Wednesday, May 11, 2016

2006 AP Micro FRQ (question 2)

2006 AP Micro FRQ (question 2)



(a) What is the dollar value of the firm's total fixed cost?

Understand that Total Cost = Variable Cost + Fixed Costs,,, Variable costs (think labor) only exist when there is actual production. If costs are ($20) and there is no production then the cost of $20 must be a fixed cost.

Answer - 

(b) Calculate the marginal cost of producing the first unit of output.


If Fixed Costs are ($20) and the Total Costs are ($27) then the Variable Costs/ Marginal Cost must be ($7).

Answer - 

(c) If the price the firm receives for its product is $20, indicate the firms profit-maximising quantity of output and explain how you determined the answer.

If $20 is the products price, and it is a perfectly competitive firm, then the 
Marginal Revenue = Price,, as the perfectly competitive firm's (MR. DARP) is perfectly elastic.
For every unit sold the revenue increases by $20 = the MR = P.
Profit Maximising quantity is where MR = MC, which is closest with the fourth unit.

Understand that just saying the 4th unit does not explain,,, to explain you must clearly explain WHY?

EXPLAIN - Using marginal analysis we compare where a firm's MR = MC, this is where profit is maximised. The 4th unit of production the MR $20 > MC $19. We are as close to Profit Max as possible, if we produce the 5th unit MR $20 < MC $23 (a loss). The firm profit max is to produce a quantity of 4.

Answer - 

(d) Given your results in part (c), Explain what will happen to the number of firms in the industry in the long-run.

Understand that the firm is making a profit of $8 with a production of 4 units. This is positive/abnormal/super economic profit in the short-run. Profits attract firms and therefore firms will enter the market hunting for profits. 
Number of firms will increase

Answer - 

(e) Assume that this firms operates in a constant cost industry (clue), and has reached long-run equilibrium. If the government imposes a per-unit tax of $2, indicate what will happen to the firm's profit maximising output in the long-run.



If in the Long-run firms are making zero economic profit, and the government imposes a $2 tax, it is fair to assume that the marginal costs will shift to the left as input costs increase. 


Answer - 

Thanks, Linh Nguyen