AP Microeconomics : Output
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Example Questions
Example Question #1 : Output
For a monopolist, marginal cost is equivalent to which of the following?
Average fixed cost
Marginal revenue
Average total cost
Industry supply
Industry supply
Because a monopolist is the only producer in its industry, a monopolist's marginal cost curve is equivalent to the industry supply curve.
Average fixed cost and marginal revenue are incorrect because they are downward sloping, whereas supply is upward sloping.
Average total cost is a distortion of the correct answer.
Example Question #2 : Side By Side Graphs
Suppose a diseconomy of scale exists for a particular firm. If the firm doubles its output, then ___________.
its long-run average cost will less than double
its long-run average cost will exactly double
its short-run average cost will exactly double
its short-run average cost will more than double
its long-run average cost will more than double
its long-run average cost will more than double
Diseconomies of scale (and economies of scale) refer to the relationship between a firm's output and its long-run average cost. If a firm is operating under a diseconomy of scale, then doubling its output results in more than doubling its long-run average total cost.
Answer choice "its long-run average cost will exactly double" refers to the situation in which the firm is operating at its minimum efficient scale, the lowest point on the long-run average cost curve.
Answer choice "its long-run average cost will less than double" refer to situations in which the firm has an economy of scale.
Answer choices "its short-run average cost will more than double" and "its short-run average cost will exactly double" are incorrect because diseconomies of scale refer to long-run, not short-run, cost curves.
Example Question #3 : Side By Side Graphs
In order to maximize profits, a firm should continue to produce output until which of the following conditions is met?
Total revenue is greater than total cost
Total revenue is equal to marginal revenue
Marginal revenue is greater than marginal cost
Total cost is equal to total revenue
Marginal revenue equals marginal cost
Marginal revenue equals marginal cost
The profit-maximizing rule for firms is to continue producing until marginal revenue equals marginal cost.
Answer choice "Marginal Revenue is greater than marginal cost" is incorrect, because firms should continue producing under this condition.
All of the other answer choices involving either total revenue or total cost are incorrect because profit-maximization occurs "at the margin", i.e. the profit-maximization rule applies to marginal, not total, cost curves.
Example Question #4 : Side By Side Graphs
When marginal cost is greater than average total cost, which of the following must be true?
Marginal revenue must be increasing.
Average total cost must be increasing.
Marginal revenue is equal to marginal cost.
Total revenue must be constant.
Average total cost must be decreasing.
Average total cost must be increasing.
We can think of marginal revenue as our grade in a class we are currently taking and average total cost as our total GPA. If we get a better grade in our current class than our GPA, then our GPA must increase. Similarly, if marginal cost is greater than average total cost, then average total cost must be increasing. Answer choice "average total cost must be increasing" is correct.
To eliminate the other answer choices, remember that when marginal cost is greater than average total cost, 1) marginal revenue can still be decreasing, 2) marginal revenue is not necessarily equal to marginal cost, and 3) total revenue can still be changing.
Example Question #1 : Output
Suppose that the price of Good Y increases by 5%. If the quantity supplied of Good Y remains constant, then the price elasticity of supply of Good Y is ________.
less than 0.
greater than 1.
impossible to determine from the information given.
0.
1.
0.
Remember that the price elasticity of supply is calculated by taking the percent change of the quantity supplied (in this case 0%) divided by the percent change in the price (in this case 5%). So the price elasticity of supply of Good Y is 0.
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