Answers to Practice Questions for AP

I guess that fish will learn not to try and enter an oligopoly or monopoly.  They have beariers to entry.

Practice problems on a Thursday.  Utils= -843

This is for the two-sided one page sheet you got in class today.

1. F; statement has it backwards
2. T; self-explanatory but understand that in the long run the firm can choose a variety of different inputs; in the short-run at least something has to be fixed
3. T; at some point adding more people isn’t going to increase MP anymore
4. F; actually there would be diseconomies scale
5. T; they are referring to total fixed costs, those stay the same; AFC does go down as Q goes up
6. F; average total cost would be \$5 but not TC, would have to multiply ATC X Q to get TC
7. T; if TC=\$100 then TVC=\$70 (\$100-\$30); take \$70/20=\$3.50
8. T; AVC is between AVC and ATC; the gap is biggest when output is 1 and it declines with more output
9. F; ATC includes both AFC and AVC so rising variable costs could drive ATC back up; remember,  ATC is that U-shaped thing we’ve been drawing for months so it goes back up
10. F; if there are diminishing marginal returns it will cause those costs to go back up
11. T; yep, when MC is below ATC it pulls it down, when it’s above it it pulls it up; that’s why it intersects it at the lowest point
12. T; yepper, see last question
13. F; not unless MC is back above ATC
14. \$10; TFC=\$10 because when there is no output TC = TFC
15. \$12; MC=change in TC/change in output; (36-24)/(3-2)= \$12/1 = \$12
16. \$13; ATC=TC/output; \$52/4=\$13
17. \$8; TVC=TC-TFC; we know TFC is \$10 from question 14; take \$18-\$10 and TVC for 1 unit=\$8
18. \$7; TVC for 2 units is \$14 (\$24-\$10); AVC=TVC/output; \$14/2=\$7
19. 3 units; you need to calculate a MC chart and then produce all the units where the price they gave you (\$15) exceeds or equals the MC (MR=MC rule); produce 3 units because that’s the last unit where this is true; 4 is too many because MC=\$16 but MR is only \$15
20. \$9; When they ask for profit they mean total profit unless they ask for per-unit or marginal; Total profit=TR-TC; if they make 3 units TR=\$45 (3x\$15) and TC=\$36 (from chart); \$45-\$36=\$9
21. E
22. A
23. C; remember economies of scale is a long-run phenomenon whereby a firm increases its output and sees a decline in its ATC
24. B; remember, identical products in perfect competition and the demand curve for the industry is downward sloping but for the firm it’s horizontal
25. E; MR=MC
26. D; remember no barriers to entry in perfect competition; if people see a profit being made, they’ll join the industry until economic profits are driven to 0
27. E; answer kind of says it but in the short-run you should produce if your revenue can cover your variable cost; if she continues producing her loss is \$5 (\$150-155); if she shuts down she’ll lose all the fixed costs of \$15 (\$155-\$140).
28. C; a firm should produce until MR=MC or the last unit where MR>MC.  If MC>MR on your last unit, you’re making too much