Page 881 - Krugmans Economics for AP Text Book_Neat

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SOLUTIONS TO AP REVIEW QUESTIONS

3. e c. If the firm believes that the increase in demand is tempo-
4. e rary, it should not alter its fixed cost from choice 1
because choice 2 generates higher average total cost as
5. a soon as output falls back to its original quantity of
Tackle the Test: 12,000 units: $1.75 versus $1.67.
Free-Response Questions 2. a. This firm is likely to experience diseconomies of
2. Cost of scale. As the firm takes on more projects, the costs
unit MC ATC of communication and coordination required to
AVC implement the expertise of the firm’s owner are likely
to increase.
b. This firm is likely to experience economies of scale.
Because diamond mining requires a large initial setup

cost for excavation equipment, long-run average total
cost will fall as output increases.
AFC
Tackle the Test:
Quantity
Multiple-Choice Questions
Module 56 1. a
2.
Check Your Understanding 3. e e

1. a. The accompanying table shows the average total 4.
cost of producing 12,000, 22,000, and 30,000 d
units for each of the three choices of fixed cost. 5. e
For example, if the firm makes choice 1, the total
cost of producing 12,000 units of output is $8,000 +
12,000 × $1.00 = $20,000. The average total cost Tackle the Test:
of producing 12,000 units of output is therefore Free-Response Questions
$20,000/12,000 = $1.67. The other average total
costs are calculated similarly. 2. Cost of
unit
ATC LRATC
12,000 22,000 30,000
units units units
Average total
cost from $1.67 $1.36 $1.27
choice 1 Economies of scale Diseconomies of scale
Average total
Quantity
cost from 1.75 1.30 1.15
choice 2
Average total Module 57
cost from 2.25 1.34 1.05
choice 3 Check Your Understanding
1. a. oligopoly
b. perfect competition
c. monopolistic competition
So if the firm wanted to produce 12,000 units, it would
make choice 1 because this gives it the lowest average d. monopoly
total cost. If it wanted to produce 22,000 units, it would
make choice 2. If it wanted to produce 30,000 units, it Tackle the Test:
would make choice 3. Multiple-Choice Questions
b. Having historically produced 12,000 units, the firm
would have adopted choice 1. When producing 12,000 1. b
units, the firm would have had an average total cost of 2.
$1.67. When output jumps to 22,000 units, the firm can- a
not alter its choice of fixed cost in the short run, so its 3. d
average total cost in the short run will be $1.36. In the 4. a
long run, however, it will adopt choice 2, making its aver-
age total cost fall to $1.30. 5. a