Principles of Economics 7th Edition Gottheil Test Bank

Principles of Economics 7th Edition
Gottheil Test Bank

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Chapter 9
Maximizing Profit
TRUE/FALSE
Answer: T 1. If the total cost curve is greater than the total revenue curve at every level of output, the
Diff: 1 firm incurs a loss.
Answer: F 2. There are situations in which average revenue and price are different.
Diff: 3
Answer: T 3. If marginal cost equals marginal revenue on the downward-sloping segment of the
Diff: 4 marginal cost curve, then increasing production until marginal cost again equals marginal
revenue, this time on the upward-sloping segment of the marginal cost curve, is a profit-
maximizing decision.
Answer: T 4. If a firm faces a price of $12 regardless of how many units it produces and the marginal
Diff: 1 cost is constant at $10 regardless of how many units it produces, then theoretically, the
firm should never stop producing.
Answer: F 5. If at 4,000 units, the price the firm can charge is higher than its AVC and lower than its
Diff: 4 ATC, then the firm will earn a profit.
Answer: F 6. Profit maximization can occur at some output level where marginal cost and marginal
Diff: 5 revenue are not equal.
Answer: F 7. If a firm’s marginal revenue is equal to marginal cost at an output level where average
Diff: 5 variable cost is rising, the firm should shut down.
Answer: T 8. Once profit is maximized at the output level where MR = MC, profit can be calculated by
Diff: 2 subtracting the ATC from price and multiplying the result by the quantity produced.
Answer: F 9. If: (1) you produce 1,000 units, (2) your total revenue is $7,500, (3) the
Diff: 4 wage rate you pay each of the 10 workers you hired is $9.50 per hour, and (4) they each
work 8 hours to produce that 1,000 units, then you should not shut down.
Answer: F 10. If TR > TC, the firm should produce more of whatever it is producing.
Diff: 4
Answer: T 11. Picture the curve. The total revenue curve originates at the origin.
Diff: 5
Answer: F 12. Following the MC = MR rule to profit maximization tells us how much profit can be
Diff: 3 made.
Answer: F 13. Setting P = ATC allows us to calculate total profit or loss.

Diff: 3
Answer: T 14. If, at its profit-maximizing output level, the price of the good is less than average variable
Diff: 3 cost, the firm should shut down immediately.
Maximizing Profit — 244

Chapter 9 Chapter 9 Chapter —
Comprehensive Micro Macro
Answer: F 15. Corporate managers and stockholders usually have the same goal of maximizing profit.
Diff: 2
Answer: T 16. According to William Baumol, many corporate managers engage in empire-building.
Diff: 1
Answer: T 17. Adam Smith believed that the rich derive the most enjoyment from their wealth by
Diff: 3 knowing that others observe their consumption.
Answer: F 18. The Marshall Kiwanis Club noticed the organizer of their bratwurst booth, at the
Diff: 2 Celebrate Marshall Festival, seemed more interested in the size and flair of their booth
than the cost of achieving it. This excessive interest in prestige of the booth rather than
profits made for charity is an example of stakeholder rights.
Answer: F 19. The profit outcome achieved by setting MC = MR is the same as that achieved by setting
Diff: 2 TR = TC.
Answer: F 20. For the level of output, Q, firm profit is the same whether measured by TR – TC or
Diff: 3 (AR – AVC) * Q.
Answer: F 21. The goals of charitable organizations are inevitably inconsistent with the principles
Diff: 2 associated with profit maximization.
Answer: F 22. The MR = MC rule is no longer accepted by most economists as representing the
Diff: 1 behavior of firms.
Answer: F 23. All economists agree that the firm’s only goal is to maximize profit.
Diff: 1
Answer: F 24. A firm will never operate at a loss.

Diff: 1
Answer: T 25. Marginal cost is always greater than zero, regardless of the output level.
Diff: 4
Answer: F 26. A firm would be maximizing profit if MR > MC and TR > TC.
Diff: 3
Answer: T 27. ATC always exceeds AVC.

Diff: 4
Answer: F 28. Each firm knows where its MR = MC output level is located.
Diff: 2
Answer: T 29. If MR = MC, then TR and TC differ by a maximum if positive profits are earned.
Diff: 5
Answer: T 30. If MR > MC, a profit-maximizing firm should increase output.

Diff: 3
Answer: F 31. Producing where MR = MC guarantees that the firm earns a profit.
Diff: 3
Answer: T 32. Price = MR only if the price is fixed.

Diff: 3

MULTIPLE CHOICE
Answer: D 1. At the last board meeting a member proposed that the Marshall Lions Club lower its
Diff: 4 hamburger price at the Celebrate Marshall Festival. He argued this would sell more
hamburgers for charity.
a. He is wrong.
b. Revenues would decrease.
c. Revenues would rise.
d. Revenues are not what matters.
e. Profits would increase.
Answer: B 2. The Marshall Lions Club increased the price of hamburgers at their Celebrate Marshall
Diff: 4 Festival and found that revenues increased. This is likely because, ceteris paribus,
a. the quality of the hamburgers was different
b. the demand for their hamburgers was inelastic
c. the demand for their hamburgers was elastic
d. the quality of the hamburgers was lower
e. more people came to the festival
Answer: B 3. The town of Marshall’s Boy Scout Troop 1099 decreased car parking prices at the
Diff: 3 Celebrate Marshall Festival and found they made higher profits. This likely occurred
because
a. marginal cost was equal to marginal revenue
b. marginal revenue was higher than marginal cost
c. marginal revenue was less than marginal cost
d. demand was inelastic
e. marginal revenue was increasing
Answer: D 4. The Skandusky Downtown Development Corporation (SDDC), a nonprofit entity, was
Diff: 3 accused by local taxpayers of being overstaffed and too lavishly accommodated for its
purpose of achieving its community development goals. This accusation is an argument
that the SDDC
a. is managed by stakeholders
b. staff is following the MC = MR rule
c. is an example of the Lester-Machlup controversy
d. is engaged in empire building
e. is minimizing community losses
Answer: D 5. Which of the following is not possible when a firm is maximizing its profits?
Diff: 4 a. MC = MR
b. AVC is at its minimum point
c. AFC < AVC
d. MC = MR and MC is decreasing
e. MC = MR and MC is increasing
Answer: B 6. Suppose you were working for Richstone’s bakery and calculating whether the bakery
Diff: 3 was making a profit, considering the recent increase in rent. You have data for price (P),
MR, ATC, MC, AVC, at the quantity of 1,000 breads a day. Among the other
relationships you consider is (P – ATC) which measures the firm’s
a. total profit
b. profit per unit of output
c. marginal profit
d. total revenue
e. average variable cost

