ap economics review – unit 3 mr. chris meier – penn manor high school most essential topics for...

AP EconomicsAP EconomicsReview – Unit 3Review – Unit 3

Mr. Chris Meier – Penn Manor High School

Most Essential Topics for Quiz:1. Converting between Total, Marginal, Average2. Utility or Benefit Problems, especially solving a 2-good, utility-maximization problem3. Profit Maximization Problems (MC=MR … aka … MC=MB)4. Consumer & Producer Surplus (from graph or from table)5. Deriving a market demand curve from two individual tables (knowing that MB creates Demand curve, MC creates Supply curve)

AP EconomicsAP EconomicsReview – Unit 3Review – Unit 3

Mr. Chris Meier – Penn Manor High School

Topics not required on the Unit 3 Quiz•Actually drawing or interpreting from cost curves•You’ll need to answer table or word-based questions based on understanding how Marginals/Totals/Averages are related… or connection between fixed vs. variable vs. total… but not the cost curves on a graph

•LRATC Curve / Economies & Diseconomies of Scale.

•This will show up on following exam.

Question # Question # 33

Provide two synonyms for the word UTILITY

Happiness, Satisfaction, Pleasure, Benefit (even though there is a difference, same concept)


If your total benefit for consuming 5 tacos is $5, and the total benefit for consuming 6 tacos is $4.50, what is the marginal benefit of the 6th taco?

– 0.50


If you are given a table with:◦Price for Good A and Good B◦Q and MU for each quantity consumed of

eachHow would a rational consumer

determine which to consume first?

By comparing the MU/P for A and the MU/P for B. One should first purchase the one with a HIGHER MU/P (Marginal Utility per dollar)


The utility-maximizing rule states that a consumer will maximize his/her utility between good A and good B if their budget is spent and _________ = _________.

(MU/P)a = (MU/P)b …


How is the SHORT RUN different than the LONG RUN?

In the Short Run, Labor is the only Variable input. Land & Capital are FIXED/HELD CONSTANT.


Economists assume that Consumers will continue to purchase/consume a good or service until ____ = ____

MC=MB !!!!!!!!!!!!!!!!!!!


Economists assume that producers will continue to produce until ____ = ____

MC=MR !!!!!!!!!!!!!!!!!!!


What is the formula for calculating Total Revenue?

What is the formula for calculating Economic Profit?

TR = P * QEconomic Profit = TR – TC


TR = $500,000Explicit Costs = $420,000Implicit Costs = $100,000Total Fixed Costs = $50,000

◦ Is this company earning accounting profits? If so, how much?

◦ Is this company earning economic profits? If so, how much?

◦What are the Total Variable Costs for this company?

Accounting Profits? YES ($80,000)Economic Profits? NO (-$20,000 … an

econ. Loss)TVC = $470,000 (TC-TFC=TVC)


TR = $1,000,000Accounting Profit = $100,000Implicit Costs = $100,000Total Fixed Costs = $250,000

◦What are the explicit costs?◦ Is this company earning economic profits? If

so, how much?◦What are the Total Variable Costs for this

company?Explicit costs = $900,000? YES ($80,000)Economic Profits = $0 (exactly a normal

profit)TVC = $750,000 (TC-TFC=TVC)


If a business has $100,000 in explicit costs (expenses paid out), and $30,000 in implicit costs (other opportunity costs)… how much Total Revenue must this business earn to make a:◦Accounting profit of $5,000◦Normal profit◦Economic profit $50,000

Accounting profit of $5,000 @ TR=$105,000

Normal profit @ TR=$130,000Economic profit of $50,000 @

TR=$180,000


On Saturday, George has the choice of (a) playing video games for 2 hours, (b) Mowing lawns for two hours and earning $20, or (c) picking up an extra shift at work to earn $15 for two hours. Assuming George is rational and that time is the only cost, if he decides to play video games, the total benefit to George of playing video games must be at least…

At least greater than $20 for two hours (since he chose to play instead of earning $20 by mowing lawns.


What is the equilibrium price?Calculate Consumer Surplus.Calculate Producer Surplus.

Pe = $2C.S. = [1/2 (300*3) = $450 When in

doubt…P.S. = [1/2 (300*2) = $300

[[[Graph it!!]]]



Pe = $ 2C.S. = [1/2 (400*2) = $ 400P.S. = [1/2 (400*1) = $ 200 [[[Graph

it!!]]]



