Unit 7: Profit Maximization and Loss Minimization

Question 1

Profit Maximization Equilibrium

Answer 1

occurs when:

1. positive difference between TR and TC is at its highest
2. MR=MC
3. Marginal profit = 0

Question 2

Normal Profit

Answer 2

Opportunity cost

zero economic profit i.e. you are doing just as well as you could have done had the same resources been utilized in their second best use

Question 3

Abnormal Profit

Answer 3

TR>TC, it is a profit of a temporary nature in competitive markets

Question 4

Subnormal Profit

Answer 4

TC>TR

Question 5

TC>TR>TVC (optimistic)

Answer 5

the firm is better off operating at a loss as TVC is being covered and a contribution towards TFC is made

Question 6

TC>TR<TVC (optimistic)

Answer 6

the firm is better off closed down to restrict the loss to TFC, it is better to halt production temporarily

Question 7

TVC>TR<TC (pessimistic)

Answer 7

it is better to sell the business, however, it is not the best time to sell your business at times of a loss.

Question 8

Profit

Answer 8

reward for those prepared to take risks, to finance research and development, to provide a signal for where resources should be allocated, measurement of efficiency.

Question 9

Objectives other than profit

Answer 9

bigger long term profits, maximize volume of sales, maximize value of sales

Question 10

Predatory pricing

Answer 10

so low a price competitors leave

Question 11

Limit pricing

Answer 11

so low a price to prevent potential competitors from entering the market