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Microeconomics

Microeconomics. Practice Free Response Questions. MC. P. ATC. A. P 1. B. B. ------------. D. Qty. Q 1. MR. 1) Assume that a profit-maximizing firm in a monopolistically competitive industry is in long-run equilibrium.

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Microeconomics

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  1. Microeconomics Practice Free Response Questions

  2. MC P ATC A P1 B B ------------ D Qty Q1 MR 1) Assume that a profit-maximizing firm in a monopolistically competitive industry is in long-run equilibrium. • Draw a correctly labeled graph that shows the profit-maximizing firm’s price and output. • Difference between a competitive output, price & profit

  3. The city eliminates the business license fee (a fixed cost) for all firms in this industry. How does the elimination of the license fee affect: i. Output ii. Profit iii. Modify Graph i) Output/Price does NOT change WHY:a ∆in fixed costs does not ∆marginal costs or marginal revenue.

  4. (c) continued i. Output ii. Profit iii. Modify Graph ii) As fixed costs ↓ ATC Shifts downward => profits ↑ (from zero to shaded Area) c) In long run this would attract more competition -Demand would shift left -Profit would = ZERO -Quantity would fall P MC ATC A P ATC1 Economic Profits D Q Q MR

  5. Unit Elastic Elastic range Inelastic Range D MR Demand Curve & Elasticity ● ----------------- • Firms Operate in Elastic Portion of Demand • Elasticity = 1 when MR = 0

  6. Practice Free Response Question #2 Watsonia

  7. PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue • There is one art museum on the island of Watsonia. The • museum’s demand and cost curves are shown in the • graph above. The museum currently relies on an • admission charge for some of its funding. Its directors • are debating about how to set the admission charge.

  8. PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue a) Identify the price and quantity associated: i) The museum maximizes its profit. P5 Q2

  9. PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue ii) The museum maximizes its total revenue P3 Q4

  10. PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue • The museum maximizes the sum of consumer and • producer surplus(total welfare) P4 Q3

  11. PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue iv) The museum maximizes its attendance, as long as it breaks even. P2 Q5

  12. Elastic PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 Inelastic P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue • When the attendance is Q1, is the demand price elastic, • inelastic, or unit elastic? Explain. Demand is elastic at Q1. MR is greater than zero; Q1 is left of the mid-point or in the upper half of the demand.

  13. PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue • Assume that the price is set at P2. Assuming the • existence of an opportunity cost, indicate whether the • museum’s accounting profits would be positive, • negative, or zero. Explain why. Accounting profits are positive.

  14. PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue • Assume that the price is set at P2. Assuming the • existence of an opportunity cost, indicate whether the • museum’s accounting profits would be positive, • negative, or zero. Explain why. Economic profit is zero and opportunity costs exist.

  15. PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue • Assume that the price is set at P2. Assuming the • existence of an opportunity cost, indicate whether the • museum’s accounting profits would be positive, • negative, or zero. Explain why. Or-- Economic profit is zero and ATC includes opportunity costs.

  16. PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue • Assume that the government decides the museum should • charge no admission and agrees to subsidize the • museum for any losses. • Using the labeling in the graph, identify the museum’s attendance under • that circumstance. Q7

  17. Innovation in Schools http://www.youtube.com/watch?v=azNo8ttSCiY

  18. PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue • Assume that the government decides the museum should • charge no admission and agrees to subsidize the • museum for any losses. ii) Would the outcome be allocatively efficient? Explain. Outcome is NOT allocatively efficient.

  19. PRICE/COST Marginal Cost P6 P5 Average Total Cost P4 P3 P2 is greater than P1 Demand 0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 ATTENDANCE Marginal Revenue • Assume that the government decides the museum should • charge no admission and agrees to subsidize the • museum for any losses. ii) Would the outcome be allocatively efficient? Explain. MC > P or MSC > MSB

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