Review Questions VIII – F11 with Answers
1) What is meant by the first order and second order conditions for optimization?
F.O.C.  slope = 0 (for min or max)
S.O.C.  first derivative is rising (case of min) or falling (case of max)
2) What are the 4 general cases of optimal firm behavior in the SR that related to possible profit
or loss situations the firm may face?
1) Economic 
2) Zero economic 
3) Losses but operate
4) Close down
3) Using the standard u-shaped cost curves for MC, AVC, and ATC, represent each of the 4
cases from question 2.
$
MC ATC
$
MC
ATC
AVC
MR
PE
PE
q/t
q*
Losses but operate
MC
PE
q/t
q*
Economic 
$
MR
ATC
MR
q*
Zero Economic 
q/t
MC
$
PE
AVC
MR
q/t
Close down
4) Using the standard TR, TVC, and TC, represent each of the 4 cases from question 2.
TC
$
$
TC
TVC
TR
TR
q
q*
q
q*
Losses but operate
Economic 
$
TC
TC
$
TVC
TR
q*
Zero Economic 
TR
q
q
Close down
5) Plotting profits (or losses) on the vertical axis and quantity of output on the horizontal axis,
characterize the 4 cases from question 2.
$
$

FC
q
q*
q
FC
q*

Economic 
Losses but operate
$
$
q
FC
q*
Zero Economic 

q
FC

Close down