AP Microeconomics : Output

Study concepts, example questions & explanations for AP Microeconomics

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Example Questions

Example Question #1 : Output

For a monopolist, marginal cost is equivalent to which of the following?

Possible Answers:

Marginal revenue

Average fixed cost

Average total cost

Industry supply

Correct answer:

Industry supply

Explanation:

Because a monopolist is the only producer in its industry, a monopolist's marginal cost curve is equivalent to the industry supply curve.

Average fixed cost and marginal revenue are incorrect because they are downward sloping, whereas supply is upward sloping.

Average total cost is a distortion of the correct answer.

Example Question #2 : Output

Suppose a diseconomy of scale exists for a particular firm. If the firm doubles its output, then ___________.

Possible Answers:

its long-run average cost will more than double

its long-run average cost will less than double

its short-run average cost will more than double

its long-run average cost will exactly double

its short-run average cost will exactly double

Correct answer:

its long-run average cost will more than double

Explanation:

Diseconomies of scale (and economies of scale) refer to the relationship between a firm's output and its long-run average cost. If a firm is operating under a diseconomy of scale, then doubling its output results in more than doubling its long-run average total cost.

Answer choice "its long-run average cost will exactly double" refers to the situation in which the firm is operating at its minimum efficient scale, the lowest point on the long-run average cost curve.

Answer choice "its long-run average cost will less than double" refer to situations in which the firm has an economy of scale.

Answer choices "its short-run average cost will more than double" and "its short-run average cost will exactly double" are incorrect because diseconomies of scale refer to long-run, not short-run, cost curves.

Example Question #3 : Output

In order to maximize profits, a firm should continue to produce output until which of the following conditions is met?

Possible Answers:

Total revenue is equal to marginal revenue

Marginal revenue equals marginal cost

Total cost is equal to total revenue

Marginal revenue is greater than marginal cost

Total revenue is greater than total cost

Correct answer:

Marginal revenue equals marginal cost

Explanation:

The profit-maximizing rule for firms is to continue producing until marginal revenue equals marginal cost.

Answer choice "Marginal Revenue is greater than marginal cost" is incorrect, because firms should continue producing under this condition.

All of the other answer choices involving either total revenue or total cost are incorrect because profit-maximization occurs "at the margin", i.e. the profit-maximization rule applies to marginal, not total, cost curves.

 

 

 

Example Question #4 : Output

When marginal cost is greater than average total cost, which of the following must be true?

Possible Answers:

Average total cost must be decreasing.

Marginal revenue must be increasing.

Marginal revenue is equal to marginal cost.

Total revenue must be constant.

Average total cost must be increasing.

Correct answer:

Average total cost must be increasing.

Explanation:

We can think of marginal revenue as our grade in a class we are currently taking and average total cost as our total GPA. If we get a better grade in our current class than our GPA, then our GPA must increase. Similarly, if marginal cost is greater than average total cost, then average total cost must be increasing. Answer choice "average total cost must be increasing" is correct. 

To eliminate the other answer choices, remember that when marginal cost is greater than average total cost, 1) marginal revenue can still be decreasing, 2) marginal revenue is not necessarily equal to marginal cost, and 3) total revenue can still be changing.

 

Example Question #5 : Output

Suppose that the price of Good Y increases by 5%. If the quantity supplied of Good Y remains constant, then the price elasticity of supply of Good Y is ________.

Possible Answers:

greater than 1.

1.

less than 0.

impossible to determine from the information given.

0.

Correct answer:

0.

Explanation:

Remember that the price elasticity of supply is calculated by taking the percent change of the quantity supplied (in this case 0%) divided by the percent change in the price (in this case 5%). So the price elasticity of supply of Good Y is 0.

 

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