers, and each seller has a negligible impact on the market price. Therefore, they must accept the prevailing market price and cannot influence or set their own prices. They must take the price determined by the market and adjust their quantity supplied accordingly.

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  • 4. 

    In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.Refer to the information. For a purely competitive firm, marginal revenue graphs as a:

    • A.

      Straight, upsloping line.

    • B.

      Straight line, parallel to the vertical axis.

    • C.

      Straight line, parallel to the horizontal axis.

    • D.

      Straight, downsloping line.

    Correct Answer
    C. Straight line, parallel to the horizontal axis.
    Explanation
    A purely competitive firm is a price taker, meaning it has no control over the price of its output. The firm can sell as much output as it wants at the prevailing market price. Therefore, the marginal revenue for a purely competitive firm is equal to the market price, and since the market price is constant, the marginal revenue graph will be a straight line parallel to the horizontal axis.

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  • 5. 

    In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.Refer to the information. For a purely competitive firm:

    • A.

      Marginal revenue will graph as an upsloping line.

    • B.

      The demand curve will lie above the marginal revenue curve.

    • C.

      The marginal revenue curve will lie above the demand curve.

    • D.

      The demand and marginal revenue curves will coincide.

    Correct Answer
    D. The demand and marginal revenue curves will coincide.
    Explanation
    The demand and marginal revenue curves will coincide for a purely competitive firm because in a perfectly competitive market, the firm is a price taker and faces a horizontal demand curve. This means that the firm can sell any quantity of its product at the market price, and the marginal revenue earned from selling each additional unit is equal to the market price. Therefore, the demand curve and the marginal revenue curve will coincide and have the same downward slope.

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  • 6. 

    If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:

    • A.

      May be either greater or less than $5.

    • B.

      Will also be $5.

    • C.

      Will be less than $5.

    • D.

      Will be greater than $5.

    Correct Answer
    B. Will also be $5.
    Explanation
    In a purely competitive industry, the firm is a price taker and has no control over the price. The equilibrium price is determined by the market forces of supply and demand. Since the firm is selling its products at the equilibrium price of $5, it means that each additional unit of output sold will also generate a revenue of $5. Therefore, the firm's marginal revenue will also be $5.

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  • 7. 

    For a purely competitive seller, price equals:

    • A.

      Average revenue.

    • B.

      Marginal revenue.

    • C.

      Total revenue divided by output.

    • D.

      All of these.

    Correct Answer
    D. All of these.
    Explanation
    In a purely competitive market, a seller has no control over the price and must accept the market price as given. Therefore, the price equals the average revenue, which is the total revenue divided by the quantity sold. Additionally, in a competitive market, the marginal revenue is equal to the price because each additional unit sold contributes the same amount to total revenue. Therefore, all of these options are correct explanations for a purely competitive seller.

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  • 8. 

    The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______.

    • A.

      Perfectly inelastic; perfectly elastic

    • B.

      Downsloping; perfectly elastic

    • C.

      Downsloping; perfectly inelastic

    • D.

      Perfectly elastic; downsloping

    Correct Answer
    B. Downsloping; perfectly elastic
    Explanation
    In a purely competitive industry, the demand curve is downsloping because as the price decreases, the quantity demanded by consumers increases. This is due to the law of demand, which states that as price decreases, consumers are willing and able to buy more of a good or service. On the other hand, the demand curve to a single firm in that industry is perfectly elastic because the firm is a price taker and can sell as much as it wants at the market price without affecting the price. Therefore, the firm faces a horizontal demand curve, indicating that it can sell any quantity at the market price.

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  • 9. 

    Refer to the diagram, which pertains to a purely competitive firm. Curve A represents:

    • A.

      total revenue and marginal revenue.

    • B.

      Marginal revenue only.

    • C.

      Total revenue and average revenue.

    • D.

      Total revenue only.

    Correct Answer
    D. Total revenue only.
    Explanation
    Curve A represents total revenue only because it is the total amount of money a firm receives from selling its products. It does not represent marginal revenue or average revenue, which are different concepts. Marginal revenue refers to the additional revenue generated from selling one more unit of a product, while average revenue is the revenue per unit sold. Therefore, Curve A can only represent total revenue.

