AP Microeconomics : Long-run Business Equilibrium
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Example Questions
Example Question #1 : Long Run Business Equilibrium
For any firm, the long run refers to a period of time in which ________.
the price elasticity of supply is able to change
sunk costs are able to change
variable costs are able to change
fixed costs are able to change
fixed costs are able to change
The definition of the long run is a period of time in which fixed costs are able to change. For example, in the long run, a firm can move to a new plant that costs less money to operate each month.
Sunk costs are costs that cannot be recovered and therefore would not change, even in the long run.
The price elasticity of supply refers to the responsiveness of the supply curve to a change in price.
Example Question #2 : Long Run Business Equilibrium
To maximize profits, firms produce at the level at which _________.
marginal revenue equals average total cost
marginal revenue is less than marginal cost
marginal revenue equals average variable cost
marginal revenue equals marginal cost
marginal revenue equals marginal cost
The profit maximizing rule for the firm is marginal revenue equals marginal cost. Notice that the rule does not explicitly involve average total or average variable costs.
The MR=MC profit maximizing rule holds for all market structures - monopoly, oligopoly, monopolistic competition, and perfect competition.
If marginal revenue is less than marginal cost, then the firm actually loses profits with continued production.
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