1.How would a $10 increase in an avoidable per-unit fixed cost effect a price-ta
ID: 1191275 • Letter: 1
Question
1.How would a $10 increase in an avoidable per-unit fixed cost effect a price-taking firm's supply curve?
a.MC would increase by $10, and AC would not change.
b.AC would increase by $10, and MC would not change.
c.MC and AC would both decrease by $10.
d.MC and AC would both increase by $10.
2.Any price ______ will cause the firm to shut down production.
a.below the minimum of MC
b.above the maximum of AC
c.below the minimum of AC
d.between MC and AC
3.Checking to see whether the most profitable positive sales quantity results in a greater profit than not producing at all is the basis of what rule?
4. The relationship between a firm's price and sales quantity is described by the ______ for its product.
5. Which of the following is NOT true about marginal revenue?
6. Dan is the owner of a price-taking company that manufactures sporting goods. One particular facility Dan owns produces baseball bats and baseball gloves. His cost function for baseball bats is CB(QB,QG) = 100QB + QB2 + QBQG and the marginal cost is MCB = 100 + 2QB + QG, where QB is the output level for bats and QG is the output level for gloves. Dan's cost function for baseball gloves is CG(QB,QG) = 50QG + QG2 + QGQB, and the marginal cost is MCG = 50 + 2QG + QB. The price of a baseball bat is $240 and the price of a baseball glove is $150. What is Dan's total profit assuming he is producing both products at their profit-maximizing sales quantities?
7. What type of cost has NO impact on determining the profit-maximizing sales quantity?
8. Dan is the owner of a price-taking company that manufactures sporting goods. One particular facility Dan owns produces baseball bats and baseball gloves. His cost function for baseball bats is CB(QB,QG) = 100QB + QB2 + QBQG and the marginal cost is MCB = 100 + 2QB + QG, where QB is the output level for bats and QG is the output level for gloves. Dan's cost function for baseball gloves is CG(QB,QG) = 50QG + QG2 + QGQB, and the marginal cost is MCG = 50 + 2QG + QB. The price of a baseball bat is $240 and the price of a baseball glove is $150. What is the profit-maximizing sales quantity for baseball bats?
9. To earn the greatest possible profit, a firm must:
10.
In which situation might a company NOT want to maximize profit?
a.A small business owner who sells a highly specialized product at a high price in order to compete with more established businesses in the area
b.A family-owned company that has to decide between hiring a family member and hiring a highly-qualified external candidate
c.A conglomerate with a highly streamlined supply chain who sells generic goods
d.A corporation that has performed poorly in the last two quarters and is looking for new upper-management
Explanation / Answer
(1) (b)
Increase in average fixed cost increases average cost but not marginal cost.
(2) (a)
The shutdown rule is price must not be lower than AVC. But MC = AVC at the lowest point of MC, so price must not fall below minimum of MC.
(3) (b)
(4) (b)
The supply curve depicts sales volume at each price level.
(5) (c)
This mathematical expression is incorrect.
(6) (b)
He will equate MCB with PB and MCG with PG to maximize profit.
MCB = PB
or, 100 + 2QB + QG = 240
2QB + QG = 140 ..... (1)
MCG = PG
50 + 2QG + QB = 150
2QG + QB = 100 ....(2)
(2) x 2 gives us: 4QG + 2QB = 200 ..... (3)
And QG + 2QB = 140 ......(1)
(3) - (1) yields: 3QG = 60, QG = 20
QB = (140 - QG) / 2 = 120/2 = 60
Total revenue from bats = 60 x $240 = $14,400
Total revenue from gloves = 20 x $150 = $3,000
Total sales revenue = $17,400
Total costs = CB + CG = 100QB + QB2 + QBQG + 50QG + QG2 + QGQB
= $[(100 x 60) + (60 x 60) + (2 x 20 x 60) + (50 x 20) + (20 x 20)] = $13,400
Profit = total revenue - total cost = $(17,400 - 13,400) = $4,000
NOTE: Out of 10 questions the first 6 are answered.
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