Answer: D 7. Suppose you were working for Richstone’s bakery and calculating whether the bakery
Diff: 3 was making a profit, considering the recent increase in rent. You have data for price (P),
MR, ATC, MC, AVC, at the quantity of 1,000 breads a day. The firm’s total profit is
calculated by
a. P – AVC
b. P – ATC
c. P – MC
d. (P – ATC)Q
e. TR – TVC
Answer: E 8. Suppose you were working for Richstone’s bakery and calculating whether the bakery
Diff: 2 was making a profit, considering the recent increase in rent. You have the following data:
P = $20, AVC = $10, AFC = $12, and quantity of birthday cakes produced a day is 20.
You conclude that the bakery ends up at the end of the day with a
a. loss of $10
b. profit of $10
c. loss of $20
d. profit of $40
e. loss of $40
P = $20, AVC = $10, AFC = $10, and quantity of birthday cakes produced a day is 20.
You conclude that the bakery ends up at the end of the day with a
a. loss of $10
b. profit of $10
c. loss of $20
d. no loss, no profit
e. loss of $40
P = $20, AVC = $10, AFC = $8 and quantity of birthday cakes produced a day is 20.
a. loss of $10
b. profit of $10
c. profit of $20
d. profit of $40
e. loss of $40
Answer: D 11. It is clear from the text that most economists assume the primary goal of all firms is to
Diff: 1 a. maximize sales
b. minimize cost
c. maximize efficiency
d. maximize profit
e. minimize loss
Answer: C 12. At the end of the day, Gracia’s Pizza looks into the cash register to count up the day’s
Diff: 3 total revenue. Another way of calculating its total revenue would be to find
a. price × average revenue
b. price × marginal revenue
c. price × quantity
d. marginal revenue × average revenue
e. marginal revenue × marginal cost

Answer: E 13. Total revenue is a term economists use to describe the

Diff: 2 a. price the firm charges for its goods
b. money remaining after costs are paid
c. average profit earned per good sold
d. total profit earned by the firm
e. money the firm receives selling its goods
Answer: A 14. Technically speaking, when the firm’s output level is zero, its total revenue equals
Diff: 1 a. zero
b. its fixed cost
c. its variable cost
d. its marginal revenue
e. its average revenue
Exhibit I-1
Price Quan tity
$20 10
19 11
18 12
17 13
16 14
Answer: D 15. In Exhibit I-1, if the firm charges $18, total revenue will equal
Diff: 1 a. $12
b. $18
c. $108
d. $216
e. $324
Answer: A 16. In Exhibit I-1, the marginal revenue of the twelfth unit equals
Diff: 3 a. $7
b. $18
c. $216
d. $1
e. $19
Answer: C 17. J. J. Joubert, of the Joubert Dairy, tells his friend Jacques that the average revenue he gets
Diff: 3 for a liter of milk is $1. We know then that $1 is the dairy’s
a. marginal profit
b. marginal cost
c. price
d. total revenue
e. total profit
Answer: B 18. Technically speaking, average revenue is
Diff: 2 a. price × marginal revenue
b. total revenue/quantity
c. total revenue/total cost
d. marginal revenue/marginal cost
e. price × marginal cost

Answer: C 19. If you know what marginal cost is, then you should know what marginal revenue is. It’s
Diff: 2 the change in
a. total profit generated by a change in quantity
b. price generated by a change in quantity
c. total revenue generated by a change in quantity
d. output generated by a $1 change in price
e. average revenue generated by a change in quantity
Answer: D 20. Peter Schran plays no favorites. It’s one price for all customers. Under this circumstance,
Diff: 4 we know that
a. MR = MC
b. P = MC
c. TR = TC
d. P = AR
e. P = TR
Answer: A 21. If price is unchanging across the firm’s entire production range, then for the firm selling
Diff: 4 bagels at $0.40 each,
a. P = MR = AR
b. MR = MC = AC
c. TR = TC = 0
d. TR – TC = 0
e. AC = MC = TC
Exhibit I-2
Unit Marginal Marginal

Quantity Cost Revenue
12 $ 5 $9
13 6 9
14 7 9
15 8 9
16 9 9
17 10 9
Answer: D 22. In Exhibit I-2, the firm is currently producing 14 units. What would you advise this firm
Diff: 4 to do?
a. decrease quantity to 13
b. increase quantity to 15
c. remain at 14 units
d. increase quantity to 16
e. increase quantity to 17
Answer: C 23. In Exhibit I-2, this firm is currently producing 16 units. What would you advise this firm
Diff: 3 to do?
a. decrease quantity to 13
b. increase quantity to 15
c. remain at 16 units
d. decrease quantity to 14
e. increase quantity to 17
Answer: D 24. In Exhibit I-2, at what quantity does the firm maximize profit?
Diff: 3 a. 13 units
b. 14 units
c. 15 units
d. 16 units
e. 17 units

Answer: E 25. Suppose, in Exhibit I-2, that the firm is maximizing profit. How much profit is it
Diff: 5 earning?
a. zero
b. $1
c. $16
d. –$16
e. insufficient data to determine profit
Exhibit I-3
$
MC
MR
40 45 50 Quantity
Answer: B 26. In Exhibit I-3, the firm is currently producing 40 units. What would you advise the firm
Diff: 3 to do?
a. shut down
b. increase quantity
c. stay at 40 units
d. decrease quantity
e. decrease price
Answer: D 27. In Exhibit I-3, the firm is producing 50 units. What would you advise this firm to do?
Diff: 3 a. shut down
c. stay at 50 units
e. decrease price
Answer: B 28. In Exhibit I-3, a firm is currently producing 45 units. What would you advise this firm to
Diff: 3 do?
a. shut down
c. stay at 45 units
e. decrease price
Answer: D 29. Raiman’s Shoe Repair also produces custom-made shoes. When Mr. Raiman produces 12
Diff: 3 pair a week, the MC of the twelfth pair is $84, and the MR of that unit is $70. What
would you advise Mr. Raiman to do?
a. shut down
b. produce more custom-made shoes
c. stay at 12 pairs a week
d. produce fewer custom-made shoes
e. decrease price

Answer: B 30. Raiman’s Shoe Repair also produces custom-made shoes. When Mr. Raiman produces 12
Diff: 3 pair a week, the MC of the twelfth pair is $64, and the MR of that unit is $70. What
would you advise Mr. Raiman to do?
a. shut down
b. produce more custom-made shoes
c. stay at 12 pairs a week
d. produce fewer custom-made shoes
e. decrease price
Answer: D 31. Whatever else you learned about profit-maximization, you should have learned this:
Diff: 2 Maximum profit is obtained at the production level where
a. P = AC
b. TR = TC
c. MR = AR
d. MR = MC
e. TR = MR
Answer: B 32. It’s logical, it’s a rule of thumb, it’s an economic guideline: As long as MR > MC,
Diff: 4 and the firm responds by increasing the quantity it produces,
a. profit will eventually fall to zero
b. profit will increase
c. profit will decrease
d. profit will remain unchanged
e. the firm will minimize loss
Answer: C 33. It’s logical, it’s a rule of thumb, it’s an economic guideline: As long as MR > MC,
Diff: 4 and the firm responds by decreasing the quantity it produces,
a. profit will increase to infinity
e. loss will be minimized
Answer: C 34. It’s logical, it’s a rule of thumb, it’s an economic guideline: As long as MR < MC,
Diff: 4 and the firm responds by increasing the quantity it produces,
a. profit will equal zero
Answer: B 35. It’s logical, it’s a rule of thumb, it’s an economic guideline: As long as MR < MC,
Diff: 4 and the firm responds by decreasing the quantity it produces,
a. profit will equal zero
Answer: D 36. It’s logical, it’s a rule of thumb, it’s an economic guideline: By producing at a quantity
Diff: 3 where MR = MC,
a. profit is guaranteed
b. profit becomes zero
c. the firm incurs a loss
d. profit is maximized (or loss minimized)
e. the firm should increase quantity

