10.1 Short-Run Profit Maximization Flashcards
(25 cards)
What is marginal revenue?
Incremental revenue produced by generating one additional unit of product
What is marginal cost?
Additional cost incurred by generating one additional unit of output
Profit maximization point
MR = MC
A small delivery company received an order that requires nine deliveries lasting two hours each on the same day. The company owns two vans that together can make eight trips per day. The company can rent a van on a daily eight-hour basis for $72, and the fuel cost is $20 per trip. The company has several van drivers, each of whom earns $30,000 annually and is expected to make 1,000 deliveries each year. The marginal cost of the ninth delivery is
A. $122
B. $92
C. $38
D. $28
B. $92
Marginal cost is the additional cost of producing one more unit of output. If the company makes the ninth delivery, it will incur $72 to rent a van and $20 fuel cost. Van drivers’ salaries are fixed costs and will not change by additional delivery. Thus, the marginal cost of the ninth delivery is $92 ($72 + $20).
A firm produces only 5 units of output. If total variable cost is $400 and total fixed cost is $200, then
A. Marginal cost is $120.
B. Average total cost is $600.
C. Average fixed cost is $200.
D. Average variable cost is $80.
D. Average variable cost is $80.
If total variable cost is $400 for 5 units, the average variable cost is $80. The average fixed cost is $40 ($200 ÷ 5), and the average total cost is $120 ($80 + $40).
At the current output level the price is $10, the average variable cost is $6, the average total cost is $10, and marginal cost is $8. To maximize profits, a consultant would recommend that the firm should
A. Decrease production.
B. Not change production.
C. Increase production.
D. Shut down.
C. Increase production.
A firm should continue increasing production as long as marginal cost is less than selling price. Profit is maximized when marginal cost equals selling price. (In pure competition, selling price is the same as marginal revenue.)
Average Total Cost (ATC)
Average Total Cost (ATC) = (Total Variable Cost + Total Fixed Cost) ÷ Quantity
= (TVC + TFC) ÷ Q
An organization’s sales revenue is expected to be $72,600, a 10% increase over last year. For the same period, total fixed costs of $22,000 are expected to be the same as last year. If the number of units sold is expected to increase by 1,100, the marginal revenue per unit will be
A. $6
B. $46
C. $4
D. $20
A. $6
Marginal revenue (MR) is the incremental revenue for each additional unit sold (increase in revenue ÷ increase in units sold). If expected revenue of $72,600 is a 10% increase over that for the prior year, the prior year’s revenue must have been $66,000 ($72,600 ÷ 110%).
MR = ($72,600 – $66,000) / 1,100
= $6,600 / 1,100
= $6
Formula for marginal revenue
Increase in revenue ÷ Increase in units sold
A fuel company can sell 8 units of product at a selling price of $450. However, at a selling price of $445 the company can sell 9 units. What is the marginal revenue that is derived from selling the 9th unit?
A. $405
B. $4,005
C. $(5)
D. $445
A. $405
Marginal revenue is the additional (incremental) revenue produced by generating one more unit of output. It is the difference in total revenue at each level of output. At a price of $450, 8 units are sold with a resulting total revenue of $3,600. However, if the price is lowered to $445, 9 units can be sold, resulting in total revenue of $4,005. Thus, the marginal revenue produced by the 9th unit is $405 ($4,005 – $3,600).
Regardless of output, a firm has $4,000 a year in total fixed costs. This same firm has an average variable cost of $3 while producing 1,000 units of output. If the firm decides to produce 1,000 units, what will be its average total cost
A. $4.00
B. $7.00
C. $1.00
D. $3.00
B. $7.00
At a production level of 1,000 units, the average fixed cost is $4 ($4,000 ÷ 1,000 units). Adding the $4 of average fixed cost to the $3 of average variable cost produces a total cost of $7.
