1. AP Microeconomics
2004
Question 3

2. 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

3. MC P (i) Output 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

4. 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
In long run this would attract
More competition
ATC1
Economic
Profits D Q Q MR