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AP Microeconomics Unit 3 Problem Set
Concept Group 1: Total, Marginal, and Average Product & the Law of Diminishing Marginal Returns
Simulation: Paper Links Activity Reflection Questions
Complete Your Chart for Your Firm
Number of Workers (inputs)
1
2
3
4
5
6
7
8
1.
2.
3.
4.
Total Product (outputs)
Marginal Product
Average Product
What happened to the number on links produced as more workers were hired?
Why can the second worker generate more additional links than one worker working alone?
Why did the additional output for each worker eventually start to fall or even go negative?
What would happen to total output if every student in the room tried to make links given the limited resources?
Video Lessons:
5.
6.
7.
8.
9.
10.
11.
12.
13.
Explain why S=MC and D=MB.
Define total product and give the formula for calculating total product.
Define marginal product and give the formula for calculating marginal product.
Define average product and give the formula for calculating average product.
Graph a sample total, marginal, and average product.
Define the law of diminishing marginal returns. Explain the law in your own works and give a concrete example.
Define: increasing marginal returns, decreasing marginal returns, negative marginal returns.
Graph total product, and show the three stages of marginal returns: increasing, decreasing, and negative.
Complete the chart below:
Short-Run Production Function for Tony’s Hat Store
Quantity of Input
Total Product
(workers hired)
(Total hats produced)
Marginal Product
(additional hats from
each worker)
Average Product
(hats per worker)
0
0
1
10
2
25
3
45
4
60
5
70
6
75
7
70
14. Use the chart above to graph TP, MP*, AP, and identify regions of increasing, decreasing, and marginal returns.
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Concept Group 2: Short-Run Production Costs
Video Lessons:
 Accounting v. Economic Profit: https://www.khanacademy.org/economics-finance-domain/microeconomics/firmeconomic-profit/economic-profit-tutorial/v/economic-profit-vs-accounting-profit
 Fixed, Variable, and Marginal Cost: https://www.khanacademy.org/economics-finance-domain/microeconomics/firmeconomic-profit/average-costs-tutorial/v/fixed-variable-and-marginal-cost
 Marginal Cost & Average Total Cost: https://www.khanacademy.org/economics-financedomain/microeconomics/firm-economic-profit/average-costs-margin-rev/v/marginal-cost-and-average-total-cost
 Visualizing Average Costs & Marginal Costs as Slope: https://www.khanacademy.org/economics-financedomain/microeconomics/firm-economic-profit/average-costs-tutorial/v/visualizing-average-costs-and-marginal-costs-asslope
Simulation: “Houses of Cards” Activity
Complete work on separate sheet.
15. Explain the difference between accounting and economic profit.
16. Lenny decided to open a construction company—something he had been passionate about for many years. Last year, his
construction company earned $200,000 in revenue. He pays $2,000 a month in rent, $2,500 a month in wages to his
workers, and $500 a month in other costs including utilities and advertising. Prior to opening the construction company,
Lenny was a doctor earning $80,000 a year. He also used to have $75,000 in the bank that he invested into equipment
(tools, trucks, etc.) for the construction firm. In the bank that money used to earn him $5,000 per year in interest. His
depreciated at a rate of 2% per year. Calculate Lenny’s accounting and economic profit on an annual basis.
17. Explain the difference between short-run and long-run production.
18. Complete the chart below:
Term
Symbol Definition
Equation
Fixed Cost
Variable Cost
Total Fixed Cost
Total Variable Cost
Total Cost
Marginal Cost
Average Fixed Cost
Average Variable Cost
Average Total Cost
19. Complete the chart below:
TP
0
1
2
3
4
5
6
7
8
VC
0
8
14
19
24
28
34
44
56
FC
50
TC
MC
AVC
AFC
ATC
20. Graph the TC, TVC, and TFC in the chart above. Use an entire sheet of graph paper for the graph. Make the graph clear,
clean, and use different colors, if possible, to show the different curves.