6 Units: Average Fixed Cost $15.00, Average Variable Cost $25.00, Average Total Cost $40.00
7 Units: Average Fixed Cost 12.86, Average Variable Cost 24.00, Average Total Cost 36.86
8 Units: Average Fixed Cost 11.25, Average Variable Cost 23.50, Average Total Cost 34.75
9 Units: Average Fixed Cost 10.00, Average Variable Cost 23.75, Average Total Cost 33.75
The total cost of producing seven units is
A. $258.02
B. $90.02
C. $168.00
D. $280.00
A. $258.02
If seven units can be produced at an average cost of $36.86 each, multiplying that amount by seven produces the total cost of $258.02.
A company produced the following data (rounded) on its product:
Unit Cost
1 Unit Produced: Fixed $100, Variable $85, Total $185, Marginal Cost $85, Marginal Revenue $90
2 Units Produced: Fixed 50, Variable 70, Total 120, Marginal Cost 55, Marginal Revenue 90
3 Units Produced: Fixed 33, Variable 65, Total 98, Marginal Cost 55, Marginal Revenue 90
4 Units Produced: Fixed 25, Variable 67, Total 92, Marginal Cost 73, Marginal Revenue 90
5 Units Produced: Fixed 20, Variable 75, Total 95, Marginal Cost 107, Marginal Revenue 90
If two units of product were produced and sold, the total contribution margin would be
A. $40
B. $70
C. $50
D. $25
A. $40
Contribution margin is defined as total revenue minus variable costs. Total revenue for two units is $180 (2 × $90 marginal revenue), and total variable costs are $140 (2 × $70 unit cost). The total contribution margin is $40 ($180 – $140).
If a firm currently producing 500 units of output incurs total fixed costs of $10,000 and total variable costs of $15,000, the average total cost per unit is
A. $25
B. $50
C. $30
D. $20
B. $50
The average total cost per unit is calculated by dividing total costs (fixed variable) by the number of units produced. Thus, $25,000 divided by 500 units produces a unit cost of $50.
6 Units: Average Fixed Cost $15.00, Average Variable Cost $25.00, Average Total Cost $40.00
7 Units: Average Fixed Cost 12.86, Average Variable Cost 24.00, Average Total Cost 36.86
8 Units: Average Fixed Cost 11.25, Average Variable Cost 23.50, Average Total Cost 34.75
9 Units: Average Fixed Cost 10.00, Average Variable Cost 23.75, Average Total Cost 33.75
The marginal cost of producing the ninth unit is
A. $23.75
B. $25.75
C. $33.75
D. $23.50
B. $25.75
Marginal cost is the incremental cost of producing one additional unit. Thus, the marginal cost of the ninth unit is the increment over the total cost for eight units. The total cost for eight units at $34.75 each is $278, and the total cost for nine units at $33.75 each is $303.75, so the total cost for nine units is $25.75 greater than the total for eight units. This $25.75 is the marginal cost of the ninth unit.
Daily costs for a manufacturer include $1,000 of fixed costs; total variable costs are shown below.
Unit Output, Cost
10, $125
11, $250
12, $400
13, $525
14, $700
15, $825
The average total cost at an output level of 11 units is
A. $215.91
B. $250.00
C. $125.00
D. $113.64
D. $113.64
Average total cost (ATC) equals variable cost plus fixed cost at a given level of production, divided by output at that level of production. For this firm, ATC at 11 units of output is $113.64, calculated as follows:
Variable Cost: $250
+) Fixed Cost: $1,000
= Total Cost: $$1,250
Divided by output 11, Average total cost $113.64
The change in total product resulting from the use of one unit more of the variable factor is known as
A. The point of diminishing marginal productivity.
B. Marginal cost.
C. The point of diminishing average productivity.
D. Marginal product.
D. Marginal product.
Marginal product is the output obtained by adding one extra unit of a variable input factor. If the cost of the input factor is constant, a rising marginal product will result in a declining marginal cost of output. If marginal product is falling, marginal cost is rising. Hence, marginal cost is at a minimum when marginal product is at a maximum.
