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Understanding Profit Maximization concept

Question
The following payoff matrix shows the various profit outcomes for 3 projects, A, B, and C, under 2 possible states of nature: the product price is $10 or the product price is $20.
Profit
Project P = $10 P = $20
A 20 80
B 40 60
C -26 140
Using the maximin rule, the decision maker would choose
a.A
b.B
c.C
d.impossible to tell from the information given

Question
In a competitive market maximizing revenue always maximizes profits
True
False

Question

The following payoff matrix shows the various profit outcomes for 3 projects, A, B, and C, under 2 possible states of nature: the product price is $10 or the product price is $20.
Profit
Project P = $10 P = $20
A 20 80
B 40 60
C -26 140
Using the maximax rule, the decision maker would choose
a.A
b.B
c.C
d.impossible to say from the information given

Question
For the cost function TC = 200 + 3Q + 8Q2 + 4Q3, what is the average fixed cost of producing six units of output?
a.18.31
b.212.61
c.42.12
d.33.33

Question

La Tortilla is the only producer of tortillas in Santa Teresa. The firm produces 10,000 tortillas each day and has the capacity to increase production to 100,000 tortillas each day. La Tortilla has made a large profit for years, but no other firm has chosen to compete in the Santa Teresa tortilla market. La Tortilla has been able to deter entry because if other firms were to enter the market it would greatly step-up production and reduce price.

a. La Tortilla's behavior is inconsistent with economic theory.
b. La Tortilla has been successful because of its credible threat.
c.La Tortilla must have other barriers to entry to protect its monopoly power.
d.None of the above describes L Tortilla's behavior correctly.

Question

Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run?
a.P=MC.
b.MC=ATC.
c.P>MR.
d.Profit equals zero

Question

As the manager of a firm you calculate the marginal revenue is $152 and marginal cost is $200. You should
a.expand output.
b.do nothing without information about your fixed costs.
c.reduce output until marginal revenue equals marginal cost.
d.expand output until marginal revenue equals zero.

Question

A typical firm in a perfectly competitive market made positive economic profits last period. This period,

a.market supply will increase.
b.market price will rise.
c.the firm will produce more.
d.the firm's profits will increase.

Question

In a competitive market if the market price is equal to the minimum point of the firm's ATC curve, the firm may seek to earn economic profits by:

a.Producing at the rate of output where price equals demand.
b.Decreasing production costs through technological improvements.
c.Decreasing price
d.Increasing price

Question

If current output is less than the profit-maximizing output, then the next unit produced

a.will decrease profit.
b.will increase cost more than it increases revenue.
c.will increase revenue more than it increases cost.
d.will increase revenue without increasing cost.

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Solution:

Question

The following payoff matrix shows the various profit outcomes for 3 projects, A, B, and C, under 2 possible states of nature: the product price is $10 or the product price is $20.
Profit
Project P = $10 P = $20 Minimum Payoff
A 20 80 20
B 40 60 40
C -26 140 -26

The maximin criterion is as easy to do. You take the smallest payoff under each action. You then take the best (largest of these).
We have found minimum payoff of every project, maximum of minimum will be maximum of 20, 40 and -26, i.e. 40,
Project selected should be B
Using the maximin rule, the decision maker would choose
Answer : b. B

Question
In a competitive market ...

Solution Summary

There are about 10 microeconomics problems. Solution to these problems explains the profit maximization concept and shows how it can be used to make output decisions.

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