37 Questions
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
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.
average variable
What happens to a firm's fixed cost during a shut-down?
It continues to exist
In the long run, a perfectly competitive firm can earn abnormal profits.
False
Match the following terms with their definitions:
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
What is the role of profit in the economy, according to Joseph Schumpeter?
Profit enables firms to accumulate sufficient wealth to carry out innovation, leading to development.
What happens when the firm produces more than Qe?
The costs incurred from producing the extra unit are greater than the revenue
The firm makes an abnormal profit when TR = TC
False
What is the minimum return of factor inputs referred to as?
normal profit
The firm makes an abnormal/supernormal/economic profit if TR > TC, including both __________ and implicit costs.
explicit
Match the following terms with their definitions:
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
What is the main assumption made about firms in traditional economics?
They seek to maximize profit
Average revenue is equal to price.
True
What represents the change in TR resulting from a one-unit change in sales?
Marginal Revenue (MR)
The output at which profits are maximized or losses are minimized is known as the ______________ output.
equilibrium
Match the following terms with their definitions:
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
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.
False
What is the excess of total revenue over total costs?
Profit
The profit-maximising or loss-minimising rule assumes that firms seek to minimise profit.
False
What does the marginal revenue (MR) represent?
The change in TR resulting from a one-unit change in sales.
Average revenue (AR) is equal to TR ÷ ______________________.
Q
Match the following terms with their definitions:
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.
What is the condition for profit maximization in a firm?
MC = MR
If the firm produces more than Qe, the marginal profit is positive.
False
What is the role of opportunity costs in calculating normal profit?
Opportunity costs are used to calculate the minimum return of factor inputs, which is referred to as normal profit.
The firm makes a ______________ profit if TR > TC, including both explicit and implicit costs.
abnormal/supernormal/economic
Match the following terms with their definitions:
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
What is the main reason for a firm to continue producing even if it is making a loss?
To minimize losses
What is the consequence of a firm's price being less than its average variable cost?
The firm will shut down temporarily
A firm's fixed cost will be eliminated during a shut-down.
False
What is the purpose of profit in the economy, according to the content?
Profit acts as a financial incentive to entrepreneurs to undertake risks and provides a measure of efficiency.
If the firm does not expect market conditions to change for the better, it should _______________ out of business.
go
Match the following concepts with their definitions:
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
In the long run, a perfectly competitive firm can earn a normal rate of return.
True
A firm will produce that output level where MR = MC if price is equal to or greater than _______________ variable cost.
average
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.
Understand the concept of profit maximisation and loss minimization, including the profit-maximising rule and the relationship between total revenue and total costs.
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