Review PowerPoint Chapters 7-9 AP Microeconomics Mr. Meier Penn Manor HS

Test 1-9 estimated Breakdown Unit 1 (~3 questions) Unit 2 (~3-4 questions) Unit 3 (~12-14 questions) Unit 4 (~20-24 questions)

A – AVC+AFC = ATC … ATC * Q = TC Which of the following is true? TC = (AVC + AFC) * Q TFC = TC at all levels of output AVC + AFC = TC MC = TC – TFC ATC = AVC + MC A – AVC+AFC = ATC … ATC * Q = TC

MC curve above the Shutdown Point A firm’s short run supply curve is equivalent to its _________________ above _________________. MC curve above the Shutdown Point

C – Implicit costs = TC – accounting costs Implicit costs of a “Mom & Pop” owned business include Their accounting profits Their to accounting costs The earnings that could have been earned by using resources elsewhere The revenue their business earned this year The Average Revenue of other Mom & Pop businesses C – Implicit costs = TC – accounting costs

B – that would be DISeconomies of Scale Which of the following is NOT correct about economies of scale? They are associated with increases in output They are associated with the increasing portion of the LR ATC curve They are associated with the decreasing portion of the LR ATC curve They demonstrate decreases in per unit average total costs as plant size increase They may be caused by increased specialization and technology B – that would be DISeconomies of Scale

D = but can you EXPLAIN why? Marginal Cost (MC) is equal to average variable cost (AVC) and Average Total Cost (ATC) when: MC intersects AVC and ATC at their maximum points AVC and ATC intersect MC at its maximum point AVC and ATC intersect MC at its minimum point MC intersects AVC and ATC at their minimum points The economy is in the recovery phase of the business cycle D = but can you EXPLAIN why?

Productive: YES Allocative: YES In the long run, a perfectly competitive firm without government intervention will ALWAYS achieve: Productive Efficiency? Allocative Efficiency? (Yes or no – for each) Productive: YES Allocative: YES

A – P.C. has the most competitors For which of the following market structures are the most substitutes available to consumers? Perfect Competition Monopolistic Competition Oligopoly Monopoly All of the above A – P.C. has the most competitors

Which of the following market structures has the greatest degree of elasticity? Perfect Competition Monopolistic Competition Oligopoly Monopoly All of the above A – Perfectly competitive firm… means perfectly elastic demand (why don’t they just drop the price $0.01 and get all the business???

P3, P1, P3 At what P will this firm earn a normal profit? Below what P will this firm shut down in the short run? Above what P will this firm earn economic profit? P3, P1, P3

At what P will this firm earn an economic profit? In the long run, what will be this firm’s output level? A firm never choose to produce at price P BECAUSE… P4, Q3, because P<AVC (shutdown pt.) .. Aka they would not even be covering their variable costs.

Is this graph showing a firm in SR or LR ? In the LR, how will the following change? On Market Graph: Demand, Supply, Price On Firm Graph: ATC, MR, Output level D same, S decreases, P increases ATC same, MR increases, Output for typical firm increases as P rises.

Which of the following market structures has the largest number of sellers? Perfect Competition Monopolistic Competition Oligopoly Monopoly All of the above A – Tons of sellers

Which of the following market structures is NOT a price maker? Perfect Competition Monopolistic Competition Oligopoly Monopoly All of the above A – P.C. is a PRICE TAKER

Firms maximize their profits by producing a level of output at which MC = AFC MC = MR P = ATC MR = AVC P = AVC B –- MC = MR ! MC = MR !!! MC = MR !!!!!!!!!!!!!!!!!!!!!

MC = MR B –- MC = MR ! MC = MR !!! MC = MR !!!!!!!!!!!!!!!!!!!!! All Firms maximize their profits by producing where: MC = AFC MC = MR P = ATC MR = AVC P = AVC B –- MC = MR ! MC = MR !!! MC = MR !!!!!!!!!!!!!!!!!!!!!

In the short run, the shutdown point is equal to Minimum point on the ATC curve Maximum point on the ATC curve Minimum point on the AVC curve Maximum point on the AVC curve Minimum point on the MC curve C – If a firm cannot even cover its VARIABLE costs, it would be better off telling its workers to stay home (profit maximizing Q = zero

The demand curve for a typical firm operating under perfect competition is Upward sloping Downward sloping Perfectly vertical Perfectly horizontal Concave to the origin D – remember MR=D=AR=P ??

C – P does not equal min. AVC if there are any fixed costs at all. Which of the following is NOT typically true for the perfectly competitive firm in the long run? P = Minimum ATC P = Marginal Revenue P = Minimum AVC P = Marginal Cost The firm earns a normal profit C – P does not equal min. AVC if there are any fixed costs at all.

D – C.S. = willingness to pay MINUS what you actually pay Consumer surplus is The price of a good divided by its marginal utility The marginal utility of a good divided by its price The total utility of the good The difference between what the good is worth to the consumer and its market price Consumers’ annual savings D – C.S. = willingness to pay MINUS what you actually pay

Given this $2 per unit tax, calculate the following: (a) PS before the tax (b) PS after the tax (c) DWL (d) Total Gov’t Revenue (a) PS1 = $4.5 million (b) PS2 = $2 million (c) DWL = $1 million (d) GR = $4 million

The utility maximizing rule is to choose the combination of goods that … Has the highest marginal utility of each good in the basket. Has the lowest prices for the goods Has the greatest difference between marginal utility and price The marginal utility over price for each good is equal. The marginal utility over price for each good is equal, within the budget constraint. E – if MU/P for each is equal, and you spent all your money, you have maximized

Copy this graph, and label the following with the given letter Constant Returns to Scale Diseconomies of Scale Economies of Scale C … A … B

Give one possible cause your firm could experience: Economies of Scale Diseconomies of Scale A. specialization/division of labor B. Becoming TOO large, management/bureaucratic issues

According to the principle of diminishing marginal utility, as you increase the quantity consumed… Marginal utility stays the same Total utility stays the same Marginal utility decreases Marginal utility and total utility both decrease Total utility declines C – the other options COULD happen… but MU will decrease after the first unit for almost all goods.

At any given output level, on a firm graph, the vertical difference between ATC and AVC is equal to what? ATC – AVC = AFC

If a firm is earning an accounting profit, what do you know must be true about the firm’s economic profit? NOTHING. They could be earning an economic profit, a normal profit, or an economic loss. All you know is that they are covering their explicit costs.

Right edge of PROFIT box are: MC=MR carry that straight down/up to ATC Draw a side-by-side graph for perfectly competitive Industry/Firm earning short run profits. What two points are used to define the right edge of the PROFIT box? Right edge of PROFIT box are: MC=MR carry that straight down/up to ATC

Right edge of LOSS box are: MC=MR carry that straight down/up to ATC Draw a side-by-side graph for perfectly competitive Industry/Firm earning a short run loss. What two points are used to define the right edge of the LOSS box? Right edge of LOSS box are: MC=MR carry that straight down/up to ATC

Productive: NO Allocative: YES In the short run, a perfectly competitive firm without government intervention will ALWAYS achieve: Productive Efficiency? Allocative Efficiency? Yes or no. Productive: NO Allocative: YES

5 utils 5 utils per dollar cannot determine – dollars vs. utils If tacos cost $2 each, Identify the following: MU for the 4th taco MU/P for the 3rd taco How many tacos will this consumer choose to purchase? 5 utils 5 utils per dollar cannot determine – dollars vs. utils

Why must the Marginal Cost curve ALWAYS intersect ATC and AVC at their minimums? BECAUSE as soon as MC is above ATC, ATC must be increasing (due to adding the higher marginal).

Explicit – paid out of pocket Implicit – value of forgone resources If you open a McDonald’s Franchise, list (a) two expenses that would be considered EXPLICIT costs, and two expenses that would be considered IMPLICIT costs. Explicit – paid out of pocket Implicit – value of forgone resources

A. decrease, B. decrease, C. decrease, D. increase/exist If the government imposes a tax on the production of pencils, what will happen to each of the following? (increase or decrease) Price sellers receive Quantity of pencils sold Consumer surplus DeadWeightLoss (DWL) A. decrease, B. decrease, C. decrease, D. increase/exist

A. decrease, B. increase, C. increase, D. increase/exist If the government imposes a subsidy on milk, what will happen to each of the following? (increase or decrease) Price paid by the buyers Quantity of milk produced Producer Surplus DeadWeightLoss (DWL) A. decrease, B. increase, C. increase, D. increase/exist

All costs are variable in the LR, only Labor is variable in the SR. How are costs different in the LONG RUN different than the SHORT RUN? All costs are variable in the LR, only Labor is variable in the SR.

Which is more likely to promote future economic growth? Investment in more capital goods Investment in more consumer goods WHY? Capital goods, since they are used to produce more goods. (“stuff to make more stuff”)

50% / 25% … +2.0 … positive means substitutes If the price of frosted flakes increases from $4 to $5 per box, and as a result the quantity demanded of a DIFFERENT good (X)increases from 20 million to 30 million … Calculate the cross elasticity of demand for good X with respect to Frosted Flakes. What does this tell you about how these goods are related? 50% / 25% … +2.0 … positive means substitutes

WHY is it impossible for a perfectly competitive firm to earn a profit or loss in the long run? Yes, they are a price taker, and Mr. Meier says so… but what actually CHANGES in the LR to eliminate SR profits or losses?? Firms will enter or exit because of low/no barriers to entry… so supply shifts, moving MR=D=AR=P, eliminating profit/loss in LR