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  • 10. 

    Marginal revenue is the:

    • A.

      Change in product price associated with the sale of one more unit of output.

    • B.

      Change in average revenue associated with the sale of one more unit of output.

    • C.

      Difference between product price and average total cost.

    • D.

      Change in total revenue associated with the sale of one more unit of output.

    Correct Answer
    D. Change in total revenue associated with the sale of one more unit of output.
    Explanation
    Marginal revenue is the change in total revenue associated with the sale of one more unit of output. This means that it measures the increase in total revenue that occurs when one additional unit of a product is sold. It is an important concept in economics as it helps businesses determine the optimal level of production and pricing. By analyzing the marginal revenue, businesses can make informed decisions about how to maximize their profits and allocate their resources effectively.

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  • 11. 

    Refer to the short-run data. The profit-maximizing output for this firm is:

    • A.

      Above 440 units.

    • B.

      440 units.

    • C.

      320 units.

    • D.

      100 units.

    Correct Answer
    C. 320 units.
    Explanation
    Based on the short-run data, the profit-maximizing output for this firm is 320 units. This can be determined by identifying the output level at which marginal cost (MC) equals marginal revenue (MR). In the short run, a firm maximizes its profit by producing at the output level where MC = MR. In this case, MC is increasing beyond 320 units, indicating that each additional unit produced would result in higher costs than revenue generated. Therefore, to maximize profit, the firm should produce 320 units.

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  • 12. 

    A firm reaches a break-even point (normal profit position) where:

    • A.

      Marginal revenue cuts the horizontal axis.

    • B.

      Marginal cost intersects the average variable cost curve.

    • C.

      Total revenue equals total variable cost.

    • D.

      Total revenue and total cost are equal.

    Correct Answer
    D. Total revenue and total cost are equal.
    Explanation
    The break-even point is the point at which a firm's total revenue equals its total cost. This means that the firm is neither making a profit nor incurring a loss. At this point, the firm has covered all of its variable costs and is able to generate enough revenue to cover its fixed costs as well. Therefore, total revenue and total cost are equal at the break-even point.

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  • 13. 

    The MR = MC rule applies:

    • A.

      To firms in all types of industries.

    • B.

      Only when the firm is a "price taker."

    • C.

      Only to monopolies.

    • D.

      Only to purely competitive firms.

    Correct Answer
    A. To firms in all types of industries.
    Explanation
    The MR = MC rule applies to firms in all types of industries. This is because the rule states that a firm should produce an additional unit of output as long as the marginal revenue (MR) from that unit is greater than or equal to the marginal cost (MC) of producing it. This principle holds true regardless of the market structure or the level of competition in the industry. Whether a firm is a price taker, a monopoly, or operates in a purely competitive market, the MR = MC rule guides its production decisions.

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  • 14. 

    Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation:

    • A.

      Should close down in the short run.

    • B.

      Is maximizing its profits.

    • C.

      Is realizing a loss of $60.

    • D.

      Is realizing an economic profit of $40.

    Correct Answer
    D. Is realizing an economic profit of $40.
    Explanation
    Based on the information provided, the corporation is selling its output at $10 per unit, while its average variable cost is $3 per unit. This means that for each unit sold, the corporation is making a profit of $7 ($10 - $3). Since the corporation is producing 20 units of output, its total profit would be $7 multiplied by 20, which equals $140. However, we also need to consider the fixed costs of $100. Therefore, the corporation's economic profit would be $140 - $100, which equals $40. Hence, the correct answer is that the corporation is realizing an economic profit of $40.

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  • 15. 

    Suppose you find that the price of your product is less than minimum AVC. You should:

    • A.

      Minimize your losses by producing where P = MC.

    • B.

      Maximize your profits by producing where P = MC.

    • C.

      Close down because, by producing, your losses will exceed your total fixed costs.

    • D.

      Close down because total revenue exceeds total variable cost.

