Ready to see if you can explain why this profit-maximizing firm's total profit is equal to revenue minus cost? Jump into our free profit maximizing output quiz designed for budding economists and test your skills on key concepts from pure competition revenue quiz scenarios. You'll tackle when marginal cost equals marginal revenue, learn how to calculate total profit pure competition, and sharpen your analytical edge beyond the basics. Think you've mastered the numbers? Extend your practice with our average vs marginal cost quiz or dive deeper with our microeconomics final exam practice test, then get instant feedback to boost your confidence. Start the challenge now!
What is the formula for a firm's total profit in economics?
Total revenue plus total cost
Total cost minus total revenue
Total revenue minus total cost
Marginal revenue minus marginal cost
Total profit is calculated by subtracting total cost from total revenue, representing the net gain after covering all costs. It accounts for both explicit and implicit expenses. Understanding this difference is central to profit maximization decisions. For more details see Investopedia: Profit.
In a perfectly competitive market, what is the relationship between market price (P) and marginal revenue (MR)?
Price equals marginal revenue
Price is less than marginal revenue
Marginal revenue equals marginal cost
Price is greater than marginal revenue
In perfect competition, each firm is a price taker, so the revenue gained from selling one more unit precisely equals the market price. Thus MR = P for every additional unit sold. This property simplifies the profit-maximizing condition. See Investopedia: Marginal Revenue.
What does Average Cost (AC) refer to for a firm?
Total fixed cost divided by quantity produced
Total cost divided by quantity produced
Total revenue divided by quantity produced
Marginal cost divided by quantity produced
Average Cost is calculated by dividing total cost by total output, giving the cost per unit produced. It includes both fixed and variable costs. AC is crucial for determining break-even and profit conditions. More info at Investopedia: Average Cost.
At the profit-maximizing output, a perfectly competitive firm produces where which condition holds?
Price equals average cost
Marginal revenue equals marginal cost
Total revenue equals total cost
Average cost equals marginal cost
Profit maximization for any firm occurs where MR = MC, as producing beyond this point would cost more than it brings in revenue. In perfect competition MR is the market price, so P = MC. This is the primary rule for output decision. More at Khan Academy: Profit Maximization.
If a firm has a total revenue of $200 and total cost of $150, what is its total profit?
$150
-$50
$50
$350
Total profit equals total revenue minus total cost, so $200 - $150 = $50. This net value represents the firm's economic gain. It directly shows how profitable the firm is at that output level. See Investopedia: Profit.
If market price is above average cost at the profit-maximizing output, the firm earns:
Economic profit
Economic loss
Zero profit
Normal profit
When price exceeds average cost, the firm covers all its costs and still has leftover revenue, yielding positive economic profit. Economic profit signals above-normal returns that may attract entry. For more details see Investopedia: Economic Profit.
What is economic profit in microeconomic terms?
Accounting profit
Total revenue minus explicit costs only
Total revenue minus total cost including opportunity costs
Total revenue minus fixed cost
Economic profit accounts for both explicit costs (like wages) and implicit costs (opportunity costs). It measures the real return over all resources' best alternative use. This differentiates it from accounting profit, which ignores opportunity costs. See Investopedia: Economic Profit.
When a firm's price equals its average cost at the profit-maximizing output, the firm earns:
Zero economic profit
Normal loss
Negative economic profit
Maximum economic profit
If price equals average cost, total revenue just covers all costs including opportunity costs, yielding zero economic profit (normal profit). In long-run equilibrium of perfect competition, firms earn this normal profit. Read more at Khan Academy: Zero Economic Profit.
Which best describes the market structure of pure competition?
Firms colluding to set prices
Many sellers offering identical products with free entry and exit
A few sellers with differentiated products
One seller dominating the market
Pure competition is characterized by numerous sellers offering homogenous products, with no barriers to entry or exit. Firms are price takers and compete purely on output. This structure drives long-run economic profit to zero. For more details see Investopedia: Perfect Competition.
A firm will continue to produce in the short run despite economic loss as long as:
Price covers average variable cost
Total revenue exceeds total cost
Price covers average total cost
Price covers average fixed cost
The shutdown rule states a firm produces if price covers average variable cost; this covers variable inputs while contributing to fixed costs. If price falls below AVC, it minimizes losses by shutting down. See Investopedia: Shutdown Point.
If a firm's marginal cost at its current output is $10 and marginal revenue is also $10, what should the firm do to maximize profit?
Increase output
Decrease output
Maintain current output
Shut down immediately
At MR = MC, the firm is maximizing profit; any deviation would reduce profit. Increasing or decreasing output would cause MC and MR to diverge. Therefore it should keep output unchanged. More at Khan Academy: MR=MC.
In perfect competition, the individual firm's short-run supply curve is its marginal cost curve above the:
Market demand curve
Average variable cost curve
Average total cost curve
Average fixed cost curve
The firm's supply curve is the portion of the MC curve that lies above the minimum of the AVC. Below that, the firm would shut down. This defines the shutdown point. See Investopedia: Supply Curve.
If a firm's accounting profit is positive but economic profit is zero, this implies:
The firm earns a normal profit covering opportunity costs
The firm is making excess returns above opportunity costs
The firm is incurring a loss
Accounting profit includes opportunity costs
Economic profit accounts for opportunity costs; zero economic profit means the firm covers both explicit and implicit costs. Positive accounting profit shows revenue exceeds explicit costs. This is defined as normal profit. More at Investopedia: Normal Profit.
In the long run, firms in perfect competition will earn:
Zero economic profit
Variable economic profit
Positive economic profit
Negative economic profit
Free entry and exit in the long run drive economic profit to zero as new firms enter when profits are positive and exit when losses occur. Each firm then earns a normal profit only. See Investopedia: Perfect Competition.
If price is below average total cost but above average variable cost, the firm in the short run should:
Expand output
Shut down immediately
Produce to minimize losses
Earn economic profit
When price covers AVC but not ATC, the firm still covers variable costs and some fixed cost, minimizing loss by continuing production. Shutting down would incur greater loss equal to fixed costs. See Investopedia: Shutdown Point.
Given the cost function C(Q) = 50 + 2Q + Q² and market price P = $10, what is the profit-maximizing output?
2 units
3 units
4 units
5 units
Marginal cost is dC/dQ = 2 + 2Q. Set MR = P = 10 equal to MC: 10 = 2 + 2Q, so Q = 4. This yields the profit-maximizing output. For more, see Khan Academy: Marginal Cost.
The break-even point occurs where market price equals:
Marginal cost
Average variable cost
Total cost
Average total cost
At break-even, price covers all costs including fixed and variable, meaning P = ATC and economic profit is zero. It is the lowest price at which the firm avoids economic losses. See Investopedia: Break-Even Point.
Which curve represents a perfectly competitive firm's marginal revenue?
A vertical supply line
A downward-sloping demand curve
A horizontal line at the market price
An upward-sloping line
Because the firm is a price taker, each extra unit sold adds exactly the market price to revenue. Marginal revenue is thus a horizontal line at P. It differs from monopoly where MR slopes downward. More at Investopedia: Marginal Revenue.
Why is the portion of the marginal cost curve above the average variable cost curve considered the short-run supply curve for a competitive firm?
It shows the minimum price at which the firm will supply each output level
Because MC is always upward sloping
Because MR always equals MC above AVC
Because AVC includes fixed costs
Above the AVC minimum, the firm earns enough revenue per unit to cover variable costs and contribute to fixed costs, so it supplies. Below this point, the firm shuts down. Thus MC above AVC is the supply curve. See Investopedia: Supply Curve.
If a firm's fixed costs increase, how is its short-run profit-maximizing output affected?
Output increases
Firm shuts down
Output decreases
Output remains unchanged
Fixed costs do not affect marginal cost, so the MR=MC condition and profit-maximizing output remain unchanged. Only total profit is reduced. Fixed costs are sunk in the short run. See Investopedia: Fixed Cost.
How does an increase in variable costs shift the firm's short-run supply curve?
No change because fixed costs govern supply
It shifts downward because MC decreases
It shifts rightward because supply increases
It shifts upward (leftward) because MC increases
Higher variable costs raise marginal cost at each output level, causing the MC curve to shift upward. The supply curve, which is the MC above AVC, therefore shifts leftward. See Investopedia: Variable Cost.
The shutdown price is defined as the price at which:
Marginal cost equals zero
Price equals minimum average total cost
Total revenue equals fixed cost
Price equals minimum average variable cost
The shutdown price is the lowest price covering variable costs; it occurs at the minimum point of the AVC curve. If price falls below this, the firm stops production. More at Investopedia: Shutdown Point.
If price falls below average variable cost at all output levels, the firm should:
Shut down production
Produce at minimum average cost
Increase variable input
Produce less output
When price cannot cover variable costs, each unit produced adds more cost than revenue. Shutting down minimizes losses to fixed costs only. This is the shutdown rule. See Investopedia: Shutdown Point.
Which describes the long-run industry supply curve in perfect competition when firms have identical cost structures?
Upward sloping
Downward sloping
Perfectly vertical
Perfectly horizontal at the minimum of average cost
If all firms share identical costs and free entry/exit exists, industry supply is perfectly elastic at the minimum ATC, since any above that invites entry until price falls. See Investopedia: Perfect Competition.
In the long run, if firms in a competitive industry earn positive economic profit, what occurs?
New firms enter, increasing supply until profit is zero
Existing firms exit until profit rises
Government sets a price floor
Firms collude to maintain profits
Positive economic profit attracts new firms, shifting supply rightward, driving down price until profits return to normal (zero economic profit). This entry continues until no incentives remain. More at Investopedia: Perfect Competition.
A technological improvement that lowers marginal cost will in the short run:
Increase output and increase economic profit
Decrease economic profit
Decrease output
Have no effect on profit
Lower MC allows MR=MC to be met at higher output, so the firm increases production. Lower costs at each unit also raise profit. In perfect competition, lower cost improves both output and profit. See Investopedia: Technological Improvement.
