Exam 43: Profit Maximization

Nancy owns and operates a drug store that generates total revenues worth $30 million in a particular year.Her accounting costs for the year are $25 million.She could have earned $3 million in this year if she had worked as a consultant for a pharmaceutical firm.Further, she could have earned 5 percent interest on $40 million of her own money that she invests in the business this year.Nancy's accounting profit in this year is _____ and her economic profit is _____.

If a firm's marginal revenue is greater than its marginal cost, then:

Accounting profit is always equal to or greater than economic profit.

The following graph shows the demand and cost curves of an imperfectly competitive firm.MC and ATC represent the marginal cost curve and the average cost curve respectively. Figure 22.1 According to Figure 22.1, what is the firm's profit when it sells quantity Q₁ at price P₁?

Each firm under monopolistic competition produces a unique product which does not have a close substitute.

Scenario 22.2 Consider a publicly held firm (one whose stock shares are traded on the stock exchange)that earned revenue worth $350 million and incurred land, labor, and debt costs worth $320 million.The stockholders who have invested a total of $100 million in this firm could have earned 10 percent return on other comparable investments. According to the information in Scenario 22.2, how much economic profit did the firm make last year?

Economic profit is the difference between accounting profit and total fixed cost.

When the average revenue falls, marginal revenue also falls and is less than the average revenue.

Assume that the marginal revenue curve intersects the rising portion of the marginal cost curve at 100 units of output.At this output level, a profit-maximizing firm's total fixed cost is $600 and its total variable cost is $400.If the price of the product is $8 per unit, the firm should produce:

Suppose Mark invests a sum of $100, 000 in a new venture.To fund his investment, Mark withdraws $50, 000 from a savings account paying 10% per year and uses the proceeds from a bond that has just matured worth $50, 000.If he had reinvested the proceeds from the bond he could have earned interest at the rate of 5%.Calculate the opportunity cost of capital for Mark in a particular year?

Suppose that Megabucks Corporation is earning economic profit of $4, 000.If its price is $6 per unit and its ATC is $4 per unit, it must be producing 8, 000 units.

When economic profit is zero, producers do not have any incentive to deviate from the current line of production.

Scenario 22.2 Consider a publicly held firm (one whose stock shares are traded on the stock exchange)that earned revenue worth $350 million and incurred land, labor, and debt costs worth $320 million.The stockholders who have invested a total of $100 million in this firm could have earned 10 percent return on other comparable investments. According to the information in Scenario 22.2, how much accounting profit did the firm make last year?

The following graph shows the demand and cost curves of an imperfectly competitive firm.MC and ATC represent the marginal cost curve and the average cost curve respectively. Figure 22.1 Refer to Figure 22.1.At price P₁ the firm sells quantity Q₁, and total cost is shown by:

A perfectly competitive firm spends a significant part of its revenue on advertisements, and tries to sell more by reducing its price below the market price.

The marginal revenue curve of a firm coincides with the average revenue curve under perfect competition.

The table given below shows the total revenue and total cost of producing a commodity. Table 22.1 In Table 22.1, the marginal revenue from the sixth unit of output is:

In a perfectly competitive industry, the price of good A is $2.If a firm in this inudustry decides to increase its price to $2.50, it will:

Graphically, total revenue is represented by the:

A monopolistically competitive firm faces a relatively elastic demand curve than a monopolist firm because of the: