Microeconomics!

Pre-College Issues High School Life
1

<p>Hey guys, I'm doing some practice for AP Microeconomics (independent study) but I can't figure out some of these practice questions. I don't know how to put in a decent chart but the first question has two columns: Output and Total Cost. Any help is greatly appreciated!</p>

<p>1) Output Total Cost
0 18
1 24
2 28
3 30
4 34
5 40
6 48
7 58
8 70</p>

<p>If the price is $10 and the firm is a perfect competitor, the profit maximizing ouput is: A) 3 B) 4 C) 5 D) 7 E) 8</p>

<p>2) A perfectly competitive firm is operating where marginal revenue is greater than marginal costs. What should this firm do to increase profits? A) Increase production B) Decrease production C) Increase price D) Decrease price E) Do nothing.</p>

<p>3) What happens to a monopolist's price, profits, and ouput if its fixed costs decrease? A) Price decrease, profit increase, output decrease B) Price decrease, profit decrease, output decrease C) Price no change, profit increase, output no change D) Price increase, profit increase, output increase E) Price decrease, profit no change, output increase</p>

<p>4) In the long run, a monopolistically competitive firm will make: A) More profits than a perfect competitor B) Less profits than a perfect competitor C) More profits than a monopoly D) More profits than an oligopolist E) Zero economic profits</p>

<p>5) If the firms in an oligopoly could costlessly form an industry-wide cartel to jointly maximize profits, the demand curve facing the cartel would be: A) Less elastic than the industry demand curve B) The same as the industry demand curve C) More elastic than the industry demand curve D) Perfectly elastic E) Horizontal at the market clearing price</p>

<p>6) Which of the following is true of "normal accounting profits"? A) They are the only profits earned in the long run by competitive firms B) They are not an economic cost of production C) They act as signals to attract firms to enter an industry D) They are not real money E) They are also known as explicit costs</p>

<p>7) If the variable cost of producing five units of a product is $100 and the average variable cost of producing six units is $125, then the marginal cost of producing the sixth unit is: A) $125 B) $225 C) $250 D) $350 E) $750</p>

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<p>Bump. Please Help!</p>

3

<ol>
<li>D, the point of profit maximization is where marginal revenue equals marginal cost. Since the price is set at 10, the marginal revenue is always going to be 10. Look at the change in total cost as the number of units increases; this is called the marginal cost. Between 6 and 7 units, the cost increases by 10, making it (marginal cost) equal to the price of 10 (marginal revenue).</li>
</ol>

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<p>Thanks! After staring at the problem for about 30 minutes I finally figured out how to do that one. These are the answers I have come up with so far: 2) C, 6) B, and 7) C. Any input will be greatly appreciated!</p>

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<p>Now, for 3) E, 4) E, 5) A. Anyone agree or disagree? Thanks for the help! By the way, answer choice D for #5 should be "Perfectly inelastic."</p>

6

<p>Bump (10 Characters)</p>

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<p>everything looks good, but are you sure 5 isn't B</p>

<p>it's been a while so i forgot how (or even if) cartels can change elasticity</p>

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<p>Thanks pistonsfan! So do my other answers look okay? Here's some information I came across from CliffNotes: "For example, if each firm in an oligopoly sells an undifferentiated product like oil, the demand curve that each firm faces will be horizontal at the market price. If, however, the oil-producing firms form a cartel like OPEC to determine their output and price, they will jointly face a downward-sloping market demand curve, just like a monopolist." That might change some things. Any other advice?</p>

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<ol>
<li>D</li>
<li>C</li>
<li>E</li>
<li>E</li>
<li>B</li>
<li>B</li>
<li>C</li>
</ol>

<p>that looks like the final answers</p>

<p>any other inputs?</p>

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<p>Thanks a TON pistonsfan! I spent probably 3 hours looking through 5 econ books trying to find these answers (although I'm pretty sure they were pretty obvious). Let's hope I can do better by the exam in May :)</p>

<p>Actually, I do have some more quick questions.</p>

<p>"A single airline provides service from City A to City B. Explain how the airline will determine the number of passengers it will carry and the price it will charge. Then, suppose fixed costs for this airline increase. How will this increase in fixed costs affect the airline's price and output decisions in the short run?" For my answer to this, I figured since there is only a single airline providing service that it will function as a monopoly. If that's the case, I figured to find the output you just go to where MR=MC and then, to find price, draw a vertical line to the demand or AR curve. However, I was somewhat lost with the next part about what to do with an increase in fixed costs. I know, as a general rule of thumb, that monopolies will lower the price some (but not by enough to incur losses) in order to sell more of its product (increase the output). Do you agree? Any thoughts?</p>