Answer: A 37. Technically speaking, maximizing profit means finding the maximum difference between
Diff: 5 a. TR and TC
b. MR and MC
c. price and ATC
d. price and AR
e. ATC and MC
Answer: E 38. If Claeys, a candy-making firm that specializes in old-fashioned hard candies, chooses
Diff: 4 not to produce at a production level where its MR = MC, then it
a. is making as much profit as possible
b. will incur losses
c. cannot be earning a profit
d. should really shut down before it loses everything
e. is not earning maximum profit
Answer: D 39. If SnuggleTight, a pillow-making firm in Long Island, NY, incurs losses by producing
Diff: 5 where its MR = MC, then at least in the short run, it should
a. shut down
b. increase output
c. decrease output
d. remain at that output level only if P > AVC
e. remain at that output level only if P > ATC
Answer: D 40. There may be a different criterion used for the long run, but for the short run, a firm
Diff: 4 should shut down production if price is less than
a. ATC
b. AR
c. MC
d. AVC
e. AFC
Answer: C 41. Considering production decisions for only the short run, a firm producing where
Diff: 5 MC = MR should stop producing if
a. its losses are less than TFC
b. its losses equal TFC
c. its losses are greater than TFC
d. TR is less than TC
e. TR exceeds TVC
Answer: D 42. You’re called in as a consultant: Price is $24. At a production level of 200 units,
Diff: 3 MC = MR, AFC = $6, and AVC = $16. What do you advise this firm to do?
a. Increase output.
b. Decrease output.
c. Shut down operations.
d. Stay at 200 units; the firm is earning $400 profit.
e. Stay at 200 units; the firm is minimizing losses of $200.
Answer: C 43. You’re called in as a consultant: Price is $24. At a production level of 200 units,
Diff: 4 MC = MR, AFC = $6, and AVC = $25. What do you advise this firm to do?
a. Increase output.
b. Decrease output.
c. Shut down operations.
d. Stay at the current output; the firm is earning a profit of $1,400.
e. Stay at the current output; the firm is losing $1,400.

Exhibit I-4
$
ATC MC
4.00 MR
3.50
20 Quantity
Answer: A 44. In Exhibit I-4, if this firm is currently producing 20 units of output, this firm
Diff: 4 a. is at its profit-maximizing point
b. could increase profits by increasing output
c. could increase profits by decreasing output
d. should shut down
e. should decrease price
Answer: A 45. In Exhibit I-4, if this firm is currently producing 20 units of output, this firm
Diff: 3 a. is earning a profit of $10
b. is earning a profit of $.50
c. is losing $10
d. should shut down
e. is losing $.50
Answer: A 46. In Exhibit I-5 (on the following page), if this firm is currently producing 20 units of
Diff: 4 output, this firm
a. is at its profit-maximizing point
b. could increase profits by increasing output
c. could increase profits by decreasing output
d. should shut down
e. should decrease price
Answer: C 47. In Exhibit I-5, if this firm is currently producing 20 units of output, this firm
b. is losing $20
c. is earning a total profit of $60
d. should shut down
e. is earning a total profit of $3

Exhibit I-5
$
MC ATC
25 MR
22
20 Quantity
Answer: B 48. In Exhibit I-5, if this firm is currently producing 20 units of output, this firm
b. is earning a $3 profit on each item sold
c. is losing $3 on each item sold
d. should shut down
e. is earning a total profit of $3
Exhibit I-6
$
ATC
MC
AVC
35 MR
Quantity

Answer: D 49. In Exhibit I-6 (on the previous page), the price is fixed at $35. The firm is producing
Diff: 3 where MR = MC. What do you advise this firm to do in the short run?
a. Shut down.
b. Increase output.
c. Decrease output.
d. Stay at its current output.
e. Decrease price.
Answer: E 50. In Exhibit I-6, the price is fixed at $35. This firm is currently operating where MR = MC.
Diff: 4 Which of the following is true in the short run?
a. Price < AVC and this firm should shut down.
b. This firm is earning a profit of zero.
c. This firm could increase profits by increasing output.
d. Price > ATC and the firm is earning a positive profit.
e. Price > AVC, and the firm should stay at its current output.
Exhibit I-7
$
ATC
MC
AVC
14 MR
Quantity
Answer: D 51. In Exhibit I-7, the price is fixed at $14. This firm is currently operating where MR = MC.
Diff: 3 What do you advise this firm to do?
a. It should shut down.
b. It could increase profit by increasing output.
c. It could increase profit by decreasing output.
d. It should continue to operate at its current output.
e. It should decrease price.
Answer: A 52. It may be advisable for a firm to stay in business, even if it’s losing money,
Diff: 1 a. but only in the short run
b. but only if its profit covers the loss
c. but only in the long run
d. because “things may change”
e. when the owner has lots of money

Answer: D 53. If a firm produces where its MR equals its MC,

Diff: 2 a. TR is at a maximum, and TC is at a minimum
b. output is at a maximum
c. losses are at a maximum
d. profit is maximized or loss minimized
e. both TR and TC are at a maximum
Answer: C 54. Technically speaking, if price > AVC, then
Diff: 5 a. TR > TC
b. profit is positive
c. TR > TVC
d. profit is negative
e. the firm should shut down
Answer: C 55. If a firm is currently producing where MR = MC and price = $24, AVC = $22, and
Diff: 3 ATC = $26, then in the long run this firm should
a. continue to operate at a loss
b. earn a positive profit
c. go out of business
d. increase output
e. decrease price
Answer: D 56. There may be other goals an entrepreneur pursues, but the primary goal of the
Diff: 1 entrepreneur is to maximize
a. market share
b. production
c. the difference between price and cost
d. profit
e. size of the firm’s plant
Answer: C 57. An entrepreneur can be fairly certain about some factors associated with production, but
Diff: 3 is most likely to use guesswork or intuition to estimate
a. wage rate
b. monthly rent
c. price
d. labor productivity
e. interest rate
Answer: E 58. Suppose the firm’s total revenue is $4,000 and its total cost is $1,200. We know, then,
Diff: 4 that the firm
a. should produce more to maximize profit
b. should lower its price to maximize profit
c. should lower average total cost to maximize profit
d. should stay where it is because it’s maximizing profit
e. can’t determine what it should do with that incomplete information
Answer: B 59. If a potato farmer increases output and finds that total revenue increased less than total
Diff: 3 cost, then you know for sure that
a. profit had been maximized
b. the farmer should not have increased output
c. the farmer should produce even more output
d. the farmer suffers a loss
e. the farmer should have decreased output, not increased it

