Page 879 - Krugmans Economics for AP Text Book_Neat

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SOLUTIONS TO AP REVIEW QUESTIONS

Implicit cost = $2,000 + $23,000 = $25,000 Tackle the Test:
Accounting profit = Total revenue − Explicit cost − Multiple-Choice Questions
Depreciation = $25,000
Economic profit = Total revenue − Explicit cost − 1. c
Depreciation − Implicit cost = Accounting profit − Implicit 2. c
cost = $25,000 − $25,000 = $0.
b. An economic profit of zero is considered a “normal prof- 3. d
it.” The resources devoted to this business could not earn 4. e
more if used in the next best activity. This is just enough 5. c
profit to keep you in this business with no regrets.
Tackle the Test: Tackle the Test:
Multiple-Choice Questions Free-Response Questions
1. d
2. e 2. Price, cost
of unit
3. a MC
4. a $5 MR = P
5. c

Tackle the Test:
Free-Response Questions

2. a. Total revenue = 2,000 × $2 = $4,000
b. Accounting profit = $4,000 − $400 − $100 = $3,500 0 Q* Quantity
c. Sunny would need to know the opportunity cost of her
time.
d. In general, she would calculate her economic profit and
operate if she makes at least normal profit (meaning zero Module 54
economic profit). In Sunny’s case, she earns $3,500 in
accounting profit minus the $200 implicit cost of capital Check Your Understanding
and the opportunity cost of her time. Because $3,500 − 1. a. The fixed input is the 10-ton machine and the variable
$200 = $3,300, she will make at least normal profit if the input is electricity.
opportunity cost of her time is less than or equal to b. As you can see from the declining numbers in the third
$3,300.
column of the accompanying table, electricity does indeed
exhibit diminishing returns: the marginal product of each
Module 53 additional kilowatt of electricity is less than that of the
Check Your Understanding previous kilowatt.
1. The profit-maximizing level of output is three units
because marginal cost goes from being below marginal Quantity of Marginal product
revenue at a quantity of three to being above marginal electricity Quantity of ice of electricity
revenue at a quantity of four, thus passing through mar- (kilowatts) (pounds) (pounds per kilowatt)
ginal revenue at the third unit.
2. Price, cost MC 0 0 1,000
of unit
$21 1 1,000
800
17 2 1,800
15 MR = P 600
13
3 2,400
10 400
8 4 2,800

c. A 50% increase in the size of the fixed input means
0 1 2 3 4 5
Quantity that Bernie now has a 15-ton machine, so the fixed
Profit-maximizing input is now the 15-ton machine. Since it generates
quantity
a 100% increase in output for any given amount