Microeconomics Graphs - AP Microeconomics

Diseconomies of scale (and economies of scale) refer to the relationship between a firm's output and its long-run average cost. If a firm is operating under a diseconomy of scale, then doubling its output results in more than doubling its long-run average total cost.

Answer choice "its long-run average cost will exactly double" refers to the situation in which the firm is operating at its minimum efficient scale, the lowest point on the long-run average cost curve.

Answer choice "its long-run average cost will less than double" refer to situations in which the firm has an economy of scale.

Answer choices "its short-run average cost will more than double" and "its short-run average cost will exactly double" are incorrect because diseconomies of scale refer to long-run, not short-run, cost curves.

If a price ceiling is set above market equilibrium, market forces will cause the equilibrium price to be market equilibrium price. The price ceiling will never be reached because it is too high.

To create an effective price ceiling, on the other hand, the price ceiling must be set below market equilibrium price, thus stopping price levels before they can reach market equilibrium. In such a case, a shortage is expected.

The profit-maximizing rule for firms is to continue producing until marginal revenue equals marginal cost.

Answer choice "Marginal Revenue is greater than marginal cost" is incorrect, because firms should continue producing under this condition.

All of the other answer choices involving either total revenue or total cost are incorrect because profit-maximization occurs "at the margin", i.e. the profit-maximization rule applies to marginal, not total, cost curves.

We can think of marginal revenue as our grade in a class we are currently taking and average total cost as our total GPA. If we get a better grade in our current class than our GPA, then our GPA must increase. Similarly, if marginal cost is greater than average total cost, then average total cost must be increasing. Answer choice "average total cost must be increasing" is correct.

To eliminate the other answer choices, remember that when marginal cost is greater than average total cost, 1) marginal revenue can still be decreasing, 2) marginal revenue is not necessarily equal to marginal cost, and 3) total revenue can still be changing.

Remember that the price elasticity of supply is calculated by taking the percent change of the quantity supplied (in this case 0%) divided by the percent change in the price (in this case 5%). So the price elasticity of supply of Good Y is 0.

Because a monopolist is the only producer in its industry, a monopolist's marginal cost curve is equivalent to the industry supply curve.

Average fixed cost and marginal revenue are incorrect because they are downward sloping, whereas supply is upward sloping.

Average total cost is a distortion of the correct answer.

For a demand curve, the upper left portion is elastic, the middle portion is unit elastic and the lower right portion is inelastic. You can confirm by calculating E = percent change in quantity/ percent change in price between the points on the lower right portion of the demand curve. If E < 1, then demand is inelastic.

Remember that incomce elasticity of demand refers to the percent change in the quantity demanded of a good divided by the percent change in income. Since the percent change in the quantity demanded of Good X was 20% and the percent change in income was 10%, the income elasticity of demand for Good X is 20%/10% = 2. Thus, the income elasticity of demand for Good X is greater than 1.

Good X would be classified as an inferior good only if it had income elasticity of demand less than 0.

Of the five answer choices, only an increase in the price of a substitute good would cause the demand curve to increase. This result reflects the fact that when the price of the substitute good increases, consumers are less likely to buy that good and instead buy more of Good X.

All of the other answer choices would cause the demand curve to decrease.

Price discrimination occurs when a firm sets two different price levels for different consumers buying the same product. For example, a firm may sell a particular pharmaceutical drug for one price in the US and another price in Europe.

Answer choice "The price of a particular product is less than the marginal cost of producing that product" refers to the rare situation in which a firm sells a good for less than it costs to make it. This may happen in the case of promotions, but is not an example of price discrimination.

The other answer choices represent distortions of the definition of price discrimination and are therefore incorrect.

A monopolist faces a downward sloping demand curve, indicating market power, in contrast to the horizontal demand curve faced by perfectly competitive firms. A monopolist faces a downward sloping marginal revenue curve as well.

The monopolist's marginal revenue curve has the same y-intercept (intercept on the price-axis) as the demand curve, but has a steeper slope. Therefore, the demand curve is always equal to (at the intercept) or greater than (everywhere after the intercept) the marginal revenue curve. Answer choice "The demand curve is always greater than or equal to the marginal revenue curve" is correct.

The other answer choices are distortions of this relationship.

When a consumer buys less of a product after a rise in income, the good is said to be an "inferior good." (Consider, for example ramen noodles--for most consumers, when income rises, they purchase fewer ramen noodles).

Another way to think about inferior goods it that the income elasticity is negative. The formula for income elasticity is change in quantity demanded divided by change in income. In the scenario in question, income rose (so the denominator, change in income, is positive), and the quantity demanded fell (so the numerator, change in quantity demanded, is negative). Thus, the income elasticity would be negative, making good X an inferior good.

Good X is not a normal good, because for normal goods, income elasticity is between 0 and 1 (not negative).

Good X is not a luxury good, because for luxury goods, income elasticity is greater than 1 (not negative).

The income elasticity of good X for the consumer is not 1, because we know from the explanation above that income elasticity for good X must be negative.

Consumer surplus is calculated as the amount a buyer is willing and able to pay for a good or service minus the actual cost of the good or service. Thus, if the consumer is willing and able to pay $5, but the good costs only $3, consumer surplus is $5 - $3 = $2.

If we are in the inelastic portion of the demand curve, an increase in price will increase TR, since the price effect is greater than the quantity effect. Quantity will still decrease.

Total revenue is price multiplied by quantity (TR = P x Q). At point A, price is $10 and quantity is 2, so TR = 2 x 10 = 20.

The law of diminishing marginal utility states that as consumption of a particular good increases, the satisfaction gained from consuming one additional unit (i.e. the marginal utility of the good) eventually decreases.

For example, consider eating chocolate bars. The increase in satisfaction resulting from eating the first chocolate bar is probably higher than the increase in satisfaction from eating the 12th chocolate bar. In other words, the marginal utility has decreased.

The change in price of a substitute good shifts demand.

An increase in the price of good X prompts consumers to use good Y instead of good X (i.e. substituting good X for good Y), resulting in increased demand for good Y.

The definition of the long run is a period of time in which fixed costs are able to change. For example, in the long run, a firm can move to a new plant that costs less money to operate each month.

Sunk costs are costs that cannot be recovered and therefore would not change, even in the long run.

The price elasticity of supply refers to the responsiveness of the supply curve to a change in price.

The profit maximizing rule for the firm is marginal revenue equals marginal cost. Notice that the rule does not explicitly involve average total or average variable costs.

The MR=MC profit maximizing rule holds for all market structures - monopoly, oligopoly, monopolistic competition, and perfect competition.

If marginal revenue is less than marginal cost, then the firm actually loses profits with continued production.

The definition of a dominant strategy is one that leads to the highest payoff for a particular player, regardless of what other players do.

Nash equilibrium can be achieved as the result of playing a dominant strategy, eliminating answer choice "never results in Nash equilibrium".