AP Microeconomics Unit 3 Production Cost and the Perfect Competition Model Questions

Review AP Microeconomics Unit 3 through production functions, cost curves, profit, shutdown and entry decisions, and competitive efficiency.

Exam points

use production tables and graphs to calculate product measures and identify diminishing returns
calculate short-run cost measures and interpret MC, AVC and ATC relationships
explain how marginal product, input prices, productivity and fixed costs affect cost curves
classify returns to scale and use LRATC to identify economies, diseconomies and efficient scale
distinguish accounting, economic and normal profit and calculate profit or loss

Covered syllabus points

3.1 The Production Function 3.2 Short-Run Production Costs 3.3 Long-Run Production Costs 3.4 Types of Profit 3.5 Profit Maximization 3.6 Firms’ Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market 3.7 Perfect Competition

[Maximum number: 4]

The table provided shows the short-run production function for Lowen Feline, a profit-maximizing firm that produces cat food.

Table for Question 1 — AP Microeconomics

Lowen Feline sells as many bags of cat food as it wants at a market price of $ 10 per bag and hires as many workers as it wants at a market wage of $ 18.

(a)

Lowen Feline's fixed cost is $ 90. Calculate the average fixed cost if Lowen Feline hires 6 workers. Show your work.

[ 1 ]

Calculate the average fixed cost of $3 and show the work.

Average Fixed Cost $=\frac{\text { Total Fixed Cost }}{\text { Quantity of Output }}$

Average Fixed Cost $=\frac{\$ 90}{30}=\$ 3$

1 point

(b)

Assume labor is the only variable input to Lowen Feline. Calculate the marginal cost if Lowen Feline increases output from 27 to 30 units. Show your work.

[ 1 ]

Calculate the marginal cost as $6 and show the work.

Marginal Cost $=\frac{\text { Change in Total Variable Cost }}{\text { Change in Output }}$

Marginal Cost $=\frac{(\$ 108-\$ 90)}{(30-27)}=\frac{\$ 18}{3}=\$ 6$

OR

Marginal Cost $=\frac{\text { Change in Total Cost }}{\text { Change in Output }}$

Marginal Cost $=\frac{(\$ 198-\$ 180)}{(30-27)}=\frac{\$ 18}{3}=\$ 6$

1 point

(c)

With the hiring of which worker do diminishing marginal returns begin? Explain using numbers.

[ 1 ]

State that diminishing marginal returns to labor begin with the hiring of the $3^{\text {rd }}$ worker
and explain that the marginal product of the $1^{\text {st }}$ worker is 5 bags, the marginal product of
the $2^{\text {nd }}$ worker increases to 7 bags, and the marginal product of the $3^{\text {rd }}$ worker decreases
to 6 bags.

1 point

(d)

In the long run, a rival company, Gato Food, increases its production from 40 to 50 units, and its total cost increases from $600 to $900. Over the output range of 40 to 50 units, is Gato Food experiencing economies of scale, diseconomies of scale, or constant returns to scale? Explain using numbers.

Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.

[ 1 ]

[Maximum number: 5]

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

(b)

Deskward also produces chairs. Deskward increases its production from 500 chairs to 600 chairs, and its long-run total cost increases from $80,000 to $108,000.

[ 2 ]

(i)

Calculate Deskward's long-run average total cost of producing 500 chairs. Show your work.

[ 1 ]

Calculate the long-run average total cost (LRATC) as $160 per chair and show your work.

\text { LRATC at } 500 \text { chairs }=\frac{\$ 80,000}{500}=\$ 160

(ii)

As Deskward increases production from 500 chairs to 600 chairs, is Deskward experiencing economies of scale, diseconomies of scale, or the efficient scale? Explain using numbers.

[ 1 ]

[Maximum number: 11]

Anderson Company is a typical firm that manufactures Good G in a constant-cost, perfectly competitive market. Anderson Company is currently earning positive economic profit.

(a)

What must be true about the relationship between accounting profit and economic profit if Anderson Company currently incurs both explicit and implicit costs in production?

[ 1 ]

(b)

Draw correctly labeled side-by-side graphs for the market and Anderson Company and show each of the following.

[ 8 ]

(i)

The market equilibrium price and quantity, labeled $\mathrm{P}_{\mathrm{M}}$ and $\mathrm{Q}_{\mathrm{M}}$ , respectively

[ 1 ]

(b)

Draw a correctly labeled graph of the market for Good G with a downward-sloping demand (D) curve and upward-sloping supply (S) curve and label the market equilibrium price as $\mathrm{P}_{\mathrm{M}}$ and the market equilibrium quantity as $\mathrm{Q}_{\mathrm{M}}$ .

Figure for Answer to Question (i) — AP Microeconomics

1 point

(ii)

The profit-maximizing price and quantity for Anderson Company, labeled $\mathrm{P}_{\mathrm{F}}$ and $\mathrm{Q}_{\mathrm{F}}$ , respectively

[ 2 ]

For the second point, draw a correctly labeled graph for the firm and show the firm's horizontal demand and marginal revenue (d=MR) curve extended from the market equilibrium price $\left(\mathrm{P}_{\mathrm{M}}\right)$ , and label the firm's price as $\mathrm{P}_{\mathrm{F}}$ .

Figure for Answer to Question (ii) — AP Microeconomics

1 point

For the third point, the firm's graph must show a rising marginal cost (MC) curve and the
1 point profit-maximizing quantity, labeled $\mathrm{Q}_{\mathrm{F}}$ where MR=MC.

For the fourth point, the firm's graph must show the average total cost (ATC) curve below the firm's demand curve at $\mathrm{Q}_{\mathrm{F}}$ and show the MC curve passing through the minimum point of the ATC curve.

(iii)

The area representing Anderson Company's positive economic profit, shaded completely

[ 5 ]

(c)

On your graphs in part (b), show what will happen to each of the following if the market for Good G adjusts to long-run equilibrium.

[ 2 ]

(i)

Anderson Company's profit-maximizing price and quantity, labeled P* and Q*, respectively

[ 2 ]

On the firm's graph from part (a), show a lower price, labeled P*, extended from the new market equilibrium price, $\mathrm{P}_{2}$ , and show a lower quantity produced, $\mathrm{Q}^{*}$ , at the new intersection point of $\mathrm{P}^{*}=\mathrm{MR}_{2}=\mathrm{MC}=$ minimum ATC.

Total for part (c) 2 points

All question bank results loaded

Covered syllabus points

Question 1

Question (a)

Question (b)

Question (c)

Question (d)

Question 2

Question (a)

Question (i)

Question (ii)

Question (b)

Question (i)

Question (ii)

Question 3

Question (a)

Question (b)

Question (i)

Question (ii)

Question (iii)

Question (c)

Question (i)