Answer: C 60. Economists believe that entrepreneurs, whether they can articulate their behavior or not,
Diff: 3 always think about ________, which explains their MC = MR profit-maximizing activity.
a. minimizing ATC
b. maximizing revenue
c. the consequences of producing the next unit
d. maximizing output
e. doing better than breaking even
Answer: A 61. If the price doesn’t change, no matter how much output is produced, the total revenue
Diff: 4 curve is a(n)
a. upward-sloping straight line
b. downward-sloping straight line
c. horizontal straight line
d. U-shaped curve
e. hill-shaped curve
Answer: C 62. When the price of a good is constant, marginal revenue is the same as
Diff: 3 a. total revenue
b. average total cost
c. price
d. quantity of output
e. profit per unit
Answer: A 63. Average revenue is another way of describing
Diff: 2 a. price
b. output
c. total revenue
d. profit
e. marginal cost
Answer: C 64. When price is constant, the average revenue curve is a(n)
Diff: 4 a. upward-sloping straight line
b. downward-sloping straight line
c. horizontal line
d. vertical line
e. point on the total revenue curve
Answer: E 65. If the price of parsley is $1, and the price remains unchanged no matter how much
Diff: 5 parsley is produced, then the AR curve
a. is an upward-sloping straight line
b. is a downward-sloping straight line
c. lies above the MR curve
d. lies below the MR curve
e. is a horizontal line
Answer: E 66. When the price curve is a horizontal line, it always coincides with all of the following
Diff: 4 except
a. MR
b. TR/Q
c. AR
d. change in total revenue divided by change in output
e. TC

Answer: D 67. A portrait photographer produces packages of 100 photos. If sales increase from 600 to
Diff: 3 700 packages, total revenue increases from $1,200 to $1,400. The marginal revenue per
photo of the 700th package is
a. $200
b. $100
c. $20
d. $2
e. $1
Answer: B 68. Which two curves tell you whether or not you’ve achieved maximum profit?
Diff: 3 a. P and MR
b. MR and MC
c. MC and TC
d. P and AVC
e. AVC and ATC
Exhibit I-8
Q P AVC ATC MC
0 $12 — — —
1 12 3 5 5
2 12 5 6 7
3 12 7.3 8 12
4 12 9.5 10 16
Answer: C 69. In Exhibit I-8, when the firm produces a quantity of 2, its total revenue is
Diff: 1 a. $2
b. $12
c. $24
d. $10
e. $14
Answer: B 70. If you create an MR column for Exhibit I-8, it will be the same as which column?
Diff: 4 a. Q
b. P
c. AVC
d. ATC
e. MC
Answer: D 71. In Exhibit I-8, what quantity would you produce to maximize profit?
Diff: 4 a. 0
b. 1
c. 2
d. 3
e. 4
Answer: D 72. In Exhibit I-8, the maximum profit is
Diff: 4 a. $36
b. $24
c. $20
d. $12
e. $8

Answer: C 73. Suppose you’re producing designer clothes for Barbie dolls. You’re producing 100 units
Diff: 3 and discover that the MR for the 100th unit is $50 while the MC of the 100th unit is $45.
If you’re in the short run, it’s a signal for you to
a. shut down
b. stay where you are because you’re making profit on that unit
c. increase production beyond 100 units
d. produce less than 100 units
e. it’s no signal because price data is unknown
Answer: E 74. If ABC Printing produces 100 calendars, and the MR of the 100th is $5 and the MC is $3,
Diff: 4 then the firm is
a. maximizing profit
b. producing too many calendars
c. making a $200 profit
d. making a $200 loss
e. producing too few calendars
Answer: A 75. The fundamental rule of profit maximization is for the firm to produce where
Diff: 3 a. MR = MC
b. ATC is minimized
c. quantity of output is maximized
d. it is most efficient
e. total revenue is maximized
Answer: B 76. The MR = MC approach to profit maximization means that a firm should produce until
Diff: 4 a. marginal revenue equals zero
b. additional profit equals zero
c. marginal cost becomes negative
d. marginal revenue equals price
e. price equals average total cost
Answer: D 77. According to the text, Israelis living on a kibbutz in Israel
Diff: 3 a. leave the economic decisions to the economists on the kibbutz
b. are adverse to profit-maximizing behavior
c. shifted from manufacturing to farming in the 1960s
d. behave according to the MR = MC rule
e. act communally so do not let prices affect their decisions
Answer: C 78. According to the text, on a kibbutz in Israel
Diff: 3 a. farmers produce oranges no matter what the price
b. members are not profit maximizers
c. there is no link between an individual’s effort and reward
d. universal equality is seen as unrealistic
e. high-tech manufacturing is not feasible
Answer: C 79. A sandwich shop owner has the following information: P = MR = $4, ATC = $2,
Diff: 4 AVC = $1, MC = 4, and Q = 500. From this, she can determine
a. her profits are not being maximized
b. she has earned zero economic profits
c. she has earned economic profits of $1,000
d. she has earned economic profits of $1,500
e. she should sell fewer sandwiches

Answer: B 80. Jerome, the florist, sold 500 bridesmaid’s bouquets in June. He estimates his costs that
Diff: 4 month were ATC = $10, AVC = $6, and MC = $9. If he sold each bouquet at the constant
market price of $9, Jerome
a. made an economic profit of $500
b. made a loss of $500
c. made an economic profit of $1,500
d. made a loss of $1,500
e. should have shut down in June
Answer: B 81. Consider a firm with the following cost information: ATC = $15, AVC = $12, and
Diff: 4 MC = $14. If we know that this firm has decided to produce Q = 20 by following the rule
to maximize profits or minimize losses, then the price of the output is
a. $12
b. $14
c. $15
d. $20
e. indeterminate from the information given
Answer: D 82. Consider a firm with the following cost and revenue information: ATC = $8, AVC = $7,
Diff: 4 and MR = MC = $6. If the firm produces Q = 60 in the short run, it
a. is minimizing losses
b. makes a total loss of $60
c. should produce more output
d. is making a mistake and should shut down
e. is maximizing total profit
Answer: C 83. Consider a firm with the following cost and revenue information: ATC = $20,
Diff: 3 AVC = $10, and P = MR = $30. If the firm follows the rule to maximize profits, its
output level is 3. Therefore MC equals
a. $20
b. $10
c. $30
d. $90
e. $3
Answer: A 84. The entrepreneur will typically have the most difficulty controlling
Diff: 2 a. price
b. average total cost
c. average variable cost
d. marginal cost
e. total cost
Answer: C 85. If the price of a product falls below average total cost in the short run, the firm
Diff: 4 a. has an economic profit
b. cannot cover total fixed costs
c. experiences a loss
d. must always shut down
e. should expand output until MR = MC
Answer: E 86. In Exhibit I-9 (on the following page), the profit-maximizing output level at the price of
Diff: 3 $8 is
a. 0
b. 4
c. 7
d. 8
e. 10