The output and cost information for a firm is presented below.
Output: 0
Total Variable Cost: $0
Total Cost: $100
Output: 1
Total Variable Cost: 150
Total Cost: 250
Output 2
Total Variable Cost: 260
Total Cost: 360
Output 3
Total Variable Cost: 350
Total Cost: 450
The marginal cost of the second unit of output is
A. $110
B. $150
C. $180
D. $100
Answer (A) is correct.
Marginal cost is the additional cost of producing one more unit of output. Because total cost increased from $250 to $360, the marginal cost of the second unit is $110.
A company produced the following data (rounded) on its product:
1 Unit:
Fixed $100, Variable $85, Total $185, Marginal Cost $85, Marginal Revenue $90
2 Units:
Fixed: 50, Variable: 70, Total: 120, Marginal Cost: 55, Marginal Revenue: 90
3 Units:
Fixed: 33, Variable: 65, Total: 98, Marginal Cost: 55, Marginal Revenue: 90
4 Units:
Fixed: 25, Variable: 67, Total: 92, Marginal Cost: 73, Marginal Revenue: 90
5 Units:
Fixed: 20, Variable: 75, Total: 95, Marginal Cost: 107, Marginal Revenue: 90
Question7) How many units should be produced?
A. 2 units.
B. 3 units.
C. 4 units.
D. 5 units.
C. 4 units.
Marginal revenue exceeds marginal cost for the fourth but not the fifth unit. Production should continue until marginal cost equals marginal revenue. Accordingly, four units should be produced.
The sum of the average fixed costs and the average variable costs for a given output is known as
A. Average product.
B. Average total cost.
C. Long-run average cost.
D. Total cost.
B. Average total cost.
The sum of the average fixed costs and the average variable costs for a given output is the average total cost.
When a firm produces 10,000 units of output, its total variable cost is equal to $50,000. Also, it experiences average fixed costs of $3 per unit. What are the total costs for producing 10,000 units?
A. $50,000
B. $80,000
C. $50,003
D. $30,000
B. $80,000
A firm’s total costs consist of both variable and fixed costs. If the average fixed cost for 10,000 units is $3, the total fixed costs are $30,000. Adding the $30,000 of fixed costs to the $50,000 of variable costs produces total costs of $80,000.
At the current output level the price is $10, the average variable cost is $6, the average total cost is $10, and marginal cost is $8. To maximize profits, a consultant would recommend that the firm should
A. Not change production.
B. Shut down.
C. Decrease production.
D. Increase production.
D. Increase production.
A firm should continue increasing production as long as marginal cost is less than selling price. Profit is maximized when marginal cost equals selling price. (In pure competition, selling price is the same as marginal revenue.)
A fuel company can sell 8 units of product at a selling price of $450. However, at a selling price of $445 the company can sell 9 units. What is the marginal revenue that is derived from selling the 9th unit?
A. $(5)
B. $405
C. $445
D. $4,005
B. $405
Marginal revenue is the additional (incremental) revenue produced by generating one more unit of output. It is the difference in total revenue at each level of output. At a price of $450, 8 units are sold with a resulting total revenue of $3,600. However, if the price is lowered to $445, 9 units can be sold, resulting in total revenue of $4,005. Thus, the marginal revenue produced by the 9th unit is $405 ($4,005 – $3,600).
Regardless of output, a firm has $4,000 a year in total fixed costs. This same firm has an average variable cost of $3 while producing 1,000 units of output. If the firm decides to produce 1,000 units, what will be its average total cost?
A. $1.00
B. $7.00
C. $4.00
D. $3.00
B. $7.00
At a production level of 1,000 units, the average fixed cost is $4 ($4,000 ÷ 1,000 units). Adding the $4 of average fixed cost to the $3 of average variable cost produces a total cost of $7.
