Microeconomics Test 10

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Memorial High School *

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MICRO

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Economics

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May 26, 2024

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AP Microeconomics Page 1 of 3 Assignment: Apply Concepts of Perfect Competition 1. A. Demand for a perfectly competitive firm. Graph the demand curve for a perfectly competitive firm and explain why it's shaped the way it is. (2 points) Graph the demand curve for a perfectly competitive industry and explain why it's shaped the way it is. (2 points) Explain why the two demand curves you just drew are either similar or different. (1 point) Below is the cost, revenue, and profit data for Elmer's wheat farm, a perfectly competitive firm. Complete the table below. (4 points) Quantity Total Average Marginal Total Marginal Profit/ of Output | Cost Total Cost | Cost Price Revenue | Revenue Loss 0 $75 § - $ - $-- |80 $ - -$75 1 220 220 145 150 150 150 70 2 305 152.5 85 150 300 150 5 3 370 123.33 65 150 450 150 +80 4 400 100 30 150 600 150 +200 5 440 88 40 150 750 150 +310 6 520 86.67 80 150 900 150 +380 7 630 90 110 150 1050 150 +420 8 810 101.25 180 150 1200 150 +390 9 1,100 122.22 290 150 1350 150 +250 10 1,500 150 400 150 1500 150 0 Economists use two methods to calculate perfectly competitive firms' maximum profit: the total revenue-total cost method, and the marginal revenue equals marginal cost method. i. Draw a graph for ElImer's wheat farm showing short-run profit maximization by comparing the total revenue curve with the total cost curve. On this graph, point out where profit is maximized (include the level of output in your answer) and explain how you can tell the amount of profit from this graph. (3 points) ii. Draw a graph for EImer's wheat farm showing the marginal cost, average total cost, demand, marginal revenue, and average revenue. Indicate the level of profit where profit is maximized, shade in the area of maximum profit, give the amount of maximum profit, and explain how this number is calculated. (6 points) If the market price of a bushel of wheat increases to $185, how many bushels should Elmer produce to maximize profit? Explain your answer. (2 points) Explain the behavior of marginal costs and why the marginal cost curve has the shape it has. (1 point) Copyright © 2021 Apex Learning. See Terms of Use for further information.

AP Microeconomics Page 2 of 3 Assignment: Apply Concepts of Perfect Competition . Where does the marginal cost curve cross the average-total-cost curve? Explain the importance of this point. (2 points) Short-run supply curve for perfectly competitive firm Graph the short-run supply curve for a perfectly competitive firm and explain where this short-run supply curve lies. Indicate the following curves on your graph: marginal cost curve, marginal revenue curve, average-total-cost curve, average-variable-cost curve, short-run supply curve. (5 points) What information does the short-run supply curve convey? When used in conjunction with the average-variable-cost curve, what does the supply curve tell a firm about its profits? (2 points) Explain where on your graph from part A you can find the shutdown point, the break-even point, and the profit maximization point for a firm in a perfectly competitive industry. Indicate these points on your graph. (Copy the graph into this answer to do so.) (2 points) Graphing various situations that might face a perfectly competitive firm In the short run, a perfectly competitive firm may earn positive economic profits. On a graph, show this situation, using marginal revenue, marginal cost, average-total-cost, and average-variable-cost curves. Indicate the level of output the firm will produce and shade in the area that represents the firm's positive economic profit. In words, explain why your graph shows positive economic profits. (3 points) In the short run, a perfectly competitive firm may earn negative economic profits but continue to operate. On a graph, show this situation, using marginal revenue, marginal cost, average-total-cost, and average-variable-cost curves. Indicate the level of output the firm will produce and shade in the area that represents the firm's negative economic profit. Explain why your graph shows negative economic profits. (3 points) Since the firm is experiencing an economic loss but is not shutting down, explain why the firm is continue to produce. (1 point) In the short run, a perfectly competitive firm might earn negative economic profits and then decide to shut down. On a graph, show this situation, using marginal revenue, marginal cost, average-total-cost, and average-variable-cost curves. Indicate the level of output at which the firm will no longer produce. Explain why your graph shows the shut down point. (4 points) . If the firm shuts down, will the firm still be responsible for paying its fixed costs? Explain your answer. (1 point) Is the firm now out of business in the short run, since it has shut down? Explain your answer. (1 point) Copyright © 2021 Apex Learning. See Terms of Use for further information.

