2005 AP Microeconomics

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2005 AP Microeconomics. Question 1. Bestmilk, a typical profit-maximizing dairy firm, is operating in a constant-cost, perfectly competitive industry in long-run equilibrium. P. P. S. LRATC. MC. p. P. MR=D=AR=P. D. Q. Q. q. Q. Bestmilk Firm. Market/Industry.

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2005

AP Microeconomics

Question 1

Bestmilk, a typical profit-maximizing dairy

• firm, is operating in a constant-cost, perfectly
• competitive industry in long-run equilibrium.

P

P

S

LRATC

MC

p

P

MR=D=AR=P

D

Q

Q

q

Q

Bestmilk Firm

Market/Industry

• Draw correctly labeled side-by-side graphs for
• the dairy market and for Bestmilk and show
• each of the following.

(i) Price and output for the industry

(ii) Price and output for Bestmilk

P

P

S

LRATC

MC

p

P

MR=D=AR=P

D

Q

Q

q

Q

Bestmilk Firm

Market/Industry

P1

D1

Q1

(b) Assume that milk is a normal good and that consumer

income falls. Assume that Bestmilk continues to

produce. On your graphs, show the effect of the

decrease in income on each of the following in the

short-run.

(i) Price and output for the industry

P

P

S

LRATC

MC

p

P

MR=D=AR=P

P1

D

D1

Q

Q

q

Q

Q1

Bestmilk Firm

Market/Industry

p1

MR1=D1=AR1 =P1

q1

(b) Assume that milk is a normal good and that consumer

income falls. Assume that Bestmilk continues to

produce. On your graphs, show the effect of the

decrease in income on each of the following in the

short-run.

P and Q go down.

(ii) Price and output for Bestmilk

P

P

S

LRATC

MC

p

A

p2

P

MR=D=AR=P

P1

p1

MR1=D1=AR1 =P1

B

D

D1

Q

Q

q

Q

Q1

q1

Bestmilk Firm

Market/Industry

Area of loss: p1p2AB

(b) Assume that milk is a normal good and that consumer

income falls. Assume that Bestmilk continues to

produce. On your graphs, show the effect of the

decrease in income on each of the following in the

short-run.

(iii) Area of loss or profit for Bestmilk

P

P

S

LRATC

MC

p

P

MR=D=AR=P

P1

P1

MR1=D1=AR1 =P1

D

D1

Q

Q

q

Q

Q1

q1

Bestmilk Firm

Market/Industry

AVC

(c ) Following the decrease in consumer income, what must

be true for Bestmilk to continue to produce in the

short run?

Anytime a question asks whether or not a firm

should produce, the student MUST draw an

AVC curve for the firm.

P

P

S

LRATC

MC

AVC

p

P

MR=D=AR=P

P1

P1

MR1=D1=AR1 =P1

D

D1

Q

Q

q

Q

Q1

Bestmilk Firm

Market/Industry

B

C

q1

(c ) Following the decrease in consumer income, what must

be true for Bestmilk to continue to produce in the

short run?

If the price (Point B) is greater then the

AVC (Point C) at the profit-maximizing quantity,

Bestmilk should continue to produce.

P

P

S

LRATC

MC

AVC

p

P

MR=D=AR=P

P1

P1

MR1=D1=AR1 =P1

D

D1

Q

Q

q

Q

Q1

Bestmilk Firm

Market/Industry

S1

q1

(d) Assume that the industry adjusts to a new

long-run equilibrium. Compare the following

between initial and the new long-run equilibrium.

Because economic

profits are less than zero, firms will exit the market.

(i) Price in the industry

P

S1

P

S

LRATC

MC

AVC

p

P

MR=D=AR=P

P1

P1

MR1=D1=AR1 =P1

D

D1

Q

Q

q

Q

Q1

q1

Bestmilk Firm

Market/Industry

(ii) Output of a typical firm

Since Bestmilk firm is a price taker and will

take the market price, the firm quantity returns

back to the original “q.”

P

S1

P

S

LRATC

MC

AVC

p

P

MR=D=AR=P

P1

P1

MR1=D1=AR1 =P1

D

D1

Q

Q

q

Q

Q1

q1

Bestmilk Firm

Market/Industry

Q2

(iii) The number of firms in the dairy industry.

Looking at the market graph, as the number of

firms exit the industry, quantity goes down.