AP_Krugman_Textbook

in going from 2 to 3 emeralds is (−$9) × 2 =−$18.

That’s because 2 emeralds can only be sold at a price

of $84 when 3 emeralds in total are sold, although they

could have been sold at a price of $93 when only 2 in

total were sold.

Tackle the Test:

Multiple-Choice Questions

1. d


2. b


3. a


4. e


5. b

Tackle the Test:

Free-Response Questions

S-38 SOLUTIONS TO AP REVIEW QUESTIONS

Q 1 Q 2 Quantity

Price

of unit

S 2

S 1

D

P 1

P 2

Market

q 2 q 1 Quantity

Price,

cost of

unit

ATC

MC

MR 2 = D 2

P 1 MR 1 = D 1

P 2

Firm

Profit

Module 61

Check Your Understanding

1. a.The demand schedule is found by determining the price
   at which each quantity would be demanded. This price
   is the average revenue, found at each output level by
   dividing the total revenue by the number of emeralds
   produced. For example, the price when 3 emeralds are
   produced is $252/3 =$84. The price at the various out-
   put levels is then used to construct the demand schedule
   in the accompanying table.
   b.The marginal revenue schedule is found by calculating
   the change in total revenue as output increases by one
   unit. For example, the marginal revenue generated by
   increasing output from 2 to 3 emeralds is ($252 −
   $186) =$66.
   c.The quantity effect component of marginal revenue is the
   additional revenue generated by selling one more unit of
   the good at the market price. For example, as shown in
   the accompanying table, at 3 emeralds, the market price
   is $84; so, when going from 2 to 3 emeralds the quantity
   effect is equal to $84.
   d.The price effect component of marginal revenue is
   the decline in total revenue caused by the fall in price
   when one more unit is sold. For example, as shown
   in the table, when only 2 emeralds are sold, each
   emerald sells at a price of $93. However, when
   Emerald, Inc. sells an additional emerald, the price
   must fall by $9 to $84. So the price effect component

Quantity of Quantity

emeralds Price of Total Marginal effect Price effect

demanded emerald revenue revenue component component

1 $100 $100

$86 $93 −$7

2 93 186

66 84 − 18

3 84 252

28 70 − 42

4 70 280

− 30 50 − 80

5 50 250

e.In order to determine Emerald, Inc.’s profit-maximizing

output level, you must know its marginal cost at

each output level. Its profit-maximizing output level

is the one at which marginal revenue is equal to mar-

ginal cost.

2. As the accompanying diagram shows, the marginal cost
   curve shifts upward to $400. The profit-maximizing price
   rises to $700 and quantity falls to 6. Profit falls from
   $3,200 to $300 × 6 =$1,800. The quantity a perfectly