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Unformatted text preview: Chapter 09 - Profit Maximization Chapter 9: Profit Maximization Main Concepts and Learning Objectives This chapter focuses on the profit maximizing output quantity and price for a firm facing any type of demand curve. It then analyzes the special case of perfectly competitive firms. The implications of fixed costs, avoidable fixed costs, and sunk costs are emphasized. Students who master the material presented in this chapter will be able to: Find the profit-maximizing price and quantity Analyze whether the firm should produce or shut down Use the demand curve to specify the inverse demand curve, and vice-versa. Construct a supply curve. Define and compute profit and producer surplus. Multiple Choice Quiz (10 questions) covering main points: 1. Which of the following statements is true? a. P=120-3Q is an inverse demand function b. P=120-3Q is a demand function c. For every demand function, there is an equivalent inverse demand function. d. Both a and c. 2. Authors typically prefer lower book prices than publishers because: a. authors are more sympathetic to the budget issues faced by students. b. authors maximize revenue, while publishers maximize profit. c. authors do not bear the cost of producing the extra books that would be sold at the lower price. d. Both b and c (many authors write books that are not purchased by students) 3. The demand curve faced by a firm that is a price taker is a. P = A; where A is the market-determined price b. Q = A; where A is the market-determined quantity c. P = Q d. P = 0 9-1 Chapter 09 - Profit Maximization 4. Worked-out problem 9.3 states that you can find the new efficient scale of production by determining the output level at which: a. marginal revenue = average cost b. marginal cost = marginal revenue c. marginal cost = average cost d. none of the above 5. The import fee for softwood lumber, causes the supply curve in the domestic market to shift a. up and to the left (in) b. down and to the right (out) 6. The discussion of the behavior of U.S. oil producers (in application 9.4) assumes that these firms are: a. price takers b. perfectly competitive firms c. firms with market power d. Both a and b 7. Profit is equal to: a. revenue total cost b. producer surplus sunk cost c. Both a and b d. None of the above 8. True or false? A firms producer surplus equals the area between a horizontal line drawn at the level of its price P and its supply curve. a. True b. False 9. True or false? When a firms profit-maximizing sales level is positive, its marginal revenue equals its marginal cost at that quantity. a. True b. False 10. True or false? A firms profit equals its producer surplus less its sunk costs....
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This note was uploaded on 04/06/2011 for the course ECON 3332 taught by Professor Craig during the Spring '11 term at Rensselaer Polytechnic Institute.
- Spring '11