AP MICRO 3.4 & 3.5

If accounting profit is greater than zero for a firm in a competitive industry, then which of the following must be true?

• The firm has no fixed cost.

• The firm has positive economic profit.

• The firm’s total revenue exceeds its explicit cost.

• The firm’s economic profit exceeds its opportunity cost.

• New firms will enter the industry in the long run.

Raheem is currently working as a financial analyst earning $75,000 a year and is considering quitting his current job to start an art gallery. The estimated annual revenue from the art gallery is $175,000. The annual cost of labor, advertising, and acquiring the art inventory is $125,000. What are Raheem’s accounting and economic profits if he opens the art gallery?

• Accounting profit is –$25,000, and economic profit is $50,000.

• Accounting profit is $100,000, and economic profit is $50,000.

• Accounting profit is $50,000, and economic profit is –$25,000.

• Accounting profit is $100,000, and economic profit is –$25,000.

• Accounting profit is $50,000, and economic profit is $100,000.

If the marginal revenue of the 201st unit of output is $15 and the marginal cost of the 201st unit is $20, the total economic profit of producing 201 units will be

• $995

• $1000

• $1005

• $1015

• $1035

Dylan recently quit his job as a journalist for a local newspaper where he was making $80,000 per year. He opened an ice-cream shop where he earns a yearly total revenue of $250,000. He spends $150,000 each year on rent, resources, and workers he hires. Which of the following equals Dylan’s accounting profit and economic profit from the ice-cream shop?

• A

• B

• C

• D

• E

Which of the following ignores implicit costs?

• Normal profit

• Accounting Profit

• Economic profit

• Opportunity cost

• Economic cost

Assume that a firm is maximizing short-run profits and that price is greater than average variable cost. Which of the following must be true at the firm’s level of output?

• Marginal revenue is equal to average total cost.

• Marginal revenue is greater than total variable cost.

• Marginal revenue is equal to price, which is greater than average total cost.

• Marginal revenue is equal to marginal cost.

• Price is equal to average total cost.

At the current output level, a firm finds that it has the potential to increase its profit by expanding output. If P = price, MR = marginal revenue, and MC = marginal cost, which of the following must hold at the current output for this firm?

• P = MR < MC

• P = MR = MC

• MR = MC

• MR > MC

• MR < MC

If the product price is $85, how many units of output must the firm produce in order to maximize profits?

• 0

• 3

• 4

• 5

• 6

Greencom is currently producing 20 units of output. At this level of output, Greencom’s marginal revenue is $6, marginal cost is $6, and average total cost is $9. If Greencom operates in a monopolistically competitive market and sells all 20 units of output for $10 per unit, it can be concluded that

• Greencom would earn more profit by decreasing output

• Greencom would earn more profit by increasing output

• Greencom is earning zero economic profit

• Greencom is earning negative economic profit

• Greencom is earning positive economic profit

The graph provided shows the marginal revenue (MR), average variable cost (AVC), average total cost (ATC), and marginal cost (MC) curves for a perfectly competitive firm. Which of the following is true if the firm is currently producing Q* units of output?

• The firm can increase its economic profit by producing fewer units of output.

• The firm can increase its economic profit by increasing the price of its product.

• The firm is maximizing its economic profit at the current level of output.

• The firm can increase total revenue by producing fewer units of output.

• The firm can increase total revenue by decreasing the price of its product.