Perfect Competition Practice FRQ



FRQ #1: Labor and Production

Assume that a firm produces output using $100 of fixed inputs. The only variable input is labor, which can be obtained at a wage rate of $11. The firm can sell all of the output it produces at a market price of $3.

|Number of Employees |Total Product (Quantity) |Marginal Product |Marginal Revenue |Marginal Factor Cost |

| | | |Product | |

|0 |0 | | | |

|1 |10 | | | |

|2 |25 | | | |

|3 |35 | | | |

|4 |42 | | | |

|5 |46 | | | |

|6 |48 | | | |

|7 |47 | | | |

a) Explain how the law of diminishing marginal returns is demonstrated in this example.

b) Using marginal analysis, identify how many employees this firm should hire? How can you tell?

c) At the level of output identified in part (b), is the firm earning an economic profit or economic loss. How much?

Practice FRQ: Perfect Competition

Tim is a producer of Christmas trees in a perfectly competitive market that is currently in long-run equilibrium at the price of $50. At equilibrium quantity of 100 trees, Tim’s average variable cost per tree is $35.

a. Draw a graph for both the industry and Tim’s firm (include MR, MC, ATC, and AVC).

i. Label the area of Tim’s Total Revenue

ii. Label the area of Total Cost

iii. Label the shut down point

b. Describe Tim’s firm in terms of the following:

i. Productive efficiency

ii. Allocative efficiency

c. With new graphs, show the results of an increase in demand for Christmas trees on the following:

i. Price and quantity of Tim’s firm in the short-run

ii. Price and quantity of Tim’s firm in the long-run

2005 AP Micro Question #1: Perfectly Competitive Firm

FRQ #1

Assume that in a perfectly competitive industry with equilibrium price of $25, a firm has the following characteristics:

Marginal Cost = Average Variable Cost at $20

Marginal Cost = Average Total Cost at $30

Output = 100 Units

a. Draw a graph for the industry and the firm

i. Label AVC, ATC, MC, and MR

ii. Label Short-run supply curve

iii. Label shut down price

iv. Approximately how much is the total profit or loss? How do you know?

b. With a new set of graphs, explain what you would expect to happen to this industry in the long-run.

i. Explain what happens to price, quantity, and profit/loss for the firm in the long-run.

ii. Explain what happens to price and quantity for the industry in the long-run.

FRQ #2:

Complete the following chart for a perfectly competitive firm selling its product at a price of $30, and then answer the questions:

|Output |Total Revenue |Marginal Revenue |Variable Cost |Fixed Cost |Total Cost |Marginal Cost |

|0 |0 |- |0 | |10 |- |

|1 | | |30 | | | |

|2 | | |50 | | | |

|3 | | |60 | | | |

|4 | | |70 | | | |

|5 | | |85 | | | |

|6 | | |105 | | | |

|7 | | |130 | | | |

|8 | | |170 | | | |

a. What is the AVC when producing five units out output?

b. To maximize profits or minimize losses, what output should this firm produce? Explain how you got your answer?

c. Using your answer from (b), what is the profit or loss per unit at the profit maximizing output?

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