AP_Krugman_Textbook

b.The profit-maximizing quantity is 4.

c.The firm’s maximum profit is TR−TC=(4 ×$14) −$56

=$56 −$56 =$0.

Module 59

Check Your Understanding

1.

a.The firm should shut down immediately when price is

less than minimum average variable cost, the shut-down

price. In the accompanying diagram, this is optimal for

prices in the range from 0 to P 1.

b.When the price is greater than the minimum average

variable cost (the shut-down price) but less than the

minimum average total cost (the break-even price), the

firm should continue to operate in the short run even

though it is making a loss. This is optimal for prices in

the range from P 1 to P 2.

c.When the price exceeds the minimum average total cost

(the break-even price), the firm makes a profit. This hap-

pens for prices in excess of P 2.

2. This is an example of a temporary shut-down by a firm
   when the market price lies below the shut-down price,
   the minimum average variable cost. The market price is
   the price of a lobster meal and the variable cost is the
   cost of the lobster, employee wages, and other expenses
   that increase as more meals are served. In this example,
   however, it is the average variable cost curve rather
   than the market price that shifts over time, due to sea-
   sonal changes in the cost of lobsters. Maine lobster
   shacks have relatively low average variable cost during
   the summer, when cheap Maine lobsters are available;
   during the rest of the year, their average variable cost is
   relatively high due to the high cost of imported lob-
   sters. So the lobster shacks are open for business during
   the summer, when their minimum average variable cost
   lies below price; but they close during the rest of the
   year, when the price lies below their minimum average
   variable cost.

Tackle the Test:

Multiple-Choice Questions

1. e


2. d

Quantity

Price,

cost of

unit MC ATC

AVC

Q 1 Q 2

P 1

P 2

0

At prices above P 2 , the firm

operates with a profit

At prices above P 1 and

below P 2 , the firm operates

in the short run with a loss

At prices below P 1 , the firm

shuts down immediately

Tackle the Test:

Free-Response Questions

2. a.

b.$10

Module 58

Check Your Understanding

1. a.The firm maximizes profit at a quantity of 4, because it is
   at that quantity that MC=MR.
   b.At a quantity of 4 the firm just breaks even. This is
   because at a quantity of 4, P=ATC,so the amount the
   firm takes in for each unit—the price—exactly equals the
   average total cost per unit.


2. The lowest price that would allow the firm to break even
   is $10, for the minimum average total cost is $500/50 =
   $10, and price must at least equal minimum average total
   cost in order for the firm to break even.

Tackle the Test:

Multiple-Choice Questions

1. d


2. d


3. d


4. c


5. c

Tackle the Test:

Free-Response Questions

2. a.
   QMC
   0
   16
   1
   6
   2
   8
   3
   12
   4
   16
   5
   20
   6
   24
   7

$10

Price

Quantity

Demand

S-36 SOLUTIONS TO AP REVIEW QUESTIONS