1. 2005
AP Microeconomics
Question 1

2. Bestmilk, a typical profit-maximizing dairy
firm, is operating in a constant-cost, perfectly
competitive industry in long-run equilibrium.

3. Draw correctly labeled side-by-side graphs for
LRATC MC p P
MR=D=AR=P D q Q Q Q
Bestmilk Firm
Market/Industry
Draw correctly labeled side-by-side graphs for
the dairy market and for Bestmilk and show
each of the following.
(i) Price and output for the industry
(ii) Price and output for Bestmilk

4. P Q S D p q Bestmilk Firm Market/Industry P1 D1 Q1
LRATC MC q
MR=D=AR=P
Bestmilk Firm
Market/Industry P1 D1 Q1
(b) Assume that milk is a normal good and that consumer
income falls. Assume that Bestmilk continues to
produce. On your graphs, show the effect of the
decrease in income on each of the following in the
short-run.
(i) Price and output for the industry

5. P Q S D p q Bestmilk Firm Market/Industry P and Q go down. P1 p1 D1 Q1
LRATC MC q
MR=D=AR=P
Bestmilk Firm
Market/Industry D1 Q1 P1 p1
MR1=D1=AR1 =P1 q1
(b) Assume that milk is a normal good and that consumer
income falls. Assume that Bestmilk continues to
produce. On your graphs, show the effect of the
decrease in income on each of the following in the
short-run.
(ii) Price and output for Bestmilk
P and Q go down.

6. P Q S D p q Bestmilk Firm Market/Industry Area of loss: p1p2AB P1 p1
LRATC MC q
MR=D=AR=P
Bestmilk Firm
Market/Industry D1 Q1 P1 p1
MR1=D1=AR1 =P1 q1 p2 A B
Area of loss: p1p2AB
(b) Assume that milk is a normal good and that consumer
income falls. Assume that Bestmilk continues to
produce. On your graphs, show the effect of the
decrease in income on each of the following in the
short-run.
(iii) Area of loss or profit for Bestmilk

7. Anytime a question asks whether or not a firm P Q S D p
LRATC MC q
MR=D=AR=P
Bestmilk Firm
Market/Industry D1 Q1 P1
MR1=D1=AR1 =P1 q1
AVC
(c ) Following the decrease in consumer income, what must
be true for Bestmilk to continue to produce in the
short run?
Anytime a question asks whether or not a firm
should produce, the student MUST draw an
AVC curve for the firm.

8. If the price (Point B) is greater then the Q S D p
LRATC MC q
MR=D=AR=P
Bestmilk Firm
Market/Industry D1 Q1 P1
MR1=D1=AR1 =P1
AVC B C q1
(c ) Following the decrease in consumer income, what must
be true for Bestmilk to continue to produce in the
short run?
If the price (Point B) is greater then the
AVC (Point C) at the profit-maximizing quantity,
Bestmilk should continue to produce.

9. (d) Assume that the industry adjusts to a new P Q S D p
LRATC MC q
MR=D=AR=P
Bestmilk Firm
Market/Industry D1 Q1 P1
MR1=D1=AR1 =P1
AVC S1 q1
(d) Assume that the industry adjusts to a new
long-run equilibrium. Compare the following
between initial and the new long-run equilibrium.
Because economic
profits are less than zero, firms will exit the market.
(i) Price in the industry

10. (ii) Output of a typical firmQ S D p
LRATC MC q
MR=D=AR=P
Bestmilk Firm
Market/Industry D1 Q1 P1
MR1=D1=AR1 =P1
AVC S1 q1
(ii) Output of a typical firm
Since Bestmilk firm is a price taker and will
take the market price, the firm quantity returns
back to the original “q.”

11. (iii) The number of firms in the dairy industry.P Q S D p
LRATC MC q
MR=D=AR=P
Bestmilk Firm
Market/Industry D1 Q1 P1
MR1=D1=AR1 =P1
AVC S1 q1 Q2
(iii) The number of firms in the dairy industry.
Looking at the market graph, as the number of
firms exit the industry, quantity goes down.