AP Microeconomics 2004 Question 3

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. MC P ATC P D Q Q MR

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. MC P (i) Output ATC Output does not because the in fixed costs does not marginal costs. P D Q Q MR

MC P (ii) Economic profits ATC P D Q Q MR 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. MC P (ii) Economic profits ATC P As fixed costs decrease this causes the ATC to decrease, thus increasing profits from zero to shaded area. ATC1 Economic Profits D Q Q MR