    Correct Answer
    C. Close down because, by producing, your losses will exceed your total fixed costs.
    Explanation
    If the price of the product is less than the minimum average variable cost (AVC), it means that the revenue generated from selling the product is not enough to cover the variable costs of production. In this situation, continuing to produce and sell the product would lead to losses that exceed the total fixed costs. Therefore, the best course of action would be to close down the production to avoid further losses.

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  • 16. 

    If a purely competitive firm shuts down in the short run:

    • A.

      Its loss will be zero.

    • B.

      It will realize a loss equal to its total variable costs.

    • C.

      It will realize a loss equal to its total fixed costs.

    • D.

      It will realize a loss equal to its explicit costs.

    Correct Answer
    C. It will realize a loss equal to its total fixed costs.
    Explanation
    In the short run, a purely competitive firm will shut down if its total fixed costs exceed its total revenue. When a firm shuts down, it stops producing output and incurs a loss equal to its total fixed costs. This is because fixed costs are unavoidable expenses that the firm must pay even if it doesn't produce anything. Therefore, the correct answer is that the firm will realize a loss equal to its total fixed costs.

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  • 17. 

    Answer the question on the basis of the following data confronting a firm:Refer to the data. This firm is selling its output in a(n):

    • A.

      Monopolistically competitive market.

    • B.

      Monopolistic market.

    • C.

      Purely competitive market.

    • D.

      Oligopolistic market.

    Correct Answer
    C. Purely competitive market.
    Explanation
    Based on the given data, it can be inferred that the firm is selling its output in a purely competitive market. This is because in a purely competitive market, there are many sellers and buyers, homogeneous products, perfect information, and easy entry and exit for firms. The data does not mention any elements of monopolistic competition, monopolistic market, or oligopolistic market, which suggests that these options are not applicable. Therefore, the correct answer is purely competitive market.

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  • 18. 

    Answer the question on the basis of the following data confronting a firm:Refer to the data. At the profit-maximizing output, the firm's total revenue is:

    • A.

      $48

    • B.

      $32.

    • C.

      $80.

    • D.

      $64

    Correct Answer
    A. $48
    Explanation
    Based on the given data, the firm's profit-maximizing output corresponds to a total revenue of $48. This can be inferred by comparing the given options and selecting the one that matches the profit-maximizing output.

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  • 19. 

    In the short run, a purely competitive firm will always make an economic profit if:

    • A.

      P = ATC.

    • B.

      P > AVC.

    • C.

      P = MC.

    • D.

      P > ATC.

    Correct Answer
    D. P > ATC.
    Explanation
    In the short run, a purely competitive firm will always make an economic profit if the price (P) is greater than the average total cost (ATC). This is because when the price is higher than the average total cost, the firm is able to cover all its costs and still have a surplus left over as profit. On the other hand, if the price is equal to or lower than the average total cost, the firm will either break even or incur losses. Therefore, for a purely competitive firm to make an economic profit in the short run, the price must be greater than the average total cost.

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  • 20. 

    Refer to the diagram for a purely competitive producer. The firm will produce at a loss at all prices:

    • A.

      Above P1.

    • B.

      Above P3.

    • C.

      Above P4.

    • D.

      Between P2 and P3.

    Correct Answer
    D. Between P2 and P3.
    Explanation
    The firm will produce at a loss between P2 and P3 because at this price range, the average total cost (ATC) is higher than the market price. This means that the firm's revenue from selling its products will not be enough to cover its production costs, resulting in a loss. However, the firm will continue to produce in the short run as long as the price is above the minimum average variable cost (AVC) to minimize losses and contribute towards fixed costs.

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  • 21. 

    Refer to the diagram for a purely competitive producer. If product price is P3:

    • A.

      The firm will maximize profit at point d.

    • B.

      The firm will earn an economic profit.

    • C.

      Economic profits will be zero.

    • D.

      New firms will enter this industry.

    Correct Answer
    C. Economic profits will be zero.
    Explanation
    If the product price is P3 in a purely competitive market, economic profits will be zero. In a perfectly competitive market, firms are price takers and cannot influence the price of the product. At P3, the firm's average total cost (ATC) will be equal to the price, resulting in zero economic profits. If economic profits were positive, it would attract new firms to enter the industry, increasing competition and driving down prices until economic profits reach zero.

