Chapter 9



Chapter 11: Practice Quiz

Profit Maximization

1. A firm’s marginal revenue is defined as

a. the ratio of total revenue to total quantity produced.

b. the additional output produced by lowering price.

c. the additional revenue received due to technical innovation.

d. the additional revenue received when selling one more unit of output.

2. In order to maximize profits, a firm should produce at the output level for which

a. average cost is minimized.

b. marginal revenue equals marginal cost.

c. marginal cost is minimized.

d. price minus average cost is as large as possible.

e. marginal profit is maximized.

3. If demand facing the firm is price-inelastic, marginal revenue will be

a. positive.

b. zero.

c. negative.

d. constant.

4. If a firm wished to maximize total revenues it should produce where

a. marginal cost is zero.

b. marginal revenue is zero.

c. marginal revenue is equal to marginal cost.

d. marginal revenue is equal to price.

e. marginal revenue is negative.

5. If a firm is a price taker, its marginal revenue is

a. equal to market price.

b. less than market price.

c. greater than market price.

d. a multiple of market price that may be either greater than or less than one.

6. If a firm’s marginal revenue is below its marginal cost, an increase in production will usually

a. increase profits.

b. leave profits unchanged.

c. decrease profits.

d. increase marginal revenue.

7. If the demand faced by a firm is inelastic, selling one more unit of output will

a. increase revenues.

b. decrease revenues.

c. keep revenues constant.

d. increase profits.

8. If the demand faced by a firm is elastic, selling one less unit of output will

a. increase revenue.

b. decrease revenue.

c. keep revenues constant.

d. decrease price.

9. If the demand faced by a firm is unit elastic, selling one less unit of output will

a. increase revenue.

b. decrease revenue.

c. keep revenues constant.

d. decrease profits.

10. If the demand curve a firm faces shifts to the right, usually

a. it would be impossible to tell whether the marginal revenue curve shifts.

b. the marginal revenue curve would shift to the left.

c. the marginal revenue curve would shift to the right.

d. the marginal revenue curve would not shift.

11. It is usually assumed that a perfectly competitive firm’s short run supply curve is given by its marginal cost curve. In order for this to be true, which of the following additional assumptions are necessary:

I. That the firm seek to maximize profits.

II. That the marginal cost curve be positively sloped.

III. That price exceed average variable cost.

IV. That price exceed average total cost.

a. All of the above

b. I and II but not III and IV

c. I and III but not II and IV

d. I and II only

e. I, II and III, but not IV

12. Which of the following conditions would result in the short-run marginal cost curve not correctly reflecting the supply behavior of a profit-maximizing firm?

a. The firm is a price taker.

b. Price exceeds average total cost.

c. The elasticity of demand facing the firm is –3.

d. The firm can vary several inputs in the short run.

13. If price is equal to short-run average variable cost, the firm is at the point known as

a. the breakeven point.

b. the profit-maximizing point.

c. the short run shutdown point.

d. the revenue maximizing point.

14. If a price-taking firm’s production function is given by [pic], its supply function is given by

a. q = 2pw.

b. q = p/2w.

c. q = 2p/w.

d. q = 2w/p.

15. If a price-taking firm’s production function is given by [pic], its profit function is given by

a. [pic].

b. [pic].

c. [pic].

d. [pic].

16. Profit functions are homogeneous of degree

a. zero in input and output prices

b. zero in input prices.

c. one in input and output prices.

d. one in input prices.

17. One implication of the fact that profit functions are convex in prices is that firms will always prefer

a. stable input and output prices.

b. input and output prices that fluctuate about a given level.

c. stable input prices and fluctuating output prices.

d. fluctuating input prices and stable output prices.

18. Short-run producer surplus can be calculated by integration as (where q is the firm’s profit-maximizing output level and MC(q) is its marginal cost function)

a. [pic].

b. [pic].

c. [pic].

d. [pic].

19. A profit-maximizing firm’s demand function for labor can be found by differentiating

a. the profit function with respect to w.

b. the cost function with respect to w.

c. the supply function with respect to w.

d. the production function with respect to w.

20. Input demand functions that are calculated from profit functions differ from those calculated from cost functions because

a. they assume cost-minimization.

b. they hold output constant.

c. they assume output price is constant.

d. they assume output is set at its profit-maximizing level.

21. A firm’s demand for labor is known as a “derived demand” because

a. the firm gains utility from hiring more labor.

b. the amount of labor hired depends upon how much output the firm can sell.

c. the wage rate paid to workers is derived from the market for labor.

d. it is derived from the demand for capital.

22. If the price of an input falls, a firm would increase the use of that input for two reasons:

a. The input is now more productive, and the firm can substitute this input for other relatively more expensive inputs.

b. The input is now more productive, and overall production costs are now lower, meaning a firm may choose to increase production.

c. Overall production costs are now lower and the firm can substitute this input for other relatively more expensive inputs.

d. Overall production costs are now lower and the firm will have more of other inputs to use with the one in question.

23. In an input market, economic rent is defined as the

a. total remuneration paid to a factor of production.

b. minimum amount required to retain a factor of production in its present use.

c. total cost for a firm of renting land, equipment, and buildings.

d. extent to which payments to a factor of production exceed the minimum amount required to retain it in its present use.

24. A firm will hire additional units of any input up to the point where

a. the marginal productivity of the input is maximized.

b. the marginal cost of employing the input is minimized.

c. the expense of employing the last unit is equal to the revenue brought in by the last unit.

d. the revenue brought in by the input is maximized.

25. An input’s marginal revenue product is given by

a. the input’s marginal expense times marginal revenue.

b. the input’s marginal expense times the input’s marginal physical productivity.

c. marginal revenue times the number of units employed.

d. the input’s marginal physical productivity times marginal revenue of the firm’s output.

26. If a firm is a price taker in both the input and output markets, its marginal revenue product of labor is given by

a. the price of its output times labor’s marginal physical productivity.

b. the marginal value product of labor.

c. the marginal revenue product of capital times the ratio of the wage rate to the rental rate on capital.

d. all of the above.

27. A profit-maximizing firm will never hire that quantity of a factor of production for which that factor has an increasing marginal productivity because

a. it would not be maximizing output.

b. it would not be maximizing the productivity of labor.

c. it would not be minimizing costs.

d. it would not be maximizing profits.

28. The substitution effect of a change in wage rate on a firm’s demand for labor input will be more significant

a. the greater the change in output.

b. the more sharply curved are the firm’s isoquants.

c. the flatter are the firm’s isoquants.

d. the more inelastic is demand for their final good.

29. The output effect of a change in the wage rate on a firm’s demand for labor input will be greater

a. the larger the share of labor costs in total costs and the greater the price elasticity of demand for output.

b. the larger the share of labor costs in total costs and the smaller the price elasticity of demand for output.

c. the larger the share of labor costs in total costs and the higher the quantity demanded.

d. the smaller the possibilities of substituting capital for labor.

30. Suppose capital and labor must be used in fixed proportions to produce widgets and that the price elasticity of demand for widgets is zero. Then the wage elasticity of demand for labor by widget makers will be

a. +1.

b. –1.

c. 0.

d. infinite.

31. If the wage rate rises, labor’s share in the total costs of a production process

a. will increase.

b. will decrease.

c. may increase or decrease depending on the elasticity of demand for the product.

d. may increase or decrease depending on the ease of substitution of other inputs for labor.

32. If the firms in perfectly competitive industries each have a production function given by [pic] and the price elasticity of demand for the industry’s output is –1, the wage elasticity of demand for labor by the industry will be

a. 0.

b. –0.5

c. –1.

d. –2.

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