Suppose Total Costs are given by TC(Q) = A + B*Q and Demand is given by Q(P) = X - Z*P where A, B, X, and Z are known parameters (e.g., 10, 1, 20, and -1).
1. What are revenues?
A) Revenue = X - Z*P
B) Revenue = A + B*P
C) Revenue = (X - Z*P)*(P - B)
D) Revenue = (X - Z*P)*P
2. What is marginal revenue with respect to price P (i.e., (dRevenue)/(dP))?
A) MR = X - 2*Z*P
B) MR = B
C) MR = X - 2*Z*P + B*Z
D) MR = -Z
3. What are variable costs?
A) VC = A
B) VC = A + B*Q
C) VC = B*Q
D) VC = Q^2
4. What are fixed costs?
A) FC = A
B) FC = A + B*Q
C) FC = Q
D) FC = Q^2
5. What is the marginal cost to make one unit of output (i.e., MC = (dTC)/(dQ))?
A) MC = A
B) MC = A + B*Q
C) MC = B
D) MC = Q
6. It is possible to write a firm's total costs as a function of P instead of Q. We'll do this most of the time since firms often maximize profits by choosing P. What are the firm's total costs?
A) Costs = A + B*X - B*Z*P
B) Costs = X - Z*P
C) Costs = A + B*X
D) Costs = A + B*X + B*Z*P
7. If the firm sets a price equal to P, what are its profits?
A) Profit = (X - Z*P)*P
B) Profit = (X - Z*P)*(P - B) - A
C) Profit = X^(P - B)
D) Profit = (X + Z*P)*(P + B) + A
8. What is the firm's marginal profit from increasing P (i.e., (dProfit)/(dP))?
A) d(Q)/dP*(P - B) + Q
B) d(P)/dQ*Q + P
C) P
D) P - B
9. True or False: To arrive at the firm's "profit-maximizing condition," set marginal profit (i.e., your answer to the previous problem) to Zero.
A) True
B) False
