Q.1 R-a-P is run by an owner, who can earn £40 000 a year by managing another firm.

She has also

invested £200 000 in R-a-P that could be earning 12 per cent interest elsewhere. What are the
economic profits of R-a-P? (Use the data given in the table below and calculate economic profit
based on pre-tax profit.)

Opportunity cost 1= 40,000

Opportunity cost 2= 12 percent of 200000= 24000

Total opportunity cost= 64000

The profit made by firm pre-tax= 100,000

Economic profit= 100,000- 64000= 36000

Q.2 (a) Snark International borrows £50 000 from the bank and increases its inventories. How does
this affect its balance sheet (shown in the table below)? (b) How would interest on the loan appear
in the income statement of Snark International?

A. The 50, 000 will be added to assets as inventories and also added to liabilities as the bank
loan.
B. The interest of loan will be added to the liabilities.

Q.3 (a) Do firms aim to maximize profits? (b) Should firms support charities, the arts and political
campaigns? Is there any conflict with (a)?
A. yes firms aims to maximise profits by being cost effective and decreasing marginal cost compare
to marginal revenue.

Q.4 True or False If MR < MC at a given level of output, a firm should increase production to increase
profits.

False. The firm will produce less if the MR is less than MC because it is in the condition of loss. So the
less production will decrease its marginal cost.

Q.5 Common fallacies Why are these statements wrong? (a) Firms with an accounting profit must be
thriving. (b) Firms do not know their marginal costs. A theory of supply cannot assume that firms set
marginal revenue equal to marginal cost. (c) To maximize profit, maximize sales.

A. The firm accounting profit is not always thriving as the firm also face loss.

B. Firm always know the marginal cost. Whatever we read theoretically the firm use it as practically.

C. when MR is less than MC then the sells must be lowered to maximise the profit.

Q.6 A firm with the costs shown in the following table can now sell as much output as it wants at a
price of £12. (a) Draw the MR and MC curves. (b) What output will it produce?

Output TC MC Revenue MR
O 10 0
1 25 15 12 12
2 36 11 24 12
3 44 8 36 12
4 51 7 48 12
5 59 8 60 12
6 69 10 72 12
7 81 12 84 12
8 95 14 96 12
9 111 16 108 12
10 129 18 120 12

24

Mc

MR

2 4 6 8 10 12

Q.7 How do the following affect the income statement for R-a-P shown in the table in Question 1?
(a) Ra-P owes £70 000 to its workers for work done in the year. (b) Instead of renting an office (for
the rent of £50 000 shown under Cost), R-a-P owns its office. (c) During the year R-a-P was paid by a
creditor owing money from the year before.

A. 70,000 would be added to liabilities as account payable.

B. the rent from the liabilities will be removed.

C. the account receivable will be added to the asset.

Q.8 In the table below, assume that the total costs of making each unit of output, as shown in the
second column, increase by £40. What level of output should the firm produce? Explain. Cost,
revenue, profit (weekly)

As the total cost is increased by the firm then the firm will increase its production and the profit will
eventually increase.

Q.9 A firm faces the following linear inverse demand for its product, P = 60 − 2Q. Find the firm’s total
revenue function, TR(Q). Plot the total revenue function. (Hint: using P = 60 − 2Q, plot a demand
schedule for an arbitrary number of quantities – say, from 5 to 25 in fives.)

50

10

5 10 15 20 25

Quantities Total revenue

5 250
10 400
15 450
20 400
25 250

Q.10 The following table reports the total revenue and the total cost of Keinko International, a firm
producing coffee. Keinko does not have any fixed costs. Complete the columns for marginal revenue
(MR) and marginal cost (MC). In a graph, plot the MR and MC curves and show the profitmaximizing
level of output.

Quantity TR TC MR MC
1 48 5
2 90 20 42 15
3 128 45 38 25
4 163 80 35 35
5 195 125 32 45
6 225 180 30 55
7 251 245 26 65
 8 273 320 22 75
9 293 405 20 85
10 309 500 16 95

100 MC

20 MR

2 4 6 8 10 Q

Q.11 Now suppose that Keinko faces an increase in demand for its coffee. For each unit of coffee,
total revenues increase by 20. Find the new total revenue for each level of output and the
corresponding new marginal revenue. In a graph, plot the new MR and MC curves. How has the
increase in demand affected the output choice of Keinko?

output TR MR
1 68
2 110 42
3 148 38
4 183 35
5 215 32
6 245 30
7 271 26
8 293 22
9 313 20
10 329 16

100 MC

20 MR

2 10

The increased in demand has increased the total revenue.