Pe = $ 1C.S. = [1/2 (250*5) = $ 625P.S. = [1/2 (250*1) = $ 125 [[[Graph

it!!]]]


Q TC0 0

1 5

2 9

3 14

4 20

5 28

What is the marginal cost of unit 3?

What is the marginal cost for unit 5?

If P=7, what is the profit maximizing output level?

$5, $8, Profit Max = 4 units


Q TC0 5

1 15

2 20

3 30

4 45

5 65



What are the Total Fixed Costs for producing 2 units?

What are the Total Variable Costs for producing 2 units?

$10, $15, $5, $15


Q TC ($)0 50

1 200

2 300

3 450

4 700

5 1000


What is the TVC of producing 3 units?

What is the TFC of producing 100 units?

What is the ATC of producing 5 units?

$300, $400, $50, $200


Q MC0 --

1 5

2 4

3 5

4 6

5 7

If P=$5, what is profit maximizing output level?

What is TC for 4 units?What is the AVC for 3

units?

Profit Max. = 3 units [MC=MR]

TC at 4 units = $20AVC at 3 units = 14/3 =

$4.67


Q TC0 10

1 16

2 21

3 28

4 36

5 50

If P=$12, what is the profit maximizing output level?

What is the marginal cost of producing the 3rd unit?

What is the ATC of producing 4 units?

Profits maximized at 4 units

MC of 3rd unit = $7ATC at 4 units = 36/4 =

$9


Q MC0 --

1 25

2 20

3 24

4 30

5 32

What is the TC to produce 3 units?

If P=$25, what is the profit-maximizing output level?

25+20+24=$69Profit is maximized at 3

units (profit of $6)


Q TC ($)0 20

1 50

2 75

3 110

4 150

5 210

6 300

If P=$50, what is the profit maximizing output level?

What is the marginal cost of producing the 6th unit?

AVC of producing 3 units?TFC of producing 5 units?Profits maximized at 4

unitsMC of 6th unit = $90AVC at 3 units = (110-20)/3

= $30TFC = $20 (constant)


If Gasoline costs $3, and Milk costs $2, how would you maximize your utility with a budget of $15? How many utils would that provide?

3 Gasoline, 3 Milk [TU = 220 utils]

Q Gasoline

TU Gasoline

Q Milk TU Milk

1 60 1 44

2 99 2 84

3 120 3 100

4 135 4 112

5 144 5 120


If Pencils costs 50 cents, and Pens cost $1, how would you maximize your utility with a budget of $5?

4 pencils, 3 pens [TU = 58 utils]

Q Pencils

TU Pencils Q Pens TU Pens

1 8 1 15

2 15 2 27

3 20 3 35

4 23 4 42

5 25 5 45


If Tacos costs $1, and Pizza costs $2, how would you maximize your utility with a budget of $10?

4 Tacos & 3 Pizzas [TU = 80 utils]

Q Tacos TU Tacos Q Pizza TU Pizza

1 12 1 20

2 21 2 36

3 28 3 48

4 32 4 54

5 30 5 55

Question # Question # 2828This table shows TB for

John & Paul for KitKats (in cents).

Calculate MB for eachDraw a MARKET demand

curve for KitKats (most accurate = step graph)

If P=5 cents, how many will each purchase? What is total C.S. for the market?

Draw graph. MB = additional benefit per unit. At P=5, John buys 2, Paul buys 3. Total CS=10 cents.


David & Bill for Pizzas (in dollars).


curve for Pizzas (most accurate = step graph)

If P=5 dollars, how many will each purchase? What is Total C.S. for the market?

Draw Step graph. MB = additional benefit per unit. At P=5, David buys 3, Bill buys 3. Total CS=14 dollars.


Mike & Susan for Ice Cream Sundaes (in dollars).


curve for Sundaes (most accurate = step graph)

If P=2 dollars, how many will each purchase? What is Total C.S. for the market?

Draw Step graph. MB = additional benefit per unit. At P=2, Mike buys 4, Susan buys 3. Total CS=15 dollars.


Lydia & Anna for TicTacs (in cents).


curve for TicTacs (most accurate = step graph)

If P=3 cents, how many will each purchase? What is Total C.S. for the market?

Draw Step graph. MB = additional benefit per unit. At P=3, Lydia buys 4, Anna buys 3. Total CS=10 cents.

ap economics review – unit 3 mr. chris meier – penn manor high school most essential topics for...

Documents

total variable costs

total fixed costs

implicit costs

total benefit

opportunity costs

total revenue

explicit costs expenses

accounting profits