Question

Here are some true and false questions to see if you understand the revenue and profit terms and the three key rules to maximize profit. Briefly explain why you chose that answer

1) When marginal profit is 0 dollars, we know that total profit is 0.

2) If marginal profit is negative, a firm's total profit will increase if the firm produces fewer units of product.

3) At is current output level, the Placone Firm has AR=12 dollars and MC=10 dollars, which means its average profit is two dollars

4) A firm determines it will maximize its total profit by producing 800 units per week because at that output both MR and MC are 600dollars. The price the firm should charge for its output also is 600 dollars.  

Answer 1

a) False

Marginal profit is the addition to the total profit from sale of an additional unit of good while total profit is the difference between total revenue and total cost from sale of all the goods. So, even if the marginal profit is zero, the total profit may be positive. Also, when marginal profit is zero, the marginal cost equals the marginal revenue which means that the firm is maximizing its profit.

b) True

A negative marginal profit means that the marginal cost exceeds marginal revenue i.e. the additional cost incurred on sale of an additional units is more than the revenue earned, so, decreasing the output will increase profit. Also, marginal profit is the addition to the total profit, so, a negative marginal profit must be decreasing profit from earlier sold outputs, so, profit will increase if production is reduced.

c) False

Average profit = Average Revenue- Average cost and not average revenue - marginal cost. So, average profit is not $2

d) False

The statement is true for a firm in perfectly competitive market as demand is perfectly elastic, so, price will equal marginal cost and thus, marginal revenue at profit maximizing level. Although the firm will not charge $600, if the firm is not in a perfectly competitive market but in a monopoly or monopolistic competition or oligopoly etc. because demand is not perfectly elastic here and the price will be marked up the marginal cost.