Cost,
Exhibit I-9
Revenues MC
($)
8 P = MR = 8
ATC
7
5 P = MR = 5
4 AVC
2 P = MR = 2
0 4 7 8 10 Quantity
Answer: D 87. In Exhibit I-9, the maximum profit at the price of $8 is

Diff: 3 a. $80
b. $69
c. $30
d. $20
e. $10
Answer: E 88. In Exhibit I-9, when the price is $5, the firm
Diff: 4 a. is making an economic profit of $21
b. should produce output equal to 10
c. is breaking even
d. should shut down
e. should produce output equal to 7
Answer: A 89. In Exhibit I-9, when the price is $2, the profit-maximizing (or loss-minimizing) firm
Diff: 4 a. should shut down and produce zero
b. should produce output equal to 4
c. is making an economic profit of $8
d. should try to produce more output
e. has total revenue equal to $20
Answer: C 90. In Exhibit I-9, when the price rises from $5 to $8, the profit-maximizing (or loss-
Diff: 3 minimizing) firm goes from making a
a. loss to making a smaller loss
b. loss to making a larger loss
c. loss to making a profit
d. profit to making a loss
e. profit to making a larger profit
Answer: A 91. If a firm shuts down in the short run, it will
Diff: 2 a. incur losses equal to its fixed costs
b. produce at the output level where MR = MC
c. reduce its losses to zero
d. do this because P > AVC
e. have total revenue greater than total fixed costs

Answer: B 92. Suppose the price of a product is less than its average variable cost. When the firm’s
Diff: 3 fixed obligations are completely ended, it will now most likely
a. make an economic profit
b. go out of business
c. expand to a bigger operation
d. continue to be shut down
e. break even
Answer: A 93. If price equals average total cost, then total revenue
Diff: 3 a. equals total cost
b. equals total fixed cost
c. equals total variable cost
d. is greater than total cost
e. equals marginal revenue
Answer: E 94. If price is greater than average variable cost, then the firm
Diff: 4 a. should cease production
b. earns economic profits
c. just breaks even
d. makes an economic loss
e. may make either an economic profit or loss
Answer: A 95. When a business finds its obligations are ended,
Diff: 3 a. all costs are variable costs
b. this is the short run
c. the market price of the output rises
d. the marginal cost curve shifts up
e. it may have to continue operations to minimize losses
Answer: B 96. A doorknob manufacturer sells 400 doorknobs at a price of $10 each. It has total costs of
Diff: 4 $4,500, of which $700 are fixed costs. This means the firm
a. has an economic profit of $500
b. should produce in the short run at a loss
c. should shut down in the short run
d. has total variable costs of $500
e. has price less than average variable cost
Answer: E 97. A custom paper company finds that when the price of paper is $5, its total revenues are
Diff: 5 $60,000. Its total costs are $70,000, of which $57,000 are variable costs. From this we
can infer
a. the firm sells 14,000 units of paper
b. economic profit is $10,000
c. the firm should shut down in the short run
d. total fixed costs are $3,000
e. price is greater than average variable cost
Answer: C 98. The neighborhood ice cream shop finds that when it charges $3 per ice cream cone, its
Diff: 2 total revenues are $90,000. It has total variable costs of $30,000 and total fixed costs of
$40,000. From this we can infer the
a. shop should be moved because the rent is too high
b. price is less than average total cost
c. economic profits are $20,000
d. shop will be closed in the long run
e. shop sells 10,000 ice cream cones

Answer: A 99. If a firm is operating at a loss in the short run and finds that its price is greater than
Diff: 5 average variable cost, then in the short run
a. it should produce where MR = MC
b. it should produce zero output
c. it should go out of business
d. total revenue is less than total variable costs
e. total revenue is greater than total costs
Answer: D 100. Who conducted the study in the 1940s that surveyed entrepreneurs to determine whether
Diff: 3 they used marginal analysis in choosing their production levels?
a. Milton Friedman
b. Fritz Machlup
c. Michael Kalecki
d. Richard Lester
e. R. L. Hall
Answer: B 101. The Lester-Machlup controversy applies to whether or not firms
Diff: 4 a. choose the correct plant size
b. use marginal analysis to choose output levels
c. correctly calculate their economic profits and losses
d. engage in wasteful advertising campaigns
e. pollute the environment
Answer: C 102. The controversy about whether entrepreneurs should be judged according to what they do
Diff: 3 or say originated between
a. Friedman and Hopkins
b. Berle and Means
c. Lester and Machlup
d. Baumol and Galbraith
e. Smith and Thurow
Answer: C 103. Who believes that marginal analysis provides the best model of a firm’s behavior?
Diff: 3 a. William Baumol
b. John K. Galbraith
c. Milton Friedman
d. Richard Lester
e. Lester Thurow
Answer: B 104. The author of the New Industrial State, who believes that managerial bureaucracy
Diff: 2 controls corporate goals and behavior, is
a. William Baumol
b. John K. Galbraith
c. Milton Friedman
d. Richard Lester
e. Lester Thurow
Answer: D 105. John K. Galbraith and Lester Thurow both believe that the modern corporation
Diff: 2 a. follows the MR = MC rule
b. tries to minimize costs
c. hires too few managers
d. is run by managers for managers
e. serves the interests of stockholders

Answer: D 106. Adam Smith believed that the rich man enjoys his riches primarily because he gets great
Diff: 4 pleasure from
a. the goods and services he can buy
b. his donations to charity
c. leaving an inheritance to his heirs
d. the attention he gets from others
e. his easy life of leisure
Answer: A 107. Total profit can be calculated by
Diff: 5 a. subtracting total variable cost from total revenue
b. subtracting total revenue from total costs
c. subtracting total costs from total revenue
d. finding the product of the difference between average profit and average total cost
and the quantity produced
e. quantity produced times the difference between marginal cost and average total
cost
Answer: E 108. If a fishing boat owner brings 10,000 fish to market and the market price is $7 per fish,
Diff: 1 she will have $70,000 in total revenue. If the average variable cost of 10,000 fish is $4
and the fixed cost of the boat is $20,000, what is her profit?
a. $1
b. $3
c. $1,000
d. $3,000
e. $10,000
Answer: A 109. A fishing boat owner brings 50,000 fish to market and the market price is $4 per fish. Her
Diff: 2 average variable cost of 50,000 fish is $1 and the fixed cost of the boat is $100,000, what
is her profit per fish?
a. $1
b. $500
c. $5,000
d. $25,000
e. $500,000
Answer: D 110. Suppose that you have returned from your fishing expedition with 20,000 fish. The
Diff: 4 market price is $3 per fish. Your average fixed cost was $1 and your total variable cost
was $5,000. If the price jumps to $3.50 before you sell your first fish, how much extra
profit, if any, do you earn?
a. c and d
b. Extra profit is zero.
c. Extra profit is enough to cover half of the fixed cost of your next trip.
d. Extra profit is enough to cover all of the variable costs of your next two trips.
e. Extra profit is $45,000.
Answer: A 111. Suppose that you have returned from your fishing expedition with 20,000 fish. The
Diff: 3 market price is $3 per fish. Your average fixed cost was $1 and your total variable cost
was $5,000. If the price jumps to $3.50 before you sell your first fish, how much extra
profit, if any, do you earn?
a. $10,000
b. $25,000
c. $30,000
d. $45,000
e. $70,000

Answer: D 112. If the market price is $5 and you are currently producing at a level where average total
Diff: 3 cost is $3 and falling, you should
a. b or c, it doesn’t matter
b. shut down
c. produce only enough to cover variable costs
d. produce where MR = MC
e. produce until the average total cost and average revenue are equal
Answer: D 113. The market price for wallets is $20. Your technology is such that at your most efficient
Diff: 4 production point, the average total cost of producing a wallet is $2.50. Your manager
runs into your office and shouts, “Boss!!! Average costs are rising!! Average costs are
rising!!” To make a profit-maximizing decision, you should
a. definitely decrease production
b. immediately stop production
c. completely ignore your manager
d. ask the manager about the marginal cost
e. ask the manager about the average total cost
Answer: B 114. When choosing the production level for tomorrow you find that at an output of 100 units,
Diff: 3 the total variable costs are $20,000 and the average fixed cost is only $50. If the market
price is $200, you should
a. hire an economic consultant
b. produce at a loss equal to $5,000
c. produce more than 100 units
d. produce fewer than 100 units
e. produce where MC is at a minimum
Answer: E 115. The marginal cost of producing fish increases by $.01 with each additional fish. The
Diff: 5 marginal cost of the first fish is $.01, for the second it is $.02, etc. If the market price for
fish is $7 per fish and your total fixed cost is $7,000, you should
a. stop fishing after the 7,000th fish
b. stop fishing after the 700th fish
c. stop fishing after the 1,000th fish
d. shut down
e. there is not enough information to answer this question
Answer: C 116. The marginal cost of catching a fish is the same as the average total cost at your current
Diff: 3 level of 3,000 fish. If the price you receive for fish is greater than the marginal cost of the
3,000th fish, you should
a. add another boat to your fleet
b. decrease production until MC = MR
c. increase production until MC = MR
d. stop production at 3,000th fish
e. decrease production until the marginal cost of the next unit is enough to pay for the
workers, bait, and fuel
Answer: B 117. Which controversy developed over a disagreement about how managers make profit
Diff: 2 maximizing production decisions?
a. Lester-Satlow
b. Lester-Machlup
c. Friedman-Lester
d. Friedman-Phelps
e. Kalecki-Gottheil

Answer: D 118. When we see a firm make a long-run decision to exit the industry, it is likely that
Diff: 3 a. profits are positive but unattractive to the owner
b. market prices only covered average total, but not average variable costs
c. all loans have been paid back early
d. market prices will stay below marginal costs at all levels of production where
average total costs are falling
e. the cost of fixed factors of production have increased dramatically
Answer: E 119. If a firm has not maximized its profit, it could be the case that
Diff: 4 a. marginal cost is less than average total cost
b. marginal cost is greater than average total cost
c. marginal cost, average total cost, and marginal revenue all intersect at the same
quantity
d. marginal cost is higher than average variable cost
e. the market price is higher than marginal cost
Answer: D 120. Suppose a company increases production from a point where marginal cost equals
Diff: 3 average total cost to a point where marginal revenue and marginal cost are equal. Is it a
good idea for the company to do this? Why?
a. No; average total costs have increased which means the company is not
minimizing losses.
b. Yes; because average variable costs are always less than average total costs.
c. No; because the marginal cost of producing the last unit is the same as the
marginal revenue.
d. Yes; even though the previous level of output had minimized the average total cost,
there was still profit to be earned by producing additional units.
e. No; the previous level of output was the most efficient because it had the lowest
average total cost.
Answer: D 121. If a firm in a competitive industry is making no profit but still producing, it must be the
Diff: 2 case that
a. MC = MR > ATC
b. MC = MR < ATC
c. MC = ATC > MR
d. MC = MR = ATC
e. this situation is not possible
Answer: D 122. Which of the following statements is false?
Diff: 5 a. Profit is increasing when marginal revenue is greater than marginal cost.
b. Marginal cost is always decreasing.
c. Marginal and average total costs are equal at the most efficient production level.
d. The AFC and AVC curves cross.
e. The AFC and ATC curves do not cross.
Answer: E 123. The Bumpy Ride Suspension company makes springs for bicycle seats. Currently the
Diff: 4 springs sell for $5 each. Being profit maximizers, the company makes just enough
springs so that the marginal cost of the last spring produced is $5. Their average total cost
at that output is $3.50. If they currently produce 1,000 springs and the market price falls
by $1, approximately how much profit will be lost?
a. all of the profit will be lost
b. profit will fall by $1 per spring
c. there will be no loss of profit
d. more than $1,000 but less than $1,500
e. less than $1,000

Answer: D 124. Wild Woman’s Wild Wilderness Adventures sells 1,000 vacation packages each year.
Diff: 1 The average total cost of the packages is $450 and each package sells for $770. Annual
profit is
a. $230
b. $320
c. $2,300
d. $320,000
e. $3.2 million
Answer: A 125. Entrepreneurs operate in which spheres of economic life?
Diff: 3 a. c and e
b. education and training
c. production
d. accounting
e. markets
Answer: B 126. Suppose an entrepreneur commits to a production schedule but underestimates the market
Diff: 4 price for his products. What will be true about his current level of production?
a. Losses will be very high.
b. Marginal cost will be less than marginal revenue.
c. Marginal cost will be more than marginal revenue.
d. Average total cost will exceed price.
e. Total fixed costs will be too low.
Answer: D 127. Suppose an entrepreneur commits to a production schedule but overestimates the market
Diff: 5 price for her products. Which situation is not possible?
a. Price equals average total cost.
b. Losses are greater than if she shut down.
c. Total profit is positive.
d. Average variable cost is greater than marginal cost.
e. Total profit is zero.
Answer: C 128. A fishing boat owner sells her entire catch of 8,000 fish and maximizes profit that is
Diff: 4 equal to $4,000. Suppose fish prices increase and you are asked to calculate her profit
knowing that she now sells 10,000 fish. If fish prices increased by $1 per fish, what do
you need to know to calculate her new profit level?
a. average fixed cost
b. average variable cost
c. change in average total cost
d. marginal cost
e. average total cost
Answer: E 129. A fishing boat owner sells her entire catch of 8,000 fish and maximizes profit that is
Diff: 4 equal to $4,000. Suppose fish prices increase and she now sells 10,000 fish. If fish prices
increased by $1 per fish, what do you need to know to calculate her new average total
cost?
a. average fixed cost
b. change in average variable cost
c. change in total variable cost
d. how many fish she catches
e. how much profit is made

Answer: B 130. A fishing boat owner sells her entire catch of 20,000 fish and maximizes profit that is
Diff: 3 equal to $7,000. Suppose fish prices increase and you are asked to calculate her profit
knowing that she now sells 30,000 fish. If fish prices increased by $3 per fish, what can
you say about her new profit level?
a. profit > $90,000
b. profit < $97,000
c. profit < $90,000
d. profit > $67,000
e. profit > $10,500
Answer: D 131. Suppose Al, Betty, and Carl own the only fishing companies in your village. Suppose the
Diff: 4 market price today is $10 per fish. Suppose Al catches 4,000 fish with an average total
cost of $7.50, Betty catches 6,000 fish with an average total cost of $6, and Carl catches
10,000 fish with an average total cost of $7. How much would Betty’s average total cost
have to fall in order for her to make as much total profit as Carl?
a. $1
b. $2
c. $4
d. $5
e. Betty cannot make as much profit as Carl with only 6,000 fish.
Answer: B 132. Suppose Al, Betty, and Carl own the only fishing companies in your village. Suppose the
10,000 fish with an average total cost of $5. What is the average profit per fish in the
village today?
a. $2.40
b. $4.20
c. $3.80
d. $2
e. $5
Answer: E 133. Suppose Al, Betty, and Carl own the only fishing companies in your village. Suppose the
10,000 fish with an average total cost of $5. If everyone is a profit maximizer, what is
Betty’s marginal cost?
a. $6
b. $7
c. $8
d. $9
e. $10
Answer: D 134. Suppose you are producing where MC = AVC = $3 and this is loss minimizing. If market
Diff: 3 reports predict that the price of your product will reach a long-run equilibrium level that
is $4 higher than it is today, you should
a. increase output in advance of the expected price increase
b. remain in business
c. shut down
d. remain in business only if your most efficient production level has an average total
cost less than or equal to $7
e. shut down until the price increases, then get back in business

Answer: D 135. Suppose a profit-maximizing firm finds itself producing 1,000 cellular phones each
Diff: 3 week. The profit is $400 per week. What will the profit be if it were to minimize
costs at that output level?
a. $100
b. $200
c. $300
d. $400
e. $500
Answer: C 136. Suppose a fishing boat currently brings 10,000 fish to market and earns a profit of
Diff: 4 $40,000 when the price of fish is $8. Suppose the boat dealer had overcharged the boat
owner for the boat. Upon receiving a refund of $25,000 from the dealer, what will happen
to the AVC of producing 10,000 fish?
a. increases by $25
b. increases by $2.50
c. does not change
d. decreases by $2.50
e. decreases by $25
Answer: D 137. Suppose a fishing boat currently brings 10,000 fish to market and earns a profit of
owner for the boat. Upon receiving a refund of $25,000 from the dealer, what will happen
to the ATC of producing 10,000 fish?
a. increases by $25
b. increases by $2.50
c. does not change
d. decreases by $2.50
e. decreases by $25
Answer: D 138. Suppose a fishing boat currently brings 10,000 fish to market and earns a profit of
owner for the boat and refunded the overcharged amount. If the profit increases to $7.50
per fish, what was the value of the refund from the dealer?
a. $2.50
b. $25,000
c. $3.50
d. $35,000
e. $75,000
Answer: C 139. Suppose two fishing boats are both run by profit-maximizing captains. Bob’s boat cost
Diff: 2 him $500,000 and Debra’s boat cost her $400,000. If they both have identical boats and
their labor and fuel costs are the same, who will catch more fish?
a. Bob will catch 20 percent fewer fish
b. Debra will catch 20 percent fewer fish
c. they will catch the same
d. Bob will catch 25 percent more fish
e. Debra will catch 25 percent more fish
Answer: D 140. Suppose a fishing boat currently brings 10,000 fish to market each day and earns a profit
Diff: 2 of $40,000 when the price of fish is $12. Suppose that there are 100 workers on the boat,
and each works 10 hours each day. If their health insurance premiums, paid by the boat
owner, increase by $80 per worker, what will the new profit be?
a. $80,000
b. a loss of $40,000
c. $48,000
d. $32,000
e. a loss of $760,000

Answer: C 141. In the short run, which factor is not relevant in profit-maximizing output decisions?
Diff: 3 a. wage rates
b. raw material costs
c. mortgage costs
d. energy costs
e. market price
Answer: C 142. Marginal analysis requires that business people who make production decisions always
Diff: 4 a. know what average fixed costs are
b. remember what has happened most recently
c. remain forward looking
d. continue producing
e. remain optimistic
Answer: A 143. Suppose you are viewing a graph of the total revenue generated from the sale of bananas.
Diff: 5 On the horizontal axis, the numbers indicate the quantity of bananas. On the vertical axis
the numbers indicate total revenue. The slope of the line represents
a. b and e
b. marginal revenue
c. average variable costs
d. total revenue
e. price
Answer: C 144. Suppose you are viewing a graph of the total revenue generated from the sale of bananas.
Diff: 5 On the horizontal axis the numbers indicate the quantity of bananas. On the vertical axis
the numbers indicate total revenue. Suppose there are two lines on the graph, A and B,
and they only meet when quantity is zero. If, at an output of 10,000 bananas, A lies above
B, we can say that
a. A corresponds to more bananas than B
b. A represents average revenue at a lower price than B
c. A represents marginal revenue at a higher price than B
d. A represents total revenue at a higher price than B
e. A represents total revenue at a lower price than B
Answer: D 145. If price increases by 10 percent and a firm is maximizing profits, output will
Diff: 2 a. increase by 10 percent
b. decrease by 10 percent
c. remain unchanged
d. increase, but we don’t know by how much
e. decrease, but we don’t know by how much
Answer: B 146. If marginal revenue exceeds marginal cost, profit maximizers should
Diff: 3 a. reduce output until they are equal
b. increase output until they are equal
c. increase output until profits are zero
d. decrease output unless profits are zero
e. maintain current output
Answer: D 147. Suppose a firm notices that the price it faces has doubled, but it does not change its level
Diff: 5 of output. It must be the case that
a. profits have doubled
b. the marginal cost curve is falling
c. total revenue has decreased
d. the original price was less than half of the minimum of the AVC curve
e. this situation would not really occur

Answer: C 148. Imagine you own a machine that produces perfectly authentic and legal $100 bills. You
Diff: 3 would use this machine until
a. the bills became worthless
b. the total cost began to fall
c. the marginal cost was $100
d. the variable cost began to rise
e. the marginal revenue began to fall
Answer: E 149. The lesson learned from the discussion about kibbutzim in your textbook is that
Diff: 5 organizations which are controlled by people who place a low value on acquiring
material things
a. do not maximize profit
b. only produce enough to survive
c. cannot compete in a capitalist society
d. have religious convictions against profit
e. still maximize profit
Answer: D 150. Todd owns a painting company. He needs brushes, ladders, paint, painters, and a truck in
Diff: 4 order to produce even one painted house. If it takes one hour to set up and take down the
equipment each day, would Todd care if his employees worked an 8-hour day or a 10-
hour day, assuming that each hour they painted just as quickly as the previous hour?
a. no; the revenue and costs are the same every hour
b. no; especially if he pays his employees by the hour
c. there is no way to answer this question
d. yes; because he can reduce the average fixed cost of preparation and clean-up
e. yes; but only if the homeowner pays by the hour
Answer: C 151. In the Perspective on profit maximization and greed, greed is regarded as
Diff: 4 a. inherent in capitalist societies
b. an evil that must be addressed by all societies
c. an expression of behavior that can be associated with all forms of profit
maximization
d. an acceptable mode of behavior in a zero-sum world
e. having no negative consequences in a zero sum world
ESSAY
1. Lynne teaches violin lessons. She charges $10 for each lesson. Her marginal cost per lesson is $4, and her
ATC per lesson is also $4. If she can increase the number of lessons she teaches and still charge $10 per
lesson, should she? How will she know when she is maximizing her profit?
SOLUTION:
Since her price exceeds her marginal cost, she is not maximizing her profit. She should increase the number
of lessons she sells until the marginal cost of an additional lesson reaches $10. She will maximize profit
when her marginal revenue and her marginal cost are both $10.
2. Refer to Exhibit I-10 on the following page. If the firm in the exhibit can sell its output for $1 per unit,
should it produce 1,500 or 2,100 units of output? Explain.
SOLUTION:
To maximize profit, this firm should produce 2,100 units. It would not stop at 1,500 units because MR
exceeds MC for the additional units between 1,500 and 2,100.

3. Explain why a firm must consider variable costs rather than fixed costs, when deciding whether to produce.
SOLUTION:
It will incur its fixed costs whether or not it operates. It will only incur variable costs if it operates, so the
relevant question is whether the marginal revenue from operating is large enough to cover these variable
costs. If the marginal revenue does not cover all of the variable costs, then the owner will have to cover
them, in addition to the fixed costs, out of his/her pockets.
Exhibit I-10
Quantity Marginal Cost
1,200 1.15
1,300 1.09
1,400 1.03
1,500 1.00
1,600 0.95
1,700 0.92
1,800 0.89
1,900 0.94
2,000 0.97
2,100 1.00
2,200 1.04
2,300 1.10
4. Explain the circumstances under which a firm will produce output while incurring a short-run loss, and the
circumstances under which it will shut down while incurring a short-run loss.
SOLUTION:
If a firm can cover its variable costs by operating, then it will continue operating in the short run, that is,
until it can change the quantity of fixed resources it uses. If it covers its variable costs and has money left to
apply towards its fixed costs, then it is better off operating because the owner(s) spend less money. If it just
exactly covers its variable costs, but has no money left to apply towards its fixed costs, then it is no worse
off than if it shut down in the short run. However, if it can’t cover its variable costs, then the owner(s)
incur both fixed costs and the uncovered component of the variable costs by operating. In this case, it is
preferable to shut down and only incur its fixed costs.
5. Think about a publishing firm that uses labor, ink, paper, and electricity as its variable inputs, and rents
building space and printing presses as its fixed inputs. Describe how this publisher’s short-run response to
an increase in its labor costs would differ from its short-run response to an increase in one of its fixed costs.
SOLUTION:
Although both types of cost increases will drive the firm’s profits down, it will only respond to the increase
in the variable cost in the short run. The higher labor cost will shift the firm’s ATC, AVC, and MC curves
upward, and will induce the firm to reduce production in the short run. The higher fixed cost will not move
the MC curve, and therefore will not lead to a change in output in the short run.
6. Robert produces sunglasses. He can sell them for $15 per pair. At the level of output where MR = MC, his
AVC = $15.45 and his AFC = $.40. Explain whether or not Robert should shut down.
SOLUTION:
Robert should shut down because he cannot cover his variable costs. He is losing $.85 per pair of glasses at
the profit-maximizing/loss-minimizing output level, but he would lose less money if he padlocked his
factory and produced no sunglasses.

7. Consider a firm with one fixed cost, rent, and one variable cost, wages. Describe the effects of an increase
of this firm’s rent.
SOLUTION:
The firm’s ATC curve shifts up, but the AVC and MC curves don’t change since they depend only on
variable costs. Although the firm’s ATC curve will shift up, it will continue to produce the same level of
output where its price equals its marginal cost. Its profits fall and, perhaps, become negative.
8. How did the advent of the modern corporation reduce the likelihood that a firm’s goal is to maximize
profit? What has replaced this goal?
SOLUTION:
The corporation separates owners—stockholders—from decision makers. Although stockholders typically
want the firm to maximize profit, the managers may have other goals. They may choose, instead, to
maximize sales or to safeguard the viability of the firm. John K. Galbraith and Richard Lester believe that
managers seek to preserve the managerial class, even at the expense of profit.
9. Does minimizing average total costs ensure that a firm is maximizing its profits?
SOLUTION:
No. To maximize profits a firm should produce the output level where MR = MC. It is possible that this
will not coincide with the minimum point on the average total cost curve.
10. Verbally explain why a firm would maximize profits by producing output up to the point where MR = MC.
SOLUTION:
At levels of output below the equilibrium, marginal revenue is typically greater than marginal cost. Thus,
the firm could add more to total revenue than it would add to total cost by producing an additional unit of
output. As a result, profits would rise. The opposite holds at output levels above equilibrium, in that
MR < MC. The reduction in total revenue from producing one less unit of output is less than the reduction
in total cost by producing one less unit of output, so profits would rise by reducing output.
11. “The long run doesn’t exist; it’s a goal towards which we strive.” Explain this statement.
SOLUTION:
Firms operate in the short run, continually making choices that affect their long-run potential. Yet there
is never a point at which everything is variable for the firm, thus, there is no long run. The world is
constantly changing, continually throwing out shocks to which the firm must adapt. The goal is long-run
profits but it is achieved through short-run decisions.

Principles of Economics 7th Edition Gottheil Test Bank

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Principles of Economics 7th Edition Gottheil Test Bank

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Principles of Economics 7th Edition

Gottheil Test Bank

Answer: F 13. Setting P = ATC allows us to calculate total profit or loss.

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Answer: F 24. A firm will never operate at a loss.

Answer: T 27. ATC always exceeds AVC.

Answer: T 30. If MR > MC, a profit-maximizing firm should increase output.

Answer: T 32. Price = MR only if the price is fixed.

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Answer: E 13. Total revenue is a term economists use to describe the

Price Quan tity

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Unit Marginal Marginal

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Answer: D 53. If a firm produces where its MR equals its MC,

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Answer: D 87. In Exhibit I-9, the maximum profit at the price of $8 is

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