AP Economics Review – Unit 3 Mr. Chris Meier – Penn Manor High School Most Essential Topics for Quiz: 1. Converting between Total, Marginal, Average 2. Utility or Benefit Problems, especially solving a 2-good, utility- maximization problem 3. Consumer & Producer Surplus (from graph or from table) 4. Profit Maximization Problems (MC=MR … aka … MC=MB) 5. Deriving a market demand curve from two individual tables (step graph)

AP Economics Review – Unit 3 Mr. Chris Meier – Penn Manor High School Topics not required on the 5&6 Quiz Actually drawing or interpreting from cost curves You’ll need to answer table or word-based questions based on understanding how Marginal/Total/Average are related… or connection between fixed vs. variable… but not the cost curves on a graph LRATC Curve / Economies & Diseconomies of Scale. This will show up on 1-9 exam.

Question # 3 Provide two synonyms for the word UTILITY Happiness, Satisfaction, Pleasure, Benefit (even though there is a difference, same concept)

Question # 4 If your total benefit for consuming 5 tacos is $5, and the total benefit for consuming 6 tacos is $4.50, what is the marginal benefit of the 6 th taco? – 0.50

Question # 5 If you are given a table with: ◦ Price for Good A and Good B ◦ Q and MU for each quantity consumed of each How would a rational consumer determine which to consume first? By comparing the MU/P for A and the MU/P for B. One should first purchase the one with a HIGHER MU/P (Marginal Utility per dollar)

Question # 6 The utility-maximizing rule states that a consumer will maximize his/her utility between good A and good B if their budget is spent and _____ = _____. (MU/P)a = (MU/P)b …

Question # 7 How is the SHORT RUN different than the LONG RUN? In the Short Run, Labor is the only Variable input. Land & Capital are FIXED/HELD CONSTANT.

Question # 8 TR = $500,000 Explicit Costs = $420,000 Implicit Costs = $100,000 Total Fixed Costs = $50,000 ◦ Is this company earning accounting profits? If so, how much? ◦ Is this company earning economic profits? If so, how much? ◦ What are the Total Variable Costs for this company? Accounting Profits? YES ($80,000) Economic Profits? NO (-$20,000 … an econ. Loss) TVC = $470,000 (TC-TFC=TVC)

Question # 9 What is the formula for calculating Total Revenue? What is the formula for calculating Economic Profit? TR = P * Q Economic Profit = TR – TC

Question # 10 On Saturday, George has the choice of (a) playing video games for 2 hours, (b) Mowing lawns for two hours and earning $20, or picking up an extra shift at work to earn $15 for two hours. Assuming George is rational and that time is the only cost, if he decides to play video games, the total benefit to George of playing video games must be at least… At least greater than $20 for two hours (since he chose to play instead of earning $20 by mowing lawns.

Question # 11 What is the equilibrium price? Calculate Consumer Surplus. Calculate Producer Surplus. Pe = $2 C.S. = [1/2 (300*3) = $450 P.S. = [1/2 (300*2) = $300 [[[Graph it!!]]]

Question # 12 This table shows TB for John & Paul for KitKats (in cents). Calculate MB for each Draw a MARKET demand curve for KitKats (most accurate = step graph) If P=5 cents, how many will each purchase? What is total C.S. for the market? Draw Step graph. MB = additional benefit per unit. At P=5, John buys 2, Paul buys 3. Total CS=10 cents.

Question # 13 If Pencils costs 50 cents, and Pens cost $1, how would you maximize your utility with a budget of $5? 4 pencils, 3 pens [TU = 58 utils] Q PencilsTU PencilsQ PensTU Pens

Question # 14 QTC What is the marginal cost of unit 3? What is the marginal cost for unit 5? If P=7, what is the profit maximizing output level? $5, $8, Profit Max = 4 units

Question # 15 If Gasoline costs $3, and Milk costs $2, how would you maximize your utility with a budget of $15? How many utils would that provide? 3 Gasoline, 3 Milk [TU = 220 utils] Q Gasoline TU Gasoline Q MilkTU Milk

Question # 16 QTC What is the marginal cost of unit 3? What is the marginal cost of unit 4? What are the Total Fixed Costs for producing 2 units? What are the Total Variable Costs for producing 2 units? $10, $15, $5, $15

Question # 17 If Tacos costs $1, and Pizza costs $2, how would you maximize your utility with a budget of $10? 4 Tacos & 3 Pizzas [TU = 80 utils] Q TacosTU TacosQ PizzaTU Pizza

Question # 18 QMC If P=$5, what is profit maximizing output level? What is TC for 4 units? What is the AVC for 3 units? Profit Max. = 3 units [MC=MR] TC at 4 units = $20 AVC at 3 units = 14/3 = $4.67

Question # 19 QTC If P=$12, what is the profit maximizing output level? What is the marginal cost of producing the 3 rd unit? What is the ATC of producing 4 units? Profits maximized at 4 units MC of 3 rd unit = $7 ATC at 4 units = 36/4 = $9

Question # 20 QMC What is the TC to produce 3 units? If P=$25, what is the profit- maximizing output level? =$99 Profit is maximized at 4 units

Question # 21 If a business has $100,000 in explicit costs (expenses paid out), and $30,000 in implicit costs (other opportunity costs)… how much Total Revenue must this business earn to make a: ◦ Accounting profit of $5,000 ◦ Normal profit ◦ Economic profit $50,000 Accounting profit of TR=$105,000 Normal TR=$130,000 Economic profit of TR=$185,000

Question # 22 Economists assume that producers will continue to produce until … MC=MR !!!!!!!!!! !

Question # 23 This table shows TB for David & Bill for Pizzas (in dollars). Calculate MB for each Draw a MARKET demand curve for Pizzas (most accurate = step graph) If P=5 dollars, how many will each purchase? What is Total C.S. for the market? Draw Step graph. MB = additional benefit per unit. At P=5, David buys 3, Mary buys 3. Total CS=24 dollars.

Question # 24 This table shows TB for Lydia & Mary for TicTacs (in cents). Calculate MB for each Draw a MARKET demand curve for TicTacs (most accurate = step graph) If P=3 cents, how many will each purchase? What is Total C.S. for the market? Draw Step graph. MB = additional benefit per unit. At P=3, Lydia buys 4, Mary buys 3. Total CS=10 cents.