AP_Krugman_Textbook

Implicit cost =$2,000 +$23,000 =$25,000

Accounting profit =Total revenue −Explicit cost −

Depreciation =$25,000

Economic profit =Total revenue −Explicit cost −

Depreciation −Implicit cost =Accounting profit −Implicit

cost =$25,000 −$25,000 =$0.

b.An economic profit of zero is considered a “normal prof-

it.” The resources devoted to this business could not earn

more if used in the next best activity. This is just enough

profit to keep you in this business with no regrets.

Tackle the Test:

Multiple-Choice Questions

1. d


2. e


3. a


4. a


5. c

Tackle the Test:

Free-Response Questions

2. a.Total revenue =2,000 ×$2 =$4,000
   b.Accounting profit =$4,000 −$400 −$100 =$3,500
   c.Sunny would need to know the opportunity cost of her
   time.
   d.In general, she would calculate her economic profit and
   operate if she makes at least normal profit (meaning zero
   economic profit). In Sunny’s case, she earns $3,500 in
   accounting profit minus the $200 implicit cost of capital
   and the opportunity cost of her time. Because $3,500 −
   $200 =$3,300, she will make at least normal profit if the
   opportunity cost of her time is less than or equal to
   $3,300.

Module 53

Check Your Understanding

1. The profit-maximizing level of output is three units
   because marginal cost goes from being below marginal
   revenue at a quantity of three to being above marginal
   revenue at a quantity of four, thus passing through mar-
   ginal revenue at the third unit.


2. MC

0 54321

$21

17

15

13

10

8

Price, cost

of unit

Quantity

MR = P

Profit-maximizing

quantity

Tackle the Test:

Multiple-Choice Questions

1. c


2. c


3. d


4. e


5. c

Tackle the Test:

Free-Response Questions

Module 54

Check Your Understanding

1. a.The fixed input is the 10-ton machine and the variable
   input is electricity.
   b.As you can see from the declining numbers in the third
   column of the accompanying table, electricity does indeed
   exhibit diminishing returns: the marginal product of each
   additional kilowatt of electricity is less than that of the
   previous kilowatt.

MC

0

$5

Price, cost

of unit

Quantity

MR = P

Q*

SOLUTIONS TO AP REVIEW QUESTIONS S-33

Quantity of Marginal product

electricity Quantity of ice of electricity

(kilowatts) (pounds) (pounds per kilowatt)

00

1,000

1 1,000

800

2 1,800

600

3 2,400

400

4 2,800

c.A 50% increase in the size of the fixed input means

that Bernie now has a 15-ton machine, so the fixed

input is now the 15-ton machine. Since it generates

a 100% increase in output for any given amount