Question

Gregory Mankiw] Principles of Microeconomics, Chapter 13 and 14 mid practises

The intersection of a firm's marginal revenue and marginal cost curves determines the level of output such that which of the following is the case?
a. Total revenue is equal to variable cost.
b. Total revenue is equal to fixed cost.
c. Total revenue is equal to total cost.
d. Profit is maximized.

Assume a firm is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. What is its profit?
a. –$3200
b. –$1600
c. $1600
d. $3200

When a profit-maximizing firm in a competitive market has zero economic profit, what is its accounting profit?
a. negative (accounting losses)
b. also zero
c. Positive
d. could be positive, negative or zero

Answer 1

Question 1: (d) Profit is maximized

Question 2: (c) $1600

Question 3: (d) could be positive, negative, or zero

1. The intersection of a firm's marginal revenue and marginal cost curves determines the level of output such that profit is maximized.

(d) Profit is maximized

Profit is maximized when marginal revenue (MR) = Marginal Cost (MC) This is because when MR > MC, the firm can increase its profits by producing more, and when MR < MC, it can increase its profits by producing less.

2. The profit of the given firm is $1600

(c) $1600

Total Revenue = Price x Quantity

TR = $6 x 800 = $4800

Total Cost = Average Total Cost x Quantity

TC = $4 x 800 = $3200Profit = TR - TC

Calculate, Profit = $4800 - $3200 = $1600

Therefore, the profit of the given firm is $1600.

3. When a profit-maximizing firm in a competitive market has zero economic profit, its accounting profit could be positive, negative, or zero.

(d) could be positive, negative, or zero

When a profit-maximizing firm in a competitive market has zero economic profit, its accounting profit could be positive, negative, or zero depending upon the individual costs and revenues of the firm. If accounting profit is positive, then it is earning more than what the owners could receive elsewhere, and if it is negative, then the firm could have earned more by investing somewhere else.