Economics Micro & Macro (CliffsAP)

Free-Response Answers and Explanations

1. A.

B.Farmer Joe’s profit maximizing output is at quantity Q(FJ), and his profit maximizing price is price P*. The

profit maximizing point for all firms is where marginal cost is equal to average total cost. For Farmer Joe this

point occurs at quantity Q(FJ) and price P*. Farmer Joe’s total revenue is equal to the product of the quantity of

peaches he produces and the market price of peaches, or (Q(FJ))(P*)=TR.

C.A sudden decrease in the demand for peaches will cause the quantity of peaches demanded to decrease and the

market price of peaches to decrease. The new market price of peaches means that Farmer Joe will have a new

marginal revenue line that is below the original line of P*. The new lower price of peaches means that Farmer Joe is

not producing at the profit maximizing point, and is now producing at a point lower than the profit maximizing point.

Q(FJ) Quantity

P*

Price

MC

ATC

AVC

Q* Quantity

P*

Price

S

Part IV: AP Macroeconomics & Microeconomics Tests