Quiz diagram questions

Question 1

So what will Apple do? (Hint: remember this is the short run for Apple)

Answer 1

Apple’s ATC is above its price…so it’s making a loss. BUT…it’s only making this loss because of its high fixed costs. Apple is still covering its variable costs because Price (AR) > AVC - Apple is above its short run shut down point. So Apple is making money on every unit it sells, and will use this money to pay off its fixed costs so in the long run it can make a profit! So Apple will stay in the market and eventually enjoy long run profits

Question 2

So what will Trump do? (Hint: remember this is the short run for Trump)

Answer 2

The diagram shows that Trump is below his short run shutdown point - price is now below AVC. So Trump will shutdown and leave the market.

This is because if price (AR) is below AVC, he is selling for a price below the variable cost of producing each unit. So he’s losing money on each unit sold, so he should shut his company down to avoid further losses.

Question 3

The following diagram shows a firm with monopoly power. The firm increases its output from Y to X.

Answer 3

The firm was originally profit maximising and is now producing at the productively efficient level of output.

Question 4

Revenue maximisation

Answer 4

Where MR = 0.

Question 5

Sales maximisation

Answer 5

When a firm maximises its sales without making a loss, where AC = AR.

Question 6

The diagram shows the costs and revenues for a firm with monopoly power.

whats happening at output y and x

Answer 6

At output X, the firm is profit maximising.

At output Y the firm is revenue maximising as it is producing where MR = 0. Sales maximising is where AC = AR.

Question 7

The following diagram shows the costs and revenues for a hotel with twenty rooms.

What price should they charge in order to maximise their revenue?

Answer 7

At an output of 0N the firm is revenue maximising (MR = 0). Going up from N to the demand curve and then across to price gives a price of Y.

Question 8

So…where will Mandy profit maximise?

Answer 8

Firms will profit maximise where MC = MR at point Y. At point Y, quantity is N and price is G. (You’ve picked the point where MC = AC - this is a very common mistake but remember, firms profit max where MC = MR!)

Question 9

Answer 9

GYXK

Question 10

If the equilibrium price of mangoes is now super low at just £1…how much profit will firms make?

Answer 10

A loss of GPeTV