Chapter:
Output, Price, and Profit: The Importance of Marginal Analysis
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1. Profit maximization is
a. the only motive of any firm's management.
b. a behavioral assumption to simplify analysis.
c. the same as satisficing.
d. a literal description of a firm's behavior.
2. Total revenue
a. can be calculated directly from the demand curve.
b. can be calculated directly from the average revenue curve.
c. is found by multiplying price times quantity.
d. All of the answers above are correct.
3. Thomas Edison once said that he began making real profit on light bulbs when he dumped his surplus on the European market at less than the "cost of production." From this we can deduce
a. Edison was crazy and did not want to maximize profit.
b. Edison understood the difference between marginal and average cost.
c. Edison had a peculiar definition of the term "profit."
d. Edison did not understand the difference between fixed and variable cost.
4. In Figure 1 below, profits are maximized at output of
Figure 1
a. 10.
b. 35.
c. 50.
d. 60.
5. 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.
6. 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 answers above are correct.
7. 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
8. "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.
9. In reality, decisions made by firms may not always produce maximum total profit because
a. some executives are more motivated by altruism.
b. some executive are more interested in market share than profits.
c. some may push research and development to the point that profits decline.
d. All of the answers above are possible.
10. 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.
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