16. B.The distance between L and M represents economic profit. In the long run, new firms will enter the market to
take advantage of the economic profits.
- B.For a firm in a competitive market, the level of production is determined by the intersection of the MC curve
and the ATC curve. ATC is the average cost of producing a unit of product. This is the sum of fixed cost per unit
plus variable costs of the extra unit produced. - D. Choice A is incorrect. Many firms (true) many products (false). Oligopoly. Monopoly. Few firms (false) many
products (true). - E.Choice A is incorrect because as they increase production, they would decrease economic profit. Choice B
would be an incentive (extra profits) for other films to enter into the market. With Choice C, the number of firms
will enter the market, but until there is no more incentive for (extra profits). With Choice D, the reverse will
happen because firms would want to enter the market because of the extra profits. - C.A monopolist can increase profits by producing where demand, D, is equal to average variable cost, AVC, or
at Q level of output. - D. Substitution effect: change in optimal consumption point as the price of a product changes while holding all
other prices and satisfaction level constant. Income effect: the change in the optimal consumption point as the
income changes while holding all prices at the new price levels. Price effect: substitution effect + Income Effect.
Giffen Good = as price of product increase the amount consumed will increase. Violates the first law of demand. - B.All choices are explaining monopolistic firms with the exception of B. Choice B represents inefficiency for a
monopolistic firm, but the firm will create more profits by producing less and selling its product for a higher price. - B.Choice A is incorrect because wage and savings just explains the microeconomics of wage and humane nature
to save. Choice C is incorrect because unemployment and the demand for workers just explain the job markets.
Choice D is incorrect because population and capital derive the production curve. Choice E is incorrect because
technology and production are just variable in industry. - B.Formula is wage = MPN, where N is the last worker to be hired.
Number of Workers Marginal Revenue per worker
00
1120
296
372
448
524
612
- B.A policy where the benefits of clean air are equal to the cost of less pollution would decrease the amount of
pollution. The optimal point is where the cost of pollution to the public is equal to the benefit of pollution to the
firm. - D. Choice A is incorrect because opportunity cost is by definition loss in profits from alternative projects. The
firm still allocates funds to build the new factory but at what price. Choice B is true but is incorrect for this
question because it only states that whatever we know now about the future is only a forecast. Choice C is false
because it does not agree with the definition. Choice E is incorrect because depreciation has to do with the user
cost of the new factory. - B.In a closed economy a firm can only consume whatever it produces.
Part IV: AP Macroeconomics & Microeconomics Tests