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Problem Set #4 FRQs

Problem Set #4 FRQs. FRQ#1 (14 points). 4 Points. 4 Points. B. 1 Point Each (Requires explanation) 1 point- P = MR for perfect competition because the price is constant OR the firm is a price taker

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Problem Set #4 FRQs

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  1. Problem Set #4 FRQs

  2. FRQ#1 (14 points)

  3. 4 Points 4 Points

  4. B. 1 Point Each (Requires explanation) 1 point- P = MR for perfect competition because the price is constant OR the firm is a price taker 1 point- P > MR for monopoly because the firm must lower the price (of all units) to sell more C. 1 Point Each (Requires explanation) 1 point- For perfect competition, firms will enter, increasing supply, price will fall to minimum ATC and the firm would make a normal profit. 1 point- For monopoly, the firm will continue to make profit since there are high barriers to entry.

  5. D. 1 Point- Correctly labeled DWL 1 Point- DWL is the amount of CS and PS that is lost when a firm underproduces.

  6. FRQ#2 (6 points)

  7. B. 1 Point- Demand is elastic 1 Point (Explanation)- Because MR is greater that zero (positive) OR Because as price falls TR is increasing.

  8. FRQ#3 (5 points)

  9. A. 1 Point- Correctly drawn graph with zero economic profit (ALL OR NOTHING).

  10. B. 1 Point- Firm’s Output doesn’t change 1 Point- A change in fixed costs doesn’t change MC and therefore there is no change in the MR=MC output 1 Point- Profits increase 1 Point- Since fixed costs decrease, ATC will decrease and the firm will make profit.

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