AP Micro AP Micro Profit Maximization 2 — Questions and Answers
Question 1: In the short run, a firm experiencing an economic loss should continue operating if:
- Price exceeds average total cost
- Total revenue exceeds total fixed cost
- Price exceeds average variable cost (Correct answer)
- Marginal revenue exceeds average cost
Correct answer: Price exceeds average variable cost
If P > AVC, the firm covers variable costs and contributes to fixed costs, so operating is better than shutting down.
Question 2: For a monopolist, marginal revenue is less than price because:
- It faces a downward-sloping demand curve and must lower price on all units to sell more (Correct answer)
- Its average total cost exceeds the market price
- Fixed costs are spread over fewer units
- It has no close substitutes for its product
Correct answer: It faces a downward-sloping demand curve and must lower price on all units to sell more
To sell one more unit, a monopolist must lower the price on all units sold, so MR < P.
Question 3: A profit-maximizing monopolist produces where MR = MC and charges a price:
- Equal to MC
- Equal to MR
- Read from the demand curve above the MR = MC output (Correct answer)
- Equal to average variable cost
Correct answer: Read from the demand curve above the MR = MC output
After finding the MR = MC quantity, the monopolist charges the highest price consumers will pay, found on the demand curve at that quantity.
Question 4: A firm's short-run supply curve in a competitive market is its:
- Average total cost curve
- Average variable cost curve
- Marginal cost curve above the minimum AVC (Correct answer)
- Marginal revenue curve
Correct answer: Marginal cost curve above the minimum AVC
A competitive firm supplies along its MC curve at prices above the shutdown point (minimum AVC).
Question 5: Normal profit is best described as:
- Profit above the competitive rate of return
- Zero accounting profit
- The opportunity cost of the owner's resources (zero economic profit) (Correct answer)
- Profit earned only by monopolists
Correct answer: The opportunity cost of the owner's resources (zero economic profit)
Normal profit equals the implicit costs (opportunity costs) of the owner's resources, so economic profit is zero.
Question 6: If marginal cost exceeds marginal revenue at the current output level, a profit-maximizing firm should:
- Increase output
- Hold output constant
- Decrease output (Correct answer)
- Raise its price without changing output
Correct answer: Decrease output
When MC > MR, each additional unit costs more than it earns, so reducing output increases profit.
AP Micro AP Micro Profit Maximization 2
In the short run, a firm experiencing an economic loss should continue operating if: