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Exam 3 Review Answers

1. Kate sells apples in a perfectly competitive market. Her profit maximizing quantity is 4 pints where marginal cost equals marginal revenue. 2. As a local monopoly, FillUp's gas station faces a downward sloping demand curve. Its profit maximizing price and quantity are labeled PF and QF. An increase in fixed costs decreases economic profit but does not change the profit maximizing quantity or deadweight loss. 3. In a perfectly competitive corn market, the representative farmer produces quantity QF where price equals average total cost. If ethanol demand increases, the market price and quantity rise to P* and Q* in the short run, and the farmer earns profits.

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378 views3 pages

Exam 3 Review Answers

1. Kate sells apples in a perfectly competitive market. Her profit maximizing quantity is 4 pints where marginal cost equals marginal revenue. 2. As a local monopoly, FillUp's gas station faces a downward sloping demand curve. Its profit maximizing price and quantity are labeled PF and QF. An increase in fixed costs decreases economic profit but does not change the profit maximizing quantity or deadweight loss. 3. In a perfectly competitive corn market, the representative farmer produces quantity QF where price equals average total cost. If ethanol demand increases, the market price and quantity rise to P* and Q* in the short run, and the farmer earns profits.

Uploaded by

Amanda Heim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Exam 3 Review (Key)

1. Kate sells apples. She is a price-taker and has easy entry and exit to the market.
a) What market structure is this?

b) The price per pint of apples is $10. Fill in the cost chart and determine the profit maximizing point.

Total Average Total Average Variable Average Fixed


Quantity Marginal Cost
Cost Cost Cost Cost
2 60 30 25 5 --
4 72 18 15.5 2.5 6
6 100 16.67 15 1.67 14
8 140 17.5 16.25 1.25 20
10 185 18.5 17.5 1 22.5
12 245 20.41 19.58 .83 30

 Fixed cost = 10 at every quantity

 Use formulas to solve for missing variables


 ATC = AFC + AVC
 TC = FC + VC
 MC = ΔTC/ ΔQ
 AVC = VC/Q
 AFC = FC/Q

Profit maximizing point: 4 pints of apples (MR ≥ MC)


2. Monopoly Markets
(Source: College Board, AP Microeconomics Exam 2019)

As the only gas station in a small town, FillUp has a local monopoly on the sale of gasoline. FillUp is currently
earning positive economic profit. Draw a correctly labeled graph for FillUp and show each of the following:

a) FillUp’s profit-maximizing quantity, labeled QF


b) FillUp’s profit-maximizing price, labeled PF
c) The deadweight loss associated with FillUp’s profit-maximizing quantity, shaded completely
d) The maximum quantity at which FillUp would earn zero economic profit, labeled Q Z

Assume that FillUp’s fixed costs increase because of a new lease on its property and FillUp stays in business.
Will each of the following increase, decrease, or remain unchanged at FillUp’s profit-maximizing quantity?:

a) The deadweight loss. Explain.


b) FillUp’s economic profit

Assume the demand for gasoline decreases because people bike to work more often. What must be true for
FillUp to continue to operate in the short run? What happens to FillUp’s profit-maximizing quantity and price
in the short run assuming the firm continues to operate?

Solution:

 Start with a correctly labeled graph of the monopoly showing downward-sloping demand (D) and
marginal revenue (MR) curves with the MR curve below the demand curve.
 The profit-maximizing quantity is labeled as QF, where MR = MC.
 Deadweight loss will remain unchanged. Changes in fixed costs do not affect MC or do not change the
profit-maximizing quantity of the firm, but FillUp’s economic profit will decrease
 Price must be greater than AVC at the profit-maximizing level of output, but the profit-maximizing
quantity and price will both decrease.
3. Perfect Competition
(Source: College Board, AP Microeconomics Exam 2017)

Corn is used as food and as an input in the production of ethanol, an alternative fuel. Assume corn is produced
in a perfectly competitive market.

Draw correctly labeled side-by-side graphs for the corn market and a representative corn farmer. On your
graphs show each of the following:

a) The equilibrium price and quantity in the corn market, labeled PM and QM, respectively
b) The profit-maximizing quantity of corn produced by the representative farmer earning zero economic
profit, labeled QF

Assume the demand for ethanol increases. On your graphs in part (a) show what will happen to each of the
following in the short run:

a) The market price and quantity of corn, labeled P* and Q*


b) The area of the profit or loss earned by the representative corn farmer, shaded completely

Solution:

 Start with drawing a correctly labeled graph of the corn market with P M and QM. The market demand
curve must be downward sloping and the market supply curve must be upward sloping.
 Show a horizontal demand curve on the firm’s graph extended from the market equilibrium price, PM.
 Identify the firm’s profit-maximizing quantity, QF, at marginal cost equal to marginal revenue
(MC=MR1).
 The firm’s average total cost (ATC) curve and marginal cost (MC) pass through the minimum point of
ATC, and P = ATC = MC at QF.
 Show a rightward shift of the market demand curve and a higher price and quantity, P * and Q*.
 Shade the area representing the profit for a representative corn farmer.

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