Producer surplus in perfect competition is represented by the area:
Between average cost and marginal cost curves
Above the supply curve and below the market price
Above the demand curve and below the market price
Below the supply curve and above the market price
Producer surplus is the difference between price received and the minimum supply price (MC). Graphically it's the area above the supply (MC) curve and below the price line. This measures producer gain from market transactions. More at Investopedia: Producer Surplus.
Why is MR=MC a necessary but not sufficient condition for profit maximization?
Because MR never equals price
The second derivative (MC slope) must ensure a maximum
Average cost also must equal marginal cost
Because MR only applies in monopoly
MR=MC finds a stationary point, but to confirm that it's a maximum, the MC curve must be rising (second derivative positive). Otherwise MR=MC could be a minimum or inflection. Checking the slope ensures it's indeed profit maximizing. See Khan Academy: Second Order Condition.
What role do sunk costs play in a firm's short-run production decision?
They increase average variable cost
They are irrelevant since they cannot be recovered
They affect marginal cost directly
They determine the shutdown point
Sunk costs are past expenditures that cannot be changed by current decisions, so they don't enter marginal cost or output decisions. Only future costs and revenues matter when choosing output. Therefore, they are irrelevant in short-run supply. See Investopedia: Sunk Cost.
How does a per-unit tax on output affect a perfectly competitive firm's profit-maximizing output in the short run?
Increases output because price rises
Shuts down the firm immediately
Reduces output since marginal cost increases by the tax amount
Has no effect on output
A per-unit tax adds to marginal cost for each unit sold, shifting MC upward. The new MR=MC condition occurs at a lower output, reducing supply. Firms still produce if price covers the new AVC. For more see Investopedia: Tax Incidence.
Why is total surplus (consumer plus producer surplus) maximized in perfect competition?
Price equals average total cost, yielding productive efficiency
Firms earn zero economic profit, maximizing welfare
Allocative efficiency occurs when P = MC, meaning resources go where valued most. This maximizes the sum of consumer and producer surplus. Perfect competition achieves both allocative and productive efficiency in long-run equilibrium. Learn more at Investopedia: Allocative Efficiency.
For a firm with cost function C(Q) = a + bQ + cQ² (a, b, c > 0), what is the short-run supply function in perfect competition?
P = a + bQ + cQ²
P = b + 2cQ for P ? b
P = 2a + bQ
P = (a + bQ + cQ²) / Q
Marginal cost is dC/dQ = b + 2cQ, which equals price under P = MC. The supply function is the MC curve above the shutdown point (P ? minimum AVC, which here is b). See Khan Academy: Supply Function.
Which statement correctly compares supply elasticity in the short run versus the long run in perfect competition?
Both have equal elasticity
Short-run supply is more elastic than long-run supply
Long-run supply is more elastic than short-run supply
Neither responds to price changes
In the long run, firms can adjust all inputs and new firms can enter or exit, making supply much more responsive to price changes. Short-run supply is less elastic due to fixed inputs. Over time, industry supply becomes highly elastic. More at Investopedia: Elasticity of Supply.
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Study Outcomes
Understand Total Profit Calculation -
Grasp how this profit-maximizing firm's total profit is equal to the difference between total revenue and total cost in a pure competition market.
Calculate Total Profit -
Practice the calculate total profit pure competition method by subtracting total cost from total revenue in example problems.
Apply Marginal Analysis -
Use the marginal cost equals marginal revenue quiz to determine the profit-maximizing output level under pure competition.
Analyze Output and Revenue Strategies -
Examine how varying production levels influence total revenue and profit maximization in a pure competition revenue quiz context.
Identify Profit-Maximizing Output -
Determine the optimal output level in the profit maximizing output quiz by analyzing cost and revenue data under pure competition.
Differentiate Revenue and Cost Curves -
Compare total revenue and total cost curves to understand how this profit-maximizing firm's total profit is equal to the gap between the two curves at each output level.
Cheat Sheet
Total Profit Formula -
In pure competition, total profit (π) is calculated as total revenue minus total cost: π = TR - TC. For example, if TR is $1,000 and TC is $800, then π = $200 (Mankiw, 2020).
Marginal Cost Equals Marginal Revenue -
The profit-maximizing rule is MC = MR, where MC = ΔTC/ΔQ and MR = ΔTR/ΔQ. Remember "MC = MR, stop and stare" to lock in the ideal output (Krugman & Wells, 2018).
Identifying Profit-Maximizing Output -
Plot MC and MR curves: the intersection gives the profit-maximizing output level. Use small Q increments to spot where MR just equals or dips below MC (Journal of Economic Perspectives, 2019).
Break-Even and Shutdown Points -
A firm breaks even when TR = TC, yielding zero economic profit; it shuts down if price falls below AVC. Keep AVC curves handy to compare against market price (Investopedia, 2021).
Sample Calculation Exercise -
Practice with a table: list Q from 1 - 5, compute TC, TR = P×Q (pure competition revenue quiz style), then derive π. This hands-on approach cements "calculate total profit pure competition."