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  • 22. 

    Refer to the diagram. To maximize profit or minimize losses, this firm will produce:

    • A.

      K units at price C.

    • B.

      D units at price J.

    • C.

      E units at price A.

    • D.

      E units at price B.

    Correct Answer
    C. E units at price A.
    Explanation
    The firm will produce E units at price A in order to maximize profit or minimize losses. This is because producing more units at a lower price (A) allows the firm to increase revenue while keeping costs low. Producing at price B would result in higher costs and potentially lower profits. Producing at price C, D, or any other price is not mentioned in the question, so we cannot determine the optimal production level for those prices. Therefore, the firm should produce E units at price A to achieve the best outcome.

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  • 23. 

    Refer to the diagram. At the profit-maximizing output, total variable cost is equal to:

    • A.

      0AHE.

    • B.

      0CFE.

    • C.

      0BGE.

    • D.

      ABGH.

    Correct Answer
    B. 0CFE.
    Explanation
    At the profit-maximizing output, total variable cost is equal to 0CFE. This can be determined by looking at the diagram and identifying the point where the total variable cost curve intersects with the total cost curve. The point where these two curves intersect represents the level of output where the firm is maximizing its profit. In this case, it is at point CFE. Therefore, at this output level, the total variable cost is equal to 0CFE.

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  • 24. 

    Refer to the diagram. At the profit-maximizing output, the firm will realize:

    • A.

      A loss equal to BCFG.

    • B.

      A loss equal to ACFH.

    • C.

      An economic profit of ACFH.

    • D.

      An economic profit of ABGH.

    Correct Answer
    D. An economic profit of ABGH.
    Explanation
    The diagram is not provided, so it is difficult to determine the exact explanation for the correct answer. However, based on the options provided, we can assume that the profit-maximizing output for the firm results in an economic profit of ABGH. This implies that the firm's total revenue (TR) exceeds its total costs (TC), resulting in a positive economic profit. The specific reasons for this can vary, such as the firm having a competitive advantage, operating in a market with high demand and low competition, or effectively managing its costs.

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  • 25. 

    Refer to the diagram. The profit-maximizing output:

    • A.

      Is n.

    • B.

      Is k.

    • C.

      Is h.

    • D.

      Cannot be determined from the information given.

    Correct Answer
    A. Is n.
    Explanation
    The correct answer is "is n." This means that the profit-maximizing output is at point n on the diagram. Without further information, it is difficult to determine the exact reasoning behind this answer. However, based on the given options, it can be inferred that the diagram provides some information or context that suggests point n is the optimal output level for maximizing profit.

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  • 26. 

    In the short run, a purely competitive seller will shut down if product price: 

    • A.

      Equals average revenue.

    • B.

      Is greater than MC.

    • C.

      Is less than AVC.

    • D.

      Is less than ATC.

    Correct Answer
    C. Is less than AVC.
    Explanation
    A purely competitive seller will shut down if the product price is less than the average variable cost (AVC). This means that the seller is not able to cover the variable costs of production, such as labor and raw materials, with the revenue generated from selling the product. In this situation, it is more cost-effective for the seller to shut down operations and minimize their losses rather than continue producing at a loss.

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  • 27. 

    Refer to the diagram. At P1, this firm will produce:

    • A.

      47 units and break even.

    • B.

      47 units and realize an economic profit.

    • C.

      66 units and earn only a normal profit.

    • D.

      24 units and earn only a normal profit.

    Correct Answer
    B. 47 units and realize an economic profit.
    Explanation
    Based on the diagram, the firm will produce 47 units at point P1. At this level of production, the firm's total revenue will be equal to its total cost, resulting in a break-even point. However, since the firm is producing at a level where its total revenue exceeds its total cost, it will realize an economic profit. Therefore, the correct answer is 47 units and realize an economic profit.

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  • Current Version
  • Mar 22, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Nov 13, 2014
    Quiz Created by
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