AP Microeconomics : Long-run Business Equilibrium

Study concepts, example questions & explanations for AP Microeconomics

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Example Questions

Example Question #11 : Microeconomics Graphs

For any firm, the long run refers to a period of time in which ________.

Possible Answers:

fixed costs are able to change

variable costs are able to change

the price elasticity of supply is able to change

sunk costs are able to change

Correct answer:

fixed costs are able to change

Explanation:

The definition of the long run is a period of time in which fixed costs are able to change. For example, in the long run, a firm can move to a new plant that costs less money to operate each month.

Sunk costs are costs that cannot be recovered and therefore would not change, even in the long run.

The price elasticity of supply refers to the responsiveness of the supply curve to a change in price.

Example Question #12 : Side By Side Graphs

To maximize profits, firms produce at the level at which _________.

Possible Answers:

marginal revenue equals marginal cost

marginal revenue is less than marginal cost

marginal revenue equals average variable cost

marginal revenue equals average total cost

Correct answer:

marginal revenue equals marginal cost

Explanation:

The profit maximizing rule for the firm is marginal revenue equals marginal cost. Notice that the rule does not explicitly involve average total or average variable costs.

The MR=MC profit maximizing rule holds for all market structures - monopoly, oligopoly, monopolistic competition, and perfect competition. 

If marginal revenue is less than marginal cost, then the firm actually loses profits with continued production.

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