2021 (Set 2) AP Micro FRQ#3 (Utility/ MC=MB)
Watch me answer it here
a) Calculate the total net benefit of placing three advertisments.
Net = Benefits - Costs
Total Benefit of 3 advertisements = $3,000
Total Cost of 3 advertisements = $800
Total NET Benefit = Total Benefit - Total Cost = Total Net Benefit
$3,000 - $800 = $2,200
b) Calculate the marginal net benefit of the third advertisement.
Marginal = Change in Total / Change in Quantity
c) What is the optimal number of advertisements? Explain using marginal analysis.
The Optimal number of advertisements is where the MC = MB
If we can't get there then we want to get as close as possible to the MC = MB
without having the MC > MB.
The 4th advertisement has a MC of 500 and a MB of 600 = a 100 difference which is as close to where the MC=MB without having the MC > MB.
the 5th advertisement the MC > MB and we would never want to buy advertisements where the MC is greater than the MB as we would be losing money on that advertisement.
d) Suppose over the next year the MB for each advertisement increases by $300. Identify the optimal number of advertisements.
The MB for the 4th unit is now 900and the MC for the 4th unit is still 500 a 400 difference.
The 5th units MC is now greater than its MB and we never want our MC to be greater than the MB or we will be loosing money on that Unit.
So we stay at the 4th unit.
e) There are many firms and they advertise.
We only have one market structure that advertises for the AP.
Monopolistic Competition
Natural Monopoly Cheat Sheet
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