Answers to Practice Questions for AP

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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



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