AP Microeconomics 3.7 Perfect Competition Questions

Analyze competitive markets and firms as price takers, choose output where marginal revenue equals marginal cost, and evaluate efficiency.

Exam points

use price-taking conditions to explain horizontal firm demand and P = MR = AR
link market and firm graphs, transfer price and choose the firm's output at P = MC
calculate or shade firm profit and loss from price, ATC and the chosen quantity
derive the firm's short-run supply from MC above AVC and apply the shutdown rule
trace demand changes through short-run market price, firm output and profit or loss

Covered syllabus points

PRD-3.A—a. Define (using graphs as appropriate) the characteristics of perfectly competitive markets and efficiency. b. Explain (using…

[Maximum number: 3]

Deskward is a typical profit-maximizing firm that produces and sells wooden desks in a constant-cost, perfectly competitive market that is in long-run equilibrium.

(a)

Draw correctly labeled side-by-side graphs for the wooden desk market and for Deskward and show each of the following.

[ 3 ]

(i)

Deskward's profit-maximizing price and quantity, labeled $\mathrm{P}_{\mathrm{F}}$ and $\mathrm{Q}_{\mathrm{F}}$ , respectively

[ 2 ]

Draw a correctly labeled graph for Deskward that shows the firm's horizontal demand and marginal revenue ( $\mathrm{d}=\mathrm{MR}$ ) curve extended from the market equilibrium price ( $\mathrm{P}_{\mathrm{M}}$ ) and label the firm's price as $\mathrm{P}_{\mathrm{F}}$ . Figure for Answer to Question (i) — AP Microeconomics

The firm's graph must show a rising marginal cost (MC) curve, and show the firm's profit-maximizing quantity, labeled $\mathrm{Q}_{\mathrm{F}}$ , where $\mathrm{MR}=\mathrm{MC}$ . Figure for Answer to Question (i) — AP Microeconomics

(ii)

Deskward's average total cost curve consistent with long-run equilibrium, labeled ATC

[ 1 ]

The firm's graph must show the average total cost (ATC) curve tangent to the firm's $\mathrm{d}=\mathrm{MR}$ curve at $\mathrm{Q}_{\mathrm{F}}$ and show the MC curve passing through the minimum point of the ATC curve. Figure for Answer to Question (ii) — AP Microeconomics

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Covered syllabus points

Question 1

Question (a)

Question (i)

Question (ii)