Page 882 - Krugmans Economics for AP Text Book_Neat

S-36 SOLUTIONS TO AP REVIEW QUESTIONS

Tackle the Test: b. The profit-maximizing quantity is 4.
Free-Response Questions c. The firm’s maximum profit is TR − TC = (4 × $14) − $56
= $56 − $56 = $0.
2. a. Price
Module 59
Check Your Understanding
$10 Demand
1. Price,
cost of MC
unit ATC
At prices above P 2 , the firm
operates with a profit
AVC
Quantity P 2
b. $10 At prices above P 1 and
below P 2 , the firm operates
in the short run with a loss
Module 58 P 1
Check Your Understanding At prices below P 1 , the firm
shuts down immediately
1. a. The firm maximizes profit at a quantity of 4, because it is 0 Q 1 Q 2 Quantity
at that quantity that MC = MR.
b. At a quantity of 4 the firm just breaks even. This is
because at a quantity of 4, P = ATC, so the amount the a. The firm should shut down immediately when price is
firm takes in for each unit—the price—exactly equals the less than minimum average variable cost, the shut-down
average total cost per unit. price. In the accompanying diagram, this is optimal for
prices in the range from 0 to P .
2. The lowest price that would allow the firm to break even b. When the price is greater than the minimum average
1
is $10, for the minimum average total cost is $500/50 = variable cost (the shut-down price) but less than the
$10, and price must at least equal minimum average total minimum average total cost (the break-even price), the
cost in order for the firm to break even. firm should continue to operate in the short run even
Tackle the Test: though it is making a loss. This is optimal for prices in
the range from P to P .
Multiple-Choice Questions c. When the price exceeds the minimum average total cost
1
2
1. d (the break-even price), the firm makes a profit. This hap-
2. d pens for prices in excess of P .
2
3. d 2. This is an example of a temporary shut-down by a firm
4. c when the market price lies below the shut-down price,
the minimum average variable cost. The market price is
5. c the price of a lobster meal and the variable cost is the
cost of the lobster, employee wages, and other expenses
Tackle the Test: that increase as more meals are served. In this example,
Free-Response Questions however, it is the average variable cost curve rather
than the market price that shifts over time, due to sea-
2. a. sonal changes in the cost of lobsters. Maine lobster
Q MC
shacks have relatively low average variable cost during
0 the summer, when cheap Maine lobsters are available;
16 during the rest of the year, their average variable cost is
1 relatively high due to the high cost of imported lob-
6 sters. So the lobster shacks are open for business during
2 the summer, when their minimum average variable cost
8
3 lies below price; but they close during the rest of the
12 year, when the price lies below their minimum average
4 variable cost.
16
5 Tackle the Test:
20
6 Multiple-Choice Questions
24 1.
7 e
2. d