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    Monopolistic Comp FRQs Answers

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    Heizlyn Amyneina
    The document summarizes two sample free response questions (FRQs) related to monopolistic competition from an AP Economics exam in December 2016. The first FRQ asks about a cellular telephone industry and (1) shows the profit-maximizing output and price for a typical firm in the short-run with economic profits, (2) explains why demand would be elastic, (3) explains how the demand curve shifts left in the long-run due to entry, and (4) shows the new profit-maximizing point in the long-run. The second FRQ asks about a cleaning product company, Mary & Company, operating at a loss or profit. It (1) shows the profit-maximizing

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    Monopolistic Comp FRQs Answers

    Uploaded by

    Heizlyn Amyneina
    3K views4 pages
    The document summarizes two sample free response questions (FRQs) related to monopolistic competition from an AP Economics exam in December 2016. The first FRQ asks about a cellular telephone industry and (1) shows the profit-maximizing output and price for a typical firm in the short-run with economic profits, (2) explains why demand would be elastic, (3) explains how the demand curve shifts left in the long-run due to entry, and (4) shows the new profit-maximizing point in the long-run. The second FRQ asks about a cleaning product company, Mary & Company, operating at a loss or profit. It (1) shows the profit-maximizing

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    The document summarizes two sample free response questions (FRQs) related to monopolistic competition from an AP Economics exam in December 2016. The first FRQ asks about a cellular telephone industry and (1) shows the profit-maximizing output and price for a typical firm in the short-run with economic profits, (2) explains why demand would be elastic, (3) explains how the demand curve shifts left in the long-run due to entry, and (4) shows the new profit-maximizing point in the long-run. The second FRQ asks about a cleaning product company, Mary & Company, operating at a loss or profit. It (1) shows the profit-maximizing

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    3K views4 pages

    Monopolistic Comp FRQs Answers

    Uploaded by

    Heizlyn Amyneina
    The document summarizes two sample free response questions (FRQs) related to monopolistic competition from an AP Economics exam in December 2016. The first FRQ asks about a cellular telephone industry and (1) shows the profit-maximizing output and price for a typical firm in the short-run with economic profits, (2) explains why demand would be elastic, (3) explains how the demand curve shifts left in the long-run due to entry, and (4) shows the new profit-maximizing point in the long-run. The second FRQ asks about a cleaning product company, Mary & Company, operating at a loss or profit. It (1) shows the profit-maximizing

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    AP Economics:

    Monopolistic Competition FRQs


    December 2016

    Monopolistic Competition FRQs

    1. Assume that the cellular telephone industry is monopolistically


    competitive.
    (a) Assume that cellular telephone manufacturers are earning
    short-run economic profits. Draw a correctly labeled graph
    for a typical firm in the industry and show each of the
    following:
    (i) The profit-maximizing output and price
    (ii) The area representing economic profit

    (i) Contains downward-sloping and relatively


    elastic D and MR curves, with MR lower and
    steeper then D; Q* is where MR=MC; P* is
    where Q* intersects D
    (ii) Profit is rectangle with P* ATC times Q*
    (b)At the profit-maximizing price you identified in part (a),
    would the typical firm's demand curve be price inelastic?
    Explain. No. D is elastic when MR>0 or when MR>0,
    TR rises when P decreases, indicating elasticity

    (c) Given the information in part (a), what happens to the


    demand curve for the typical firm in the long run? Explain.
    It will shift to the left. The presence of short-run
    economic profits and lack of barriers to entry means
    new firms will enter the industry. This provides
    consumers with substitutes and decreases the market
    share of the firm.

    (d)Using a new correctly labeled graph, show the profit-


    maximizing output and price for the typical firm in the long

    run.

    Properly labeled
    Q* is where MR=MC
    P* is where Q* intersects D
    D is tangent to ATC at Q* and in its downward sloping
    portion

    (e) Does the typical firm produce an output level that minimizes
    its average total cost in the long run? No
    (f) In long-run equilibrium, does the typical firm produce the
    allocatively efficient level of output? Explain. No P* >
    MC
    2. Mary & Company, operating in a monopolistically competitive industry,
    produces a cleaning product called BriteKlean. The company currently
    produces the profit-maximizing quantity of BriteKlean but is operating at
    a loss.
    (a) Draw a correctly labeled graph for Mary & Company and
    show each of the following:
    (i) The profit-maximizing output and price, labeled as QM
    and PM, respectively
    (ii) The area of loss, shaded completely

    Proper labeling
    QM is where MR=MC
    D and MR are downward sloping, with MR lower than
    D and steeper
    PM in where QM intersects D
    PM is below ATC
    Loss is rectangle ATC PM * QM

    (b) What must be true in the short run for the company to
    continue to produce at a loss? P > AVC but <ATC or
    TR>TVC
    (c) Assume now that the demand for cleaning products
    increases and that the company is now earning short-run
    economic profits. Relative to this short-run situation, how
    does each of the following change in the long run?
    (i) The number of firms Increase new firms will enter
    (ii) The company's profit Profits decrease when new
    firms enter; in the long run there will be zero
    economic profit
    (d)In the long run, if the company continues to produce, will it
    produce the allocatively efficient level of output? Explain.
    No P>MCorBoth D and MR are downward sloping
    but MR is always <D, so QM (where MR=MC - the
    profit maximizing Q) will be lower than QC (where
    D=MC - the allocatively efficient Q)
    (e) In the long run, will the company be operating in a region
    where economies of scale exist? Explain. Yes. QM will
    always be in the region where ATC is declining. MC
    intersects ATC at its minimum; if MC does not
    intersects MR in the downward sloping portion of ATC,
    a short-run profit will exist (P>ATC). This will attract
    new entrants to the industry, causing leftward shifts
    in D until it is tangent to ATC in its downward sloping
    region.

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