AP Micro AP Micro Profit Maximization 1

Question 1

The profit-maximizing rule for all firms states that output should be set where:

Accepted Answer

Marginal revenue equals marginal cost

Answer

Firms maximize profit by producing the quantity at which MR = MC, because any other output level would reduce profit.

Question 2

Economic profit equals:

Accepted Answer

Total revenue minus total costs including implicit costs

Answer

Economic profit subtracts both explicit and implicit (opportunity) costs from total revenue.

Question 3

A firm should shut down in the short run if:

Accepted Answer

Price falls below average variable cost

Answer

If price < AVC, the firm cannot cover its variable costs and minimizes losses by shutting down rather than producing.

Question 4

When a competitive firm's price equals its minimum average total cost in the long run, it earns:

Accepted Answer

Zero economic profit (normal profit)

Answer

Long-run competitive equilibrium drives economic profit to zero, where P = minimum ATC and firms earn only normal profit.

Question 5

Marginal revenue for a perfectly competitive firm equals:

Accepted Answer

The market price

Answer

A price-taking competitive firm can sell any quantity at the market price, so each additional unit adds exactly the market price to revenue.

AP Practice Test