AP Microeconomics 2004 Question 3

1) Assume that a profit-maximizing firm in a monopolistically competitive industry is in long-run equilibrium. Draw a correctly labeled graph that shows the profit-maximizing firm’s price and output. Difference between a competitive output, price & profit MC ATC D MR Qty P Q A B ------------ B

i. Output ii. Profit iii. Modify Graph Assume that the city in which this industry operates eliminates the business license fee (a fixed cost) for all firms in this industry. How does the elimination of the license fee affect each of the following for the individual firm in the short run? Explain your answers. i. Output ii. Profit iii. Modify Graph Output does not change because a ∆ in fixed costs does not ∆ marginal costs. P MC ATC P D Q Q MR

i. Output ii. Profit iii. Modify Graph (c) Assume that the city in which this industry operates eliminates the business license fee (a fixed cost) for all firms in this industry. How does the elimination of the license fee affect each of the following for the individual firm in the short run? Explain your answers. i. Output ii. Profit iii. Modify Graph As fixed costs ↓ ATC Shifts down => profits ↑ (from zero to shaded Area) In long run this would attract More competition P MC ATC P Economic Profits ATC1 D Q Q MR

3-Tools of Monetary Policy Reserve Requirement Discount Rate Changes Open Market Operations Bernanke Speaks