Multiple Choice 1. Economic profit is a. the excess of total revenue over the to
ID: 1159200 • Letter: M
Question
Multiple Choice
1. Economic profit is
a. the excess of total revenue over the total economic cost of using productive
resources.
b. total revenue minus all explicit costs of production. c. an implicit cost to the firm.
d. both a ande
2. Sweet Stuff, a candy store, had total revenues last year of $500,000. Payments for
payroll, cost of goods sold, rent, and supplies totaled $336,000. The owner invested
$200,000 in thefirm, although she could have invested in bonds paying a 12% return.
What is the firm’s economic profit?
a. -$36,000
b. $140,000
c. $164,000
d. $300,000
e. none of the above
3. Which of the following is NOT a condition of a perfect competition:
a, products produced by rival firms are perfect substitutes
b. any individual firm cannot affect market supply
c. unrestricted entry and exit
d. industry sales are small
e. each firm has complete knowledge about production and prices.
4. In a perfectly competitive market
a. a firm can attract more customer by lowering its price.
b. the additional revenue from selling one more unit output is less than price.
c. demand facing the industry is perfectly elastic.
d. all of the above e. none of the above
5. For a firm in a perfectly competitive market, marginal revenue
a is the addition tototal revenue from producing one more unit of output.
b. decreases as the firm produces more output.
c. is equal to price at any level of output.
d. both a and b
e. both a and c
The next 3 questions refer to the following:
Total cost schedule for a perfectly competitive firm: Output
0 2345
Total Cost $10
60
80
110
165
245
6. If market price is $60, how many units of output will the firm produce?
a. Zero units of output because the firm shuts down.
b. 1 unit of output
c. 2 units of output
d. 3 units of output
e. none of the above
7. If market price is $60, what is the maximum profit the firm can earn?
a. -$10
b. Zero profit, the firm shuts down
c. $75
d. $80
e. $85
8. If market price is $30, how many units of output will the firm produce?
a. 0, the firm shut down
b. 1
c. 2
d. 3
e. 4
9. In a perfectly competitive industry the market price is $25. A firm is currently producing 10,000
units of output; average total cost is $28, marginal cost is $20, and average variable cost is $20.
The firm should
a. raise price because the firm is losing money.
b. keep output the same because the firm is producing at minimum average variable
cost.
c. produce more because the next unit of output increases profit by $5.
d. produce less because the next unit of output decreased profit by $3.
e. shut down because the firm is losing money.
The next three questions refer to the following: The graph on the left shows the short-run marginal cost curve for a typical firm selling in a
perfectly competitive market. The graph on the right shows current demand and supply in the market. 10. If the firm’s demand and marginal revenue curves were drawn in the left-hand graph, what would be the elasticity of demand?
a. zero b. -6
c. 0.6
d. infinitely elastic
e. unitary 11. What is the marginal revenue for the FIRM from selling the 250th unit of output?
a. $10
b. $8
c. $6 d. $4
e. Zero 1
2. What output should the firm produce?
a. 200
b. 250
c. 150
d. 30013
The next two questions refer to the following figure:
The graph shows demand and marginal cost for a perfectly competitive firm.
13. If the firm is producing 100 units of output, increasing output by one unit would
the firm’s profit by $ .
a. increase, $3
b. increase, $2
c. decrease, $1 d. increase, $1
e. decrease, $2
14. If the firm is producing 300 units of output, decreasing output by one unit would_
the firm’s profit by $ .
a. Decrease, $2v
b. Increase, $2
c. Increase, $2
d. Decrease, $5 e. Increase, $5
15. In order to minimize losses in the short run, a perfectly competitive firm should shut
down if
a. Total revenue is less than total cost
b. Total revenue is less than total fixed cost.
c. Total revenue is less than variable cost.
d. Total revenue is less than the difference between total fixed cost and total
variable cost.
The next three questions refer to the following: The graph on the left shows the short-run cost curves for a firm in a perfectly competitive market, and the graph on the right shows the current market conditions in this industry.
16. In order to maximize profit, how much output should the firm produce?
a. 20 units
b. 40 units
c. 50 units
d. 60 units
e. 80 units
17. What is the maximum amount of profit the firm can earn?
a. $50
b. $40
c. $80
d. $150
18. What do you expect to happen in the long-run?
a. Market supply will decrease.
b. Market price will decrease.
c. The firm’s profit will decrease. d. both b ande
e. all of the above
19. When total fixed costs increase,
a. The profit-maximizing level of output falls.
b. The firm may be forced to shut down in total fixed costs get too high.
c. Economic profit decreases. d. Both a and b
e. Both b ande
Explanation / Answer
1) Economic profit= Total revenue-( Explicit cost+Implicit cost). Therefore option a is correct.
2) Economic profit includes both explicit cost and implicit cost. Here the explicit cost is $(200000+336000)=$536000. Implicit cost=200000*12/100=$24000
Therefore economic profit=$500000-(536000+24000)=-$60000. Option e is correct.
3) In perfect competition, there is a large number of buyer and seller so there is always a large number of sales. Option d is correct.
4) In perfect competition, the demand curve is perfectly elastic. Sellers and buyers are all price taker and no one can sell below or above the market price individually. Option c is correct.
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