1. AP Microeconomics
2004
Question 3

2. 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

3. 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

4. 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

5. 3-Tools of Monetary Policy
Reserve Requirement
Discount Rate Changes
Open Market Operations
Bernanke
Speaks