2023 AP Micro FRQ Set 1 #3

 2023 AP Micro FRQ Set 1 #3

A) Calculate Hansel Hangout’s total fixed cost. Show your work.

 

Hansel is a profit maximizing firm, which means they produce where MC = MR.

 

We should know that ATC = AVC + AFC

 

Average Total Costs = Average Variable Costs + Average Fixed Costs

Or 

We could rearrange it and recognize that ATC – AVC = AFC

 

So, at 6 units of output/production the ATC = $21 & the AVC = $9

How to find the ATC & AVC? 

Go to the output of production (6 units) and go straight up.

We hit the AVC curve at $9 and if we keep going up, we hit the ATC at $21.

ATC = $21

AVC = $9

So, the AFC = $12

 

Now you are scratching your head and saying, “Charles how does that help me find TFC”?

 

You should know that to go from AFC to TFC, we take AFC and multiply it by the output.

 

Or to say it differently

AFC x Quantity = Total Fixed Cost 

ATC x Quantity/output = Total Cost

AVC x Quantity/output = Total Variable Cost

 

Recognize that Total Fixed Cost & Fixed Cost are the same thing. :0

 

AFC x Quantity = Total Fixed Cost 

Answer A) $12 x 6 units produced = TFC of $72

 

 

B) Identify the price and quantity for Hansel’s at Profit max.

 

I believe we already did it, 

 

Profit Maximization for Hansel’s Hangout for Good X is where MC = MR

Answer B) Price $14 Quantity $6

C) Calculate the economic profit at the quantity identified in part (b). Show your work.

 

Economic profit = Total Revenue – Total Costs

 

6 quantity/outputs/units sold x $14 = Total Revenue of $84

 

To find Total Costs we find average total costs x quantity produced

Or

ATC x Quantity = TC

 

The firm at profit max (MR=MC) produces 6 units 

and at 6 units the ATC is $21 (we found it earlier)

 

$21 x 6 = a TC of $126

Hansel isn’t doing very well.

Total Revenue = $84

Total Costs $126

 

Remember Profit = TR – TC

 

$84 - $126 = -$42

 

Answer C) Hansel has a Negative economic profit of $42

Or we could say Hansel has a loss of $42

D) As the market for Good X adjusts to the long-run equilibrium, what will happen to the price of Good X? Explain.

From the 2023 Cheat Sheet for Perfect Competition.

How do we know that firm is a perfectly competitive firm = The MRDARP curve is horizontal

 

The price is constant which is a characteristic of perfectly competitive firms.

 

Losses in an industry cause some firms to Exit/go broke and the supply of the Good X decreases/shifts left as those firms quit producing Good X.

 

Answer D) The price increases as supply shifts left.

 

E) Assume the cross-price elasticity of demand between Good X and Good C is positive. Given the change in the long-run price of Good X in part (d), will the quantity demanded of Good C increase, decrease, or remain the same? Explain.

 

You should know that if the cross-price elasticity is positive that means the two goods are substitutes.

 

Also, substitutes are positively related in price. 

 

Example: As the price of Coke increase people switch to Pepsi, increasing the demand for Pepsi.

Answer E) Increasing demand which will increase the quantity demanded for the good.