Ch.

14 Profit maximisation and output determination

DSE-Sample Paper-9-c
The schedule below shows the marginal costs of a firm which produces electronic
watches before and after the technological improvement.
Output (Units) Marginal cost ($) before the Marginal cost ($) after the
technological improvement technological improvement
500 70 60
600 80 70
700 90 80
800 100 90
900 110 100

(i) Is marginal cost a fixed cost or a variable cost? Explain. (2 marks)

(ii) Suppose the market price of electronic watches was $80 before the technological
improvement. What is the output of the firm at this market price? (1 mark)
(iii) Suppose the market price of electronic watches fell to $70 after the technological
improvement. What is the output of the firm at this market price? (1 mark)

Ch. 14 Profit maximisation and output determination/ P.1

 MCQ

1. The marginal cost schedule of a firm can be interpreted as its supply schedule in
the production of a good because (DSE-Sample Paper-8)
A. marginal cost will increase when the output of the firm increases.
B. we can tell the quantity of the good the firm plans to produce from the
marginal cost schedule given the price of the good.
C. the quantity of the good the firm plans to produce depends positively on the
marginal cost of producing the good.
D. we can tell the price of the good from the marginal cost schedule given the
quantity of the good.

2. The schedule below shows the marginal cost of a firm in a perfectly competitive
market. (DSE-2015-5)
Output (units) 3 4 5 6 7 8 9
Marginal cost ($) 5 5.5 6 6.5 7 8 9.5

Suppose the rental of the machine hired, a fixed cost, increases by $2 while the
marginal cost for each unit of the output is reduced by $0.5. As a result, the
profit-maximising output of the firm ________ while the profit of the firm
_________.

A. increases… decreases
B. increases… may increases or decrease
C. decreases… decreases
D. decreases… may increase or decreases

Ch. 14 Profit maximisation and output determination/ P.2

3. The following table shows the cost-output relationship of a price-taker.
Output ($) Average cost ($)
2 20
3 21
4 22
5 23
6 24
7 25
Suppose the market price is $25. What are the profit-maximising output and profit
respectively? (DSE-2016-12)
A. 4 units and $0
B. 4 units and $12
C. 7 units and $0
D. 7 units and $12

4. The following table shows the cost-output relationship of a price-taker.

Output (units) Average cost ($)
5 10
6 11
7 12
8 13
9 14

The market price is $20. Suppose the average cost has increased by $2 for every
unit of output. The profit if the firm will __________. (DSE-2017-8)

A. increase by $16
B. increase by $14
C. decrease by $16
D. decrease by $14

Ch. 14 Profit maximisation and output determination/ P.3

5. The following table shows the cost-output relationship of a profit-maximising
firm. The firm has a fixed cost of $5. (DSE-2018-6)
Output (units) 1 2 3 4 5 6
Average cost ($) 7 6 7 8 9.6 12
Which of the following statements is correct?
A. The optimal scale of production is 2 units.
B. There exist diseconomies of scale after the third unit of output is produced.
C. If the market price is $8, the output is 4 units.
D. If the market price is $9, the profit is $6.

6. If the fixed cost of a price-taking firm decreases by $200 and the marginal cost of
each unit of output increases by $10, the profit-maximising output will _________
and the profit _______ . (DSE-2019-4)
A. increase … will decrease
B. increase … may increase or decrease
C. decrease … will increase
D. decrease … may increase or decrease

7. The following table shows the cost-output relationship of a price-taking firm.

(DSE-2019-10)
Total output (units) Average cost ($)
3 10
4 15
5 20
6 25
7 30
If the profit-maximising output is 6 units, the market price will be ________.
A. $5
B. $25
C. $30
D. $50

Ch. 14 Profit maximisation and output determination/ P.4

8. Which of the following statements about a perfectly competitive market are
correct? (DSE-2019-18)
(1) Firms cannot survive if they ask a price higher than the market price.
(2) There is no entry barrier to the market.
(3) The profit-maximising condition of the firms is that price equals marginal
cost.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

9. Refer to the following table about the cost-output relationship of a profit-

maximising firm. (DSE-2020-9)

Quantity (units) 1 2 3 4 5
Average cost ($) 5 6 7 8 9

If the average cost of every unit of output decreases by $1 and the market price is
$8,
A. the minimum cost of production is $18.
B. the profit maximsing output is 3 units.
C. the maximum profit is $10.
D. the marginal cost of every unit of output will remain unchanged.

10. Because of the outbreak of COVID-19, the government of a country announced a

temporary ban of dine-in services in restaurants. Which of the following
statements about restaurants under the temporary ban is correct? (DSE-2021-10)

A. If the expected sales revenue generated from takeaway food exceeds the
variable cost of running a restaurant, the restaurant will continue to operate.
B. With the extremely high cost of breaking the rental contract, the fixed rental
will affect whether the owners continue to operate their restaurant

Ch. 14 Profit maximisation and output determination/ P.5

 C. A decrease in prices of takeaway food will necessarily decrease the sales
revenue of the restaurants.
D. Unpopular restaurants will close down before popular ones.

11. The following table shows the cost-output relationship of a price-taking firm.
Quantity (units) Average cost ($)
1 5
2 4
3 4
4 4.5
5 6

Based on the above table, when the market price falls from $6 to $4, we can
conclude that (DSE-2021-12)

A. the firm starts to enjoy economies of scale.

B. the total cost of the firm will decrease from $30 to $12.
C. the profit of the firm will decrease by $6.
D. the quantity supplied will decrease from 5 units to 3 units.

12. Winnie operates a café in Sham Shui Po. To maximise her profit, Winnie will
produce more output if
A. water charges for commercial use fall.
B. business registration fee falls.
C. the monthly rental payment of the café rises.
D. the wage rate of part-time waiters increases.

1 B 2 B 3 B 4 D 5 D 6 D 7 D
8 C 9 B 10 A 11 C 12 D

Suggested Answer
DSE-Sample Paper-9-c

Ch. 14 Profit maximisation and output determination/ P.6

(i) It is a variable cost because it varies with output.
(ii) 600
(iii) 600

Ch. 14 Profit maximisation and output determination/ P.7