Topic VII: Short Answer Questions

1. At the profit maximizing level of output for a local glass manufacturer, total revenues equal $5,000 and total economic costs equal $6,000. What do we know about the firm's accounting profits?

The firms accounting profits could be greater than or less than zero. Since economic profits equal negative $1,000 and since accounting costs do not include opportunity costs, whether accounting profits are greater than or less than zero depends on the magnitude of the opportunity costs.

2. True/False (explain) -- If the marginal revenue of the last unit of output is $50 and the marginal cost is $75, the firm should close down.

False (at least it could be false) This firm should reduce output to where MR=MC. Whether it should close down or operate at that output depends on whether TR is greater than TVC.

3. True/False (explain) -- Profits are maximized where total costs are minimized.

False - TC are minimized when Q=0. This is generally not where profits are maximized. Although, it could be where losses are minimized.

It is the case that the firm want to minimize cost at any given level of output. This is not, however, the same thing as minimizing costs.

4. True/False (explain) -- Profits will begin to decline if the MR of extra units of output is falling.

False - as long as MR>MC, profits will increase, regardless of whether MR is declining or not.

5. Create 4 scenarios; in each case let TR at the profit maximizing output equal $20,000 per week and TFC = $5,000. Choose 4 conditions, by setting TVC, that would yield the 4 possible profit positions.

Scenario 1 - Economic Profits - Let TVC = anything less than $15,000.

Scenario 2 - Zero Economic Profits - Let TVC = $15,000.

Scenario 3 - Losses but operate - Let TVC = anything less than $20,000 and greater than $15,000

Scenario 4 - Close down - Let TVC  =  anything greater than $20,000.

6. Create 4 scenarios; in each case let TR at the profit maximizing output equal $20,000 per week and TFC = $50,000. Choose 4 conditions, by setting TVC, that would yield the 4 possible profit positions.

Scenario 1 - Economic Profits - can't achieve, since TR<TC no matter what TVC are.

Scenario 2 - Zero Economic Profits - can't achieve, since TR<TC no matter what TVC are.

Scenario 3 - Losses but operate - Let TVC  =  anything less than $20,000

Scenario 4 - Close down - Let TVC  =  anything greater than $20,000.