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Chapter 21: Problem 9

Statement 1: Price is equal to total revenue divided by output. Statement 2: A firm never maximizes profits. (LO3) a) Statement 1 is true, and statement 2 is false. b) Statement 2 is true, and statement 1 is false. c) Both statements are true. d) Both statements are false.

Short Answer

Expert verified
The correct answer is (a) Statement 1 is true, and Statement 2 is false.

Step by step solution

01

Understanding Statement 1

To analyze Statement 1, we need to understand the relationship between price, total revenue, and output. Price is the cost at which a product or service is sold, total revenue is the total income (or amount of money) a company receives, and output is the quantity of goods and services a company produces. Total revenue (TR) can be computed as the Price (P) multiplied by the Quantity (Q) sold. Therefore, we can get output (Q) by dividing total revenue (TR) by price (P): \(Output (Q) = \frac{Total \,Revenue (TR)}{Price (P)}\) Since this formula accurately represents the relationship between the three variables, Statement 1 is true.
02

Understanding Statement 2

To analyze Statement 2, we need to understand the concept of profit maximization in economics. Profit maximization is a fundamental goal for firms because they generally aim to make the most profit possible. This typically entails producing the output level where the marginal cost equals the marginal revenue, meaning the cost of producing one more unit of a good equals the revenue that unit brings in. Firms may not always achieve perfect profit maximization, but it is generally their guiding principle. Since firms do, in fact, strive to maximize profits, we can consider Statement 2 to be false.
03

Selecting the Correct Answer

Based on our analysis, Statement 1 is true, and Statement 2 is false. Looking at the answer options, we can conclude that: a) Statement 1 is true, and Statement 2 is false. So the correct answer is option (a).

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Most popular questions from this chapter

If the price is between the shut-down point and the break-even point, the firm is in the (LO6) a) short run making a profit b) short run taking a loss c) long run making a profit d) long run taking a loss

Statement 1: The firm's short-run supply curve runs up the marginal cost curve from the shut-down point to the break-even point. Statement 2: The firm will not accept a price below the break-even point in the short run. (LO6) a) Statement 1 is true, and statement 2 is false. b) Statement 2 is true, and statement 1 is false. c) Both statements are true. d) Both statements are false.

At an output of \(5, \mathrm{MC}=\$ 49\) and ATC \(=\$ 52\). At an output of \(6, \mathrm{MC}=\$ 59\) and ATC \(=\$ 53\). At the breakeven point, ATC is (LO6) a) above \(\$ 53\) b) \(\$ 53\) c) between \(\$ 52\) and \(\$ 53\) d) \(\$ 52\) e) less than \(\$ 52\)

If a perfectly competitive firm sells 10 units of output at a price of \(\$ 10\) per unit, its marginal revenue per unit is (LO1) a) \(\$ 1\) d) more than \(\$ 1\), but less b) \(\$ 10\) than \(\$ 10\) c) \(\$ 100\) e) more than \(\$ 10\), but less than \(\$ 100\)

The most efficient output of a firm is located (LO1, 7) a) at the shut-down point b) at the break-even point c) where \(\mathrm{MC}=\mathrm{MR}\) d) when the vertical distance between AVC and ATC is at a maximum
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