AP Microeconomics Page 3 of 3 Assignment: Apply Concepts of Perfect Competition G. Draw two graphs. On the first, show the short-run profit maximizing output of an individual firm earning an economic profit, including MR, MC, AVC, and ATC. On the second, show the short-run market equilibrium price and quantity. Explain how the industry supply curve and the market equilibrium price and quantity are determined. (6 points) H. What is the relationship between the price on the two graphs? Why does this relationship exist? (2 point) I. Explain why a firm in a perfectly competitive industry can earn economic profits only in the short run. (1 point) J. Draw the MC, MR, ATC, and long-run ATC curves for a perfectly competitive firm in long-run equilibrium. Explain the relationship between those curves. Next, draw another graph showing long-run equilibrium for the perfectly competitive market. What is the relationship between the two graphs? (6 points) K. Assume a firm is making a positive economic profit in the short run. Why would they make zero economic profits in the long run? (1 point) \% A NI RO QY QuoniMy 1 A. In a perfectly competitive market, an individual firm faces a horizontal demand curve. This shape implies that the firm must accept the prevailing market price and cannot influence it. If the firm attempts to charge a higher price, it will lose all its customers to competitors offering the same product at the market price. Consequently, the demand curve for a perfectly competitive firm is perfectly elastic. B. In contrast, the demand curve for a perfectly competitive industry is downward-sloping. This shape reflects the law of demand, where consumers are willing to buy more units when prices are lower and fewer units when prices are higher. C. The demand curves for an individual perfectly competitive firm and the entire perfectly competitive industry differ. An individual firm faces a horizontal, perfectly elastic demand curve because it is a price taker and must accept the market price determined by the industry's supply and demand. However, the industry's demand curve slopes downward, as the total quantity demanded by consumers responds to changes in the market price. While an individual firm has a fixed market price, the industry's demand curve does not have a fixed price, and the market price adjusts based on the intersection of industry supply and demand. Copyright © 2021 Apex Learning. See Terms of Use for further information.

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2. A. Completed on Table Above i. To find the point where profit is maximized, you need to identify the quantity (level of output) where the total revenue and total cost curves are furthest apart on the graph. This represents the maximum vertical distance between the two curves, which corresponds to the highest level of profit. ii. In this case, the quantity of 7 units represents the output level where profit is highest. By multiplying the quantity (7) by the difference between the price ($150) and the average total cost ($90), we can calculate the maximum profit: Quantity of Output x (Price - ATC) = Maximum Profit 7 x ($150 - $90) = 7 x $60 = $420 Therefore, at an output of 7 units, the firm achieves its maximum profit of $420 C. If the market price of a bushel of wheat increases to $185, EImer should produce 8 bushels to maximize his profit. At this higher price, the demand curve (which equals marginal revenue and average revenue) will shift upward. As a result, the new profit-maximizing output level, where the marginal cost curve intersects the demand curve, will occur at around 8 bushels. D. The behavior of marginal costs is defined as the additional cost incurred to produce one additional unit of output. The shape of the marginal cost curve is influenced by the concepts of increasing and diminishing marginal returns. Initially, at low output levels, the marginal cost curve rises due to increasing marginal returns. However, as production increases further, marginal returns start to diminish, causing the marginal cost curve to reach its lowest point and then slope upward. E. The marginal cost curve crosses the average total cost (ATC) curve at the point where the ATC is at its minimum. This point is significant because it marks the output level where the firm achieves profitability and where it is most cost-efficient to produce that quantity of units. Bugway