21. Highlight the space between the TC and TVC. What is the value of that difference? How do you know?
22. What does “average” mean, in economics?
23. If the total cost of producing 10 cars is $1,000, what is the average cost per car?
24. If the total cost of producing 50 cars is $1,000, what is the average cost per car?
25. Graph the MC, ATC, AVC, and AFC in the chart above. Use an entire sheet of graph paper for the graph. Make the
graph clear, clean, and use different colors, if possible, to show the different curves.
26. Highlight the space between the ATC and AVC. What is the value of that difference? How do you know?
27. Why will ATC and AVC get closer and closer to each other but never touch?
28. Why is AFC asymptote?
29. Use Figure 1 below to calculate the TC, FC, and VC for producing 9 units.
30. Use Figure 1 below to calculate the TC, FC, and VC for producing 7 units.
2
Figure 1
Figure 2
31. At output Q, what area represents TC, VC, and FC?
32. Complete the chart below. Then graph the MC and MP curves below using the data in chart.
Workers
TP
MP
TC
MC
0
0
$25
1
4
4
$35
$10/4=$2.50
2
12
8
$45
$10/8=$1.25
3
18
6
$55
$10/6=$1.67
4
22
4
$65
$10/4=$2.50
5
24
2
$75
$10/2=$5.00
6
25
1
$85
$10/1=$10
33. Explain why the MC curve is U-shaped.
34. Draw a graph that shows MC and ATC. Why does MC intersect ATC at ATC’s lowest point?
35. Why is the ATC curve U-shaped?
36. What is a lump-sum tax? What is a lump-sum subsidy? Which costs do lump-sum payments affect?
37. What is a per-unit tax? What is a per-unit subsidy? Which costs do per-unit payments affect?
38. Draw a graph that shows a sample MC, ATC, AVC, and AFC. Label those as MC1, ATC1, AVC1, and AFC1. Now, show
what would happen if a firm receives a lump-sum subsidy. Label those as MC1, ATC2, AVC2, and AFC2.
39. Draw a graph that shows a sample MC, ATC, AVC, and AFC. Label those as MC2, ATC2, AVC2, and AFC2. Now, show
what would happen if the firm started to pay per-unit taxes on production.
Concept Group 3: Long-Run Costs
40. What is the purpose of considering long-run production costs?
41. How do you find the LRATC curve?
42. Why does economies of scale occur?
43. Create a graph that features multiple ATC and MC curves, and create a sample LRATC curve.
44. Define: economies of scale, constant returns to scale, diseconomies of scale.
45. Highlight where on the LRATC curve the following phenomena occur: economies of scale, constant returns to scale,
diseconomies of scale.
46. Explain how the law of diminishing marginal returns affects long-run production.
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Concept Group 4: Perfect Competition in the Short Run
Video Lessons:
 Marginal Revenue & Marginal Cost: https://www.khanacademy.org/economics-finance-domain/microeconomics/firmeconomic-profit/average-costs-margin-rev/v/marginal-revenue-and-marginal-cost
 Marginal Revenue below Average Total Cost: https://www.khanacademy.org/economics-financedomain/microeconomics/firm-economic-profit/average-costs-margin-rev/v/marginal-revenue-below-average-total-cost
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
Define perfect competition.
Explain the law of one price.
Why are perfectly competitive firms considered “price takers”?
Draw a set of graphs to show how price is established a perfectly competitive industry, and then to show a price is set in
a perfectly competitive firm.
Define marginal revenue.
Define average revenue.
Explain why MR=D=AR=P.
Explain the profit maximizing rule.
In Figure 3, explain why the firm would produce 9 units. Why not 8? Why not 10?
Use Figure 3 to calculate TR & TC at Q=9. Is there profit or loss in this firm?
In Figure 4, explain why the firm would produce 7 units. Why not 6?
Use Figure 4 to calculate TR & TC at Q=7. Is there profit or loss in this firm?
Figure 3
59.
60.
61.
62.
63.
64.
65.
Figure 4
Explain the shut-down rule.
Draw a graph of MC, ATC, and AVC to show where the shutdown point is.
Should a firm shut down if P>AVC? Why or why not?
Should a firm shut down if P=AVC? Why or why not?
Should a firm shut down if P<AVC? Why or why not?
In Figure 3 above, should the firm shut down? Why or why not