The manner in which cartels set and maintain price above the competitive market price is to
Answer (D) is correct. In an oligopolistic industry, a cartel can be formed to add structure to a market with a few firms. A cartel arises when a group of oligopolistic firms join together for price-fixing purposes. This practice is illegal except in international markets. Prices are fixed at an amount greater than would occur under pure competition. Members of the cartel maintain higher prices by voluntarily restricting output.
Mrs. Robinson is hired as a consultant to a firm that is currently competing perfectly. At the current output level the price is $10, the average variable cost is $6, the average total cost is
$10, and marginal cost is $8. To maximize profits, Mrs. Robinson will recommend that the firm should
Answer (B) is correct. A firm should continue increasing production as long as marginal cost is less than selling price. Profit is maximized when marginal cost equals selling price (in pure competition, selling price is the same as marginal revenue).
Mr. B is hired as a consultant to a firm that is, currently, competing perfectly. At the current output level the price is $20, the average variable cost is $15, average total cost is $22, and marginal cost is $20. In order to maximize profits, Mr. B will recommend that the firm should
Answer (A) is correct. For profit maximization, a firm operating under pure competition should produce the level of output at which price is equal to marginal cost. Since price and marginal cost are both $20, the firm is already at its profit-maximizing position.
As of December 31 of the year just ended, a monopolist was producing at a level where the selling price was $18, it had an average total cost of $15, an average variable cost of $12, marginal revenue of $13, and a marginal cost of $14. To maximize profits in the new year, the monopolist should
Answer (D) is correct. A monopolist should not continue producing at the current level when marginal revenue is less than marginal cost. Decreasing output will result in increased profits.
At its current production, Abba Co., a monopolist, has a marginal cost of $18 and marginal revenue of $21. Abba will maximize profits by
Answer (B) is correct. A monopolist should continue increasing production until marginal revenue is equal to marginal cost. Thus, decreasing price and increasing production will enhance profitability.
Which one of the following is the most important difference between a monopoly and a firm facing perfect competition, assuming both are unconstrained profit maximizers?
Answer (B) is correct.
This is the most important difference. A monopolistís marginal revenue continuously decreases as it raises its output. Past the point where MR = $0, the monopolistís total revenue begins to decrease. For a product being sold in a purely competitive market, marginal revenue equals price.
A profit-maximizing monopolist will produce at an output level where
Answer (B) is correct. A monopolist maximizes profits by producing the output at which marginal revenue (MR) equals marginal cost (MC).
Breakeven analysis assumes that over the relevant range
(b) Breakeven analysis is based on several simplified
assumptions. One assumption is that, over the relevant range,
variable costs per unit remain unchanged. It is assumed that
over the relevant range, selling price per unit remains constant.
Thus, unit revenues are linear. Total variable costs increase with
increases in production; therefore, total costs also increase. Over
the relevant range, total fixed costs are always linear since they do
On January 1, 2012, Lake Co. increased its direct manufacturing
labor wage rates. All other budgeted costs and revenues
were unchanged. How did this increase affect Lakeís budgeted
breakeven point and budgeted margin of safety?
Budgeted Breakeven point . . .Budgeted margin of safety
(b) The budgeted breakeven point is the volume at
which total revenues equal total expenses. An increase in direct
manufacturing labor wage rates would result in higher variable
expenses and a lower contribution per unit. Accordingly, this
increases the volume of sales necessary to breakeven. The
budgeted margin of safety is the excess of budgeted total revenues
minus total revenues at the breakeven point. As discussed
above, the increase in direct manufacturing labor wages increased
the breakeven point. This higher breakeven point decreases the
budgeted margin of safety.
Which one of the following is an advantage of using variable
(c) The requirement is to identify an advantage of using
variable costing. Answer (c) is correct because a major advantage
of the use of variable costing is that it makes cost-volume relationships
more apparent. Answer (a) is incorrect because variable
costing does not comply with the US Internal Revenue
Code. Answer (b) is incorrect because variable costing does not
comply with generally accepted accounting principles. Answer
(d) is incorrect because variable costing is not most relevant to
long-run pricing strategies. In the long run all costs must be recovered.