B. The short-run supply curve conveys information about the firm's willingness and ability to supply different levels of output at various prices. Specifically, the portion of the marginal cost curve that lies above the average variable cost curve represents the short-run supply curve. C. The shutdown point is identified by the intersection of the marginal cost curve and the average variable cost curve. At this point, the firm would choose to temporarily cease production in the short run if the market price falls below the average variable cost. The break-even point occurs where the marginal cost curve intersects the average total cost curve. At this output level, the firm's total revenue equals its total cost, resulting in zero economic profit or loss. The profit maximization point is determined by the intersection of the marginal revenue curve and the marginal cost curve. At this output level, the firm maximizes its economic profit by producing where marginal revenue equals marginal cost. 4.A. The graph depicts a situation where the firm is earning positive economic profits. This is evident because the average total cost (ATC) curve lies below the marginal revenue curve, as well as the price, demand, and average revenue curves. When a firm's ATC is lower than the price it receives for its output, it indicates that the firm is covering all its costs and earning an economic profit on each unit sold. B. In the short run, even if a perfectly competitive firm is earning negative economic profits (losses), it may continue to operate. This situation can be represented on a graph by showing the ATC curve above the marginal revenue (price) curve. The area between these two curves represents the firm's negative economic profit or loss. However, the firm will still produce the output level where the marginal cost curve intersects the marginal revenue curve, as long as it can cover its variable costs. C. The firm continues to produce despite incurring economic losses because the average variable cost curve, as well as the marginal revenue, demand, and average revenue curves, are still below the price curve. This situation allows the firm to cover all its variable costs associated with output, as well as a portion of its fixed costs. By operating under these conditions, the firm can at least cover some of its fixed costs, which is a better scenario than shutting down completely and being unable to cover any costs. D. The shutdown point for a firm in the short run is represented on a graph by the intersection of the marginal cost curve and the average variable cost curve. At this output level, the price the firm receives is lower than its average variable cost. This means the firm cannot cover all its variable costs associated with production, making it optimal to cease operations. The graph demonstrates this shutdown point where the marginal cost curve meets the average variable cost curve. E. Even if the firm shuts down and stops production temporarily, it will still be responsible for paying its fixed costs, such as property costs, rent, insurance premiums, and minimum utility bills. These fixed costs must be paid regardless of whether the firm is actively producing or not. F. In the short run, a firm that has shut down production is not necessarily going out of business permanently. It may have temporarily ceased operations until economic conditions improve or it secures additional resources to resume production. This shutdown is considered a short-run decision, implying the firm may restart operations when circumstances are more favorable. G. The market equilibrium price in a perfectly competitive market (determined by the intersection of the market supply and demand curves) has a similar relationship to the price received by an individual firm in that market. For the individual firm, this price equals its marginal revenue, demand curve, and average revenue curve. Therefore, the prices on the two graphs (market and firm) have a similar relationship. H. In a perfectly competitive industry, a firm can earn positive, negative, or zero economic profits in the short run. However, earning positive economic profits is only a temporary situation in the short run, as these profits incentivize new firms to enter the market. 1. Positive economic profits earned by a firm in a perfectly competitive industry can only persist in the short run. Over time, as new firms are attracted by these profits and enter the market, the supply of the good or service increases. This increase in supply causes the market price to fall until all firms in the industry are earning only a normal, zero economic profit in the long run. Firms may experience periods of negative, zero, or positive economic profits in the short run, but over time, supply adjusts to eliminate any economic profits or losses, restoring a long-run equilibrium with zero economic profits.

J. To illustrate a perfectly competitive firm in long-run equilibrium, you can draw the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and long-run average total cost (LRATC) curves on a graph. The relationship between these curves shows the output level at the intersection of the MC and MR curves, which is the profit- maximizing quantity. The MR curve also represents the market equilibrium price, and the point where all four curves intersect represents the long-run equilibrium for the firm. On a separate graph showing the long-run equilibrium for the perfectly competitive market, the price for the firm (determined by the intersection of MC and MR) and the price for the market (determined by the intersection of market supply and demand curves) are the same. This is because in long-run equilibrium, firms earn zero economic profits, and the market price is just sufficient to cover all costs. K. Assume a firm is making a positive economic profit in the short run. In the long run, this economic profit would eventually diminish to zero due to changes in consumer preferences and demand. If consumers perceive a benefit in the firm's product, the demand curve will shift to the right, raising the equilibrium price and profits. This attracts new firms to enter the market, causing the supply curve to shift to the right as well. As more firms enter and supply increases, the market equilibrium price falls back to the level where firms are earning zero economic profits. This process of entry and exit, driven by profit motives, ensures that positive economic profits are only temporary in perfectly competitive markets. Graphs

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Microeconomics Test 10

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