Unit 7: Profit Maximisation and Loss Minimization
37 Questions
0 Views

Unit 7: Profit Maximisation and Loss Minimization

Created by
@DependablePromethium

Podcast Beta

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the purpose of a firm's profit in a competitive environment?

  • To provide a measure of efficiency and act as a financial incentive to entrepreneurs (correct)
  • To increase production
  • To maximize revenue
  • To minimize cost

    • A firm will continue to produce even if the price is less than the average variable cost.

    False

    What is the goal of a loss-minimizing firm in the short run?

    To produce at the output level where MR=MC, assuming MC cuts the MR line from below.

    A firm will shut down temporarily if its price is less than its _______________ cost.

    <p>average variable</p> Signup and view all the answers

    What happens to a firm's fixed cost during a shut-down?

    <p>It continues to exist</p> Signup and view all the answers

    In the long run, a perfectly competitive firm can earn abnormal profits.

    <p>False</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Shut-down = A permanent exit from the market Going out of business = A temporary halt in the operation of a business Abnormal profit = A profit that is higher than the normal rate of return Normal profit = A profit that is equal to the normal rate of return</p> Signup and view all the answers

    What is the role of profit in the economy, according to Joseph Schumpeter?

    <p>Profit enables firms to accumulate sufficient wealth to carry out innovation, leading to development.</p> Signup and view all the answers

    What happens when the firm produces more than Qe?

    <p>The costs incurred from producing the extra unit are greater than the revenue</p> Signup and view all the answers

    The firm makes an abnormal profit when TR = TC

    <p>False</p> Signup and view all the answers

    What is the minimum return of factor inputs referred to as?

    <p>normal profit</p> Signup and view all the answers

    The firm makes an abnormal/supernormal/economic profit if TR > TC, including both __________ and implicit costs.

    <p>explicit</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Normal profit = The minimum return of factor inputs Abnormal profit = The excess return over normal profit Economic profit = The profit that motivates the firm to supply goods and services Economic rent = Another term for abnormal profit</p> Signup and view all the answers

    What is the main assumption made about firms in traditional economics?

    <p>They seek to maximize profit</p> Signup and view all the answers

    Average revenue is equal to price.

    <p>True</p> Signup and view all the answers

    What represents the change in TR resulting from a one-unit change in sales?

    <p>Marginal Revenue (MR)</p> Signup and view all the answers

    The output at which profits are maximized or losses are minimized is known as the ______________ output.

    <p>equilibrium</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Total Revenue (TR) = The total receipts generated from selling a specific number of units Average Revenue (AR) = The revenue earned per unit sold Marginal Revenue (MR) = The change in TR resulting from a one-unit change in sales</p> Signup and view all the answers

    A firm will always maximize profit or minimize loss by producing an output level where the positive difference between total revenue and total cost is at its lowest.

    <p>False</p> Signup and view all the answers

    What is the excess of total revenue over total costs?

    <p>Profit</p> Signup and view all the answers

    The profit-maximising or loss-minimising rule assumes that firms seek to minimise profit.

    <p>False</p> Signup and view all the answers

    What does the marginal revenue (MR) represent?

    <p>The change in TR resulting from a one-unit change in sales.</p> Signup and view all the answers

    Average revenue (AR) is equal to TR ÷ ______________________.

    <p>Q</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Profit = The excess of total revenue over total costs. Total Revenue = The total receipts generated from selling a specific number of units. Average Revenue = The revenue earned by unit sold. Marginal Revenue = The change in TR resulting from a one-unit change in sales.</p> Signup and view all the answers

    What is the condition for profit maximization in a firm?

    <p>MC = MR</p> Signup and view all the answers

    If the firm produces more than Qe, the marginal profit is positive.

    <p>False</p> Signup and view all the answers

    What is the role of opportunity costs in calculating normal profit?

    <p>Opportunity costs are used to calculate the minimum return of factor inputs, which is referred to as normal profit.</p> Signup and view all the answers

    The firm makes a ______________ profit if TR > TC, including both explicit and implicit costs.

    <p>abnormal/supernormal/economic</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Qe = Output level at which profit is maximized QA = Break-even point where TR = TC QB = Break-even point where TR = TC Normal Profit = Minimum return of factor inputs Abnormal Profit = Excess over normal profit</p> Signup and view all the answers

    What is the main reason for a firm to continue producing even if it is making a loss?

    <p>To minimize losses</p> Signup and view all the answers

    What is the consequence of a firm's price being less than its average variable cost?

    <p>The firm will shut down temporarily</p> Signup and view all the answers

    A firm's fixed cost will be eliminated during a shut-down.

    <p>False</p> Signup and view all the answers

    What is the purpose of profit in the economy, according to the content?

    <p>Profit acts as a financial incentive to entrepreneurs to undertake risks and provides a measure of efficiency.</p> Signup and view all the answers

    If the firm does not expect market conditions to change for the better, it should _______________ out of business.

    <p>go</p> Signup and view all the answers

    Match the following concepts with their definitions:

    <p>Shut-down = A temporary halt in the operation of a business Going out of business = A permanent exit from the market with the sale of a firm's assets Abnormal profit = A profit above the normal rate of return Normal rate of return = The minimum return of factor inputs</p> Signup and view all the answers

    In the long run, a perfectly competitive firm can earn a normal rate of return.

    <p>True</p> Signup and view all the answers

    A firm will produce that output level where MR = MC if price is equal to or greater than _______________ variable cost.

    <p>average</p> Signup and view all the answers

    Study Notes

    Profit-Maximisation and Loss-Minimization

    • The traditional assumption is that firms seek to maximize profit, which is the excess of total revenue over total costs.

    The Profit-Maximising or Loss-Minimising Rule

    • A firm will maximize profit or minimize loss by producing an output level where the positive difference between total revenue and total cost is at its greatest, or where marginal revenue equals marginal cost.
    • The output at which profits are maximized or losses are minimized is known as the equilibrium output.

    Total Revenue, Average Revenue, and Marginal Revenue

    • Total revenue (TR) represents the total receipts generated from selling a specific number of units.
    • Average revenue (AR) refers to the revenue earned by unit sold and is equal to TR÷Q.
    • Marginal revenue (MR) represents the change in TR resulting from a one-unit change in sales and is equal to ΔTR÷ΔQ.

    Equilibrium Output

    • At the equilibrium output, the gradients of the TR and TC curves are the same, and MC = MR.
    • The distance between TR and TC is at its greatest at the equilibrium output.

    Normal Profit and Abnormal Profit

    • A normal profit is made when TR = TC, taking into account implicit costs (opportunity costs).
    • An abnormal/supernormal/economic profit is made when TR > TC.
    • Normal profit is the minimum return of factor inputs and can be regarded as a fixed cost.

    Losses and When to Go Out of Business

    • A firm making a loss will have to decide what to do, considering its current total revenue relative to its total variable cost and expectations about the future.
    • Options include: (1) continuing to operate in the short run, (2) shutting down temporarily, or (3) going out of business.
    • If total revenue is greater than total variable cost, it makes sense to continue producing to minimize loss.
    • If price is less than average variable cost, a temporary shut-down is preferable to short-run operation.

    The Role of Profits

    • Profit acts as a financial incentive to entrepreneurs to undertake risks and provides a measure of efficiency.
    • Profit enables firms to accumulate sufficient wealth to carry out innovation and acts as a market signal to indicate where resources should be allocated in satisfying consumer preferences.

    Profit-Maximisation and Loss-Minimization

    • The traditional assumption is that firms seek to maximize profit, which is the excess of total revenue over total costs.

    The Profit-Maximising or Loss-Minimising Rule

    • A firm will maximize profit or minimize loss by producing an output level where the positive difference between total revenue and total cost is at its greatest, or where marginal revenue equals marginal cost.
    • The output at which profits are maximized or losses are minimized is known as the equilibrium output.

    Total Revenue, Average Revenue, and Marginal Revenue

    • Total revenue (TR) represents the total receipts generated from selling a specific number of units.
    • Average revenue (AR) refers to the revenue earned by unit sold and is equal to TR÷Q.
    • Marginal revenue (MR) represents the change in TR resulting from a one-unit change in sales and is equal to ΔTR÷ΔQ.

    Equilibrium Output

    • At the equilibrium output, the gradients of the TR and TC curves are the same, and MC = MR.
    • The distance between TR and TC is at its greatest at the equilibrium output.

    Normal Profit and Abnormal Profit

    • A normal profit is made when TR = TC, taking into account implicit costs (opportunity costs).
    • An abnormal/supernormal/economic profit is made when TR > TC.
    • Normal profit is the minimum return of factor inputs and can be regarded as a fixed cost.

    Losses and When to Go Out of Business

    • A firm making a loss will have to decide what to do, considering its current total revenue relative to its total variable cost and expectations about the future.
    • Options include: (1) continuing to operate in the short run, (2) shutting down temporarily, or (3) going out of business.
    • If total revenue is greater than total variable cost, it makes sense to continue producing to minimize loss.
    • If price is less than average variable cost, a temporary shut-down is preferable to short-run operation.

    The Role of Profits

    • Profit acts as a financial incentive to entrepreneurs to undertake risks and provides a measure of efficiency.
    • Profit enables firms to accumulate sufficient wealth to carry out innovation and acts as a market signal to indicate where resources should be allocated in satisfying consumer preferences.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Description

    Understand the concept of profit maximisation and loss minimization, including the profit-maximising rule and the relationship between total revenue and total costs.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser