Ch 14 Review Ap Micro 10/30

Homework Check Get out a different colored pen and correct your answers Remember I grade on completeness (not correctness). This means it is in YOUR best interest to correct your own work and learn from your mistakes!!! If you have unanswered questions—TODAY IS THE DAY TO ASK! Use this homework to study for the quiz tomorrow!

Price Quantity Demanded Total Cost Total Revenue Profit Marginal Revenue $100 $2,000,000 -$2,000,000 90 100,000 $3,000,000 $9,000,000 $6,000,000 $90 80 200,000 $4,000,000 $16,000,000 $12,000,000 70 300,000 $5,000,000 $21,000,000 50 60 400,000 $24,000,000 $18,000,000 30 500,000 $7,000,000 $25,000,000 10 40 600,000 $8,000,000 -10 700,000 -30 20 800,000 $10,000,000 -50 900,000 $11,000,000 -70 1,000,000 -$12,000,000 -90 1. Profits maximized at a quantity of 500,000. Price = $50. (By graph = 450,000, price of $45) Either answer okay. As you decrease the price, marginal revenue falls at an even faster rate.

c. MR and MC cross at the profit maximizing quantity of output (450)  No change in price or quantity: profit maximizing point did not change. Increase in fixed cost will decrease profits. To maximize economic efficiency, the price would be set at $10 (MC), quantity sold = 900,000. Would lead to negative profits (would cover marginal cost but still would have to pay game creator)

Question 1e proof: Profit at MC = MR: $55 x 450,000 = $24.75m - $6.5m = $18.25m - $7.5m = $17.25m If you increase the price because of FC increase… Price $60  quantity sold = 400,000 Profit = $60 x 400,000 = $24m – $7.5m = $16.5m Lower price? Price $50  quantity sold = 500,000 Profit = $50 Price $70  quantity sold = 300,000 Profit = $70 x 300,000 = $21m – 3m = $18m

2. Price of electricity and gas increased  increase in demand for solar panels. Demand and MR curves both increase. Profits increase for solar panel company.

3. Brookes would choose quantity QB where MR = 0 3. Brookes would choose quantity QB where MR = 0. At this quantity, all possible revenue has been earned (one more produced would decrease revenue). Sally would choose quantity QS where MR = MC. Allyn would choose quantity QA where D = ATC (breaking even).

4c. Marginal cost = $14. Profit now maximized at 6000, price of $19. Quantity Total Revenue Marginal Revenue $25 23 2000 $46000 21 4000 84000 19 6000 114000 15 17 8000 136000 11 10000 150000 7 13 12000 156000 3 14000 154000 -1 9 16000 144000 -5 4b. Marginal cost = $10. Profit maximized at quantity of 8000, price of $17. 4c. Marginal cost = $14. Profit now maximized at 6000, price of $19.

5. Unregulated price = $.60; quantity = 4,000. Profit = ($.60 - .45) x 4000 = $600. Price = $.20. Firm now loses money. Would produce 8,000. Total loss = ($.29-.20) x 8,000 = approx $720. Govt would have to subsidize. Price = $.30. Firm now breaks even. Produces 7,000.

Multiple Choice Practice The graph above shows the cost and revenue curves for a natural monopoly. Consider the following two policies for regulating this natural monopoly. Policy I: Require the monopoly to set quantity and price to ensure the socially optimal level of output. Policy II: Require the monopoly to set quantity and price to ensure fair market returns (or average cost pricing). Which of the following is true of these policies? Both would result in the same level of output and price. Both would result in an inefficient allocation of resources relative to the unregulated result. Policy I would result in a lower level of output than would Policy II. Policy I would result in a higher price than would Policy II. Policy I might require the payment of a subsidy to the firm.

More FRQ Practice