AP Micro AP Micro Profit Maximization 1 — Questions and Answers
Question 1: The profit-maximizing rule for all firms states that output should be set where:
- Total revenue equals total cost
- Average revenue equals average cost
- Marginal revenue equals marginal cost (Correct answer)
- Price equals average variable cost
Correct answer: Marginal revenue equals marginal cost
Firms maximize profit by producing the quantity at which MR = MC, because any other output level would reduce profit.
Question 2: Economic profit equals:
- Total revenue minus explicit costs only
- Total revenue minus total costs including implicit costs (Correct answer)
- Total revenue minus variable costs
- Normal profit plus accounting profit
Correct answer: Total revenue minus total costs including implicit costs
Economic profit subtracts both explicit and implicit (opportunity) costs from total revenue.
Question 3: A firm should shut down in the short run if:
- Price falls below average total cost
- Price falls below average variable cost (Correct answer)
- Total revenue is less than total fixed cost
- Marginal cost exceeds average cost
Correct answer: Price falls below average variable cost
If price < AVC, the firm cannot cover its variable costs and minimizes losses by shutting down rather than producing.
Question 4: When a competitive firm's price equals its minimum average total cost in the long run, it earns:
- Positive economic profit
- Negative economic profit
- Zero economic profit (normal profit) (Correct answer)
- Maximum accounting profit
Correct answer: Zero economic profit (normal profit)
Long-run competitive equilibrium drives economic profit to zero, where P = minimum ATC and firms earn only normal profit.
Question 5: Marginal revenue for a perfectly competitive firm equals:
- Price divided by quantity
- The slope of the total cost curve
- The market price (Correct answer)
- Marginal cost
Correct answer: The market price
A price-taking competitive firm can sell any quantity at the market price, so each additional unit adds exactly the market price to revenue.
Question 6: A firm earns positive economic profit when:
- Total revenue exceeds total variable costs
- Price exceeds average total cost (Correct answer)
- Marginal revenue exceeds marginal cost
- Total revenue equals total fixed costs
Correct answer: Price exceeds average total cost
If P > ATC, the firm earns more per unit than it costs to produce, resulting in positive economic profit.
AP Micro AP Micro Profit Maximization 1
The profit-maximizing rule for all firms states that output should be set where: