4.1.4.7 Profit Quiz: AQA Economics, Unit 1

The 20 questions

1. Profit is best defined as the difference between which two quantities?

   • Total revenue and total costs
   • Price and average variable cost
   • Total revenue and marginal cost
   • Average revenue and average fixed costs

2. Normal profit is best described as:

   • The minimum reward that keeps the entrepreneur in the industry, when total revenue just covers total opportunity cost
   • The profit earned only when total revenue exceeds total costs in the long run
   • The profit a firm earns from selling goods at a price above marginal cost
   • The profit a monopolist earns from charging different prices to different consumer groups

3. Abnormal (supernormal) profit exists when:

   • Total revenue is less than total explicit costs, so the firm cannot cover its accounting costs in the period under review at all
   • Total revenue equals total opportunity cost, so the firm earns only the normal profit needed to stay in the industry and nothing more
   • Total revenue exceeds total opportunity cost, including normal profit
   • Average revenue equals average variable cost, so the firm covers its variable costs per unit but not its fixed costs in full over time

4. In a market economy, the main role of profit is to:

   • Eliminate the need for competition in the long run by rewarding the largest firms with guaranteed market shares
   • Signal where resources should be directed and reward risk-taking and innovation
   • Guarantee equal incomes for all owners of firms in every industry
   • Set the minimum wage paid to workers in each industry

5. Economic profit differs from accounting profit mainly because economic profit also deducts:

   • Depreciation charges on fixed assets alone
   • Corporation tax paid on the firm's annual profit
   • Only the wages paid to employees each month
   • Implicit (opportunity) costs, such as the forgone earnings of the owner's time and capital

6. If a firm has total revenue of £500,000 and total costs of £430,000, its profit is:

   • £930,000
   • £70,000
   • £500,000
   • £430,000

7. In the long run in a perfectly competitive market, what happens when firms earn abnormal profit?

   • Firms make losses permanently because the price falls to zero
   • New firms enter, increasing supply and driving profit back towards normal profit
   • Firms earn no profit at all because normal profit is abolished by the market
   • Firms earn abnormal profit indefinitely because entry is blocked by sunk costs that new firms cannot recover if they enter the market

8. A firm sells 2,000 units at £12 each and has total costs of £19,500. Its profit is:

   • £24,000
   • £19,500
   • £43,500
   • £4,500

9. A firm has accounting profit of £80,000. The owner could have earned £25,000 elsewhere, which is the only opportunity cost. Its economic profit is:

   • 25,000, because economic profit equals the implicit cost alone and the explicit costs have already been fully deducted from accounting
   • £55,000, which is the accounting profit after deducting the owner's forgone earnings
   • 105,000, because the owner's forgone earnings of 25,000 should be added to accounting profit as extra income
   • 80,000, because accounting profit already includes all opportunity costs and so the economic figure is the same as the accounting

10. A firm sells 1,000 units at £70 each, with total costs of £60,000 per month. Its profit per unit is:

    • £70 per unit, giving total profit of £70,000
    • £60 per unit, giving total profit of £60,000
    • £130 per unit, giving total profit of £130,000
    • £10 per unit, giving total profit of £10,000

11. A firm earns abnormal profit of £40,000 per year and barriers to entry are low. Which outcome is most likely?

    • Abnormal profit rises because entry increases total market demand indefinitely
    • New firms enter, pushing price down until abnormal profit falls towards zero
    • Existing firms leave the market, raising the abnormal profit of those that stay
    • Price rises as new entrants reduce supply, sustaining the abnormal profit

12. A firm's total revenue equals its total opportunity costs, including normal profit. The firm is best described as:

    • Making an economic loss and certain to exit the market
    • Earning normal profit only, so it has no incentive to enter or leave the market
    • Making an accounting loss while still earning abnormal profit overall
    • Earning abnormal profit, which will attract new entrants

13. Why might a firm deliberately accept lower short-run profit?

    • To guarantee the highest possible profit in every period by cutting prices so that rivals never gain share
    • To make marginal revenue always greater than price so that each unit sold adds more revenue than its price
    • To eliminate all fixed costs from its income statement by moving production into a separate company
    • To build market share and deter entrants, which may reduce short-run profit but protect long-run position

14. A firm sells 4,000 units at £15 each. Fixed costs are £18,000 and variable cost is £4 per unit. Its profit is:

    • £42,000
    • £26,000
    • £60,000
    • £34,000

15. A firm's profit rises by 10% while its revenue rises by 5%. Which must be true?

    • Total costs must have fallen, since profit rose by more than revenue
    • Average fixed costs must have risen
    • Marginal revenue must have fallen
    • Total costs must have risen by the same 5% as revenue

16. A firm with total revenue of £300,000 and total costs of £285,000 cuts costs by £20,000 without changing output or price. Its profit becomes:

    • £50,000
    • £15,000
    • £20,000
    • £35,000

17. Which example shows a firm making a loss in economic terms but a profit in accounting terms?

    • A sole trader earns 40,000 accounting profit with zero forgone earnings
    • A firm earns 40,000 accounting profit and has no fixed costs at all, so every pound of its accounting profit is also an economic profit
    • A firm earns 40,000 accounting profit and pays no tax at all
    • A sole trader earns £40,000 accounting profit but gives up £50,000 of forgone wages

18. Why might profit be a poor measure of a firm's performance on its own?

    • It is only relevant to firms in perfectly competitive markets
    • It ignores non-financial objectives such as quality, market share and social or environmental impacts
    • It is always equal to revenue minus variable costs
    • It cannot be calculated when a firm sells more than one product

19. In long-run equilibrium under perfect competition, the diagram typically shows:

    • Price equal to average total cost, so economic profit is zero
    • Price above average total cost, so profit is maximised at equilibrium
    • Average fixed cost at its minimum, so profit is at its highest
    • Marginal cost above price at the profit-maximising output

20. A firm earns £12,000 profit on total revenue of £80,000. Its profit margin is:

    • 15%
    • 85%
    • 66.7%
    • 12%

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