Profit Maximization Review

A star athlete receives an offer of $100 million from a major shoe company for a contract to exclusively endorse its products and also receives the same offer from a competing company.

If he accepts the contract offer from the first company, an economist would say that based on this information, the contract earns him

• an economic profit of $100 million because he incurred no costs.

• an economic profit of $100 million because his explicit costs are zero.

• a normal profit because his opportunity cost is equal to the payment from the contract he accepts.

• an economic loss because he is unable to accept both contracts.

• an accounting loss because he is unable to accept both contracts.

Which of the items listed below would be subtracted from total revenue to calculate a firm's accounting profits?

• Wages paid to employees

• Raw materials costs

• Salary from job given up in order to run the firm

• Dividends paid to shareholders

Which of the following must be true in order for a firm to earn economic profit?

• The firm's price must be greater than its marginal cost.

• The firm's marginal revenue must be greater than its marginal cost.

• The firm's marginal revenue must be equal to its marginal cost.

• The firm's total revenue must be greater than its total costs.

• The firm's total revenue must be equal to its total costs.

Tom was working as a delivery driver for the local pizza store. In 2014, he made approximately $20,000 for the entire year delivering pizza and performing other jobs around the pizza store.

In 2015, he decided to quit his pizza job to open his own bike rental store on the local bike trails. In 2015, Tom brought in a total revenue of $50,000 while he had total explicit costs of $30,000. These costs included both fixed and variable costs such as wages for his workers, leasing the building, buying bikes, and buying other resources needed for maintaining the bikes.

In 2015 Tom achieved

• an economic profit of $50,000

• an accounting loss of $30,000

• zero accounting profit

• an economic profit of $20,000

• an accounting profit of $20,000

Which of the following is TRUE regarding accounting and economic profits?

• Economic profits are calculated by subtracting only explicit costs from total revenue.

• Accounting profits are calculated by subtracting only implicit costs from total revenue.

• Economic profits exceed accounting profits.

• Accounting profits are equal to economic profits plus implicit costs.

• Economic profits are equal to accounting profits plus explicit costs.

Sara gives up a job that pays her a yearly salary of $350,000 in order to open her own business making cakes and other pastries. her business has yearly revenues of $500,000. She has 5 workers who earn a yearly salary of $20,000 each. She also rents office space for $2,000 a month and has materials costs of $26,000. Based on this information, what are Sara's yearly accounting and economic profits?

• Her accounting profits are $350,000 and her economic profits are $0.

• Her economic profits are $350,000 and her accounting profits are $0.

• Both her accounting and economic profits are $0.

• Her accounting profits are $372,000 and her economic profits are $22,000.

• Her accounting profits are $452,000 and her economic profits are $102,000.

If the product price is $85, how many units of output must the firm produce in order to maximize profits?

• 0

• 3

• 4

• 5

• 6

If total revenue is increasing as output increases, marginal revenue is always

• equal to average revenue

• less than average revenue

• increasing

• decreasing

• greater than zero

The profit-maximizing level of output for this firm is

• 2

• 3

• 4

• 5

• impossible to determine from the information given

A firm sells its product for $4. The profit-maximizing level of output for this firm is

• 2

• 3

• 4

• 5

• impossible to determine from the information given