Firm A is a price taker; the market price for the product is £12.

Q45 When a firm is a price taker,

its marginal costs will always be equal to its marginal revenue.

Figure No.8

Q46 The plot below shows the weekly costs for a price-taker, if the market price of the product is £20 and assuming their business objectives are to maximise profits how many units should they aim to produce a week?

The firm will produce at 400 units (per week), earning supernormal profits.

Q47 A manager of a manufacturing firm treats normal profits as a fixed cost of production (i.e. they are treating the owners’ expected return on capital employed as a cost). To break even, ensuring at least a normal profit, the manager should set price and output where;

MC = MR

Q48 In terms of normal profits which of the following statements are FALSE?

A firm making less than a normal profit but covering its explicit costs is by definition still making a profit.

Q49 The diagrams below show the weekly total cost structures for two firms, producing similar products. In this example neither firm is experiencing diminishing marginal returns. The firms are run by managers and normal profits are included in total fixed costs (TFC). Both firms sell their product for £15 (thus TR = Total Revenue)

Firm A

Firm B

For both firms, at what output will the firms break even and what type of profit will the firms be making?

Firm A: output = 100 units, earning normal profits, Firm B: output = 200 units earning normal profits

Q50 The diagrams below show the weekly total cost and revenue structures for two privately owned firms, producing two very different products. In this example neither firm is experiencing diminishing marginal returns. The firms are run by managers and normal profits of £50 are included in total fixed costs (TFC).

Firm A Firm B

Which of the following statements is false?

1. Firm A has a Low Operational Gearing

2. Compared to Firm A, Firm B will make greater profits when sales are above the break-even point but bigger loses below that point.

3. Over a year both firms will break-even earning a normal profit if weekly sales are 500 units per week on average.

4. If both firm’s return similar annual profits and where put up for sale by their owners, Firm B would always fetch a higher valuation than firm A.

5. Both firms sell their product for £10 and operate with the same mark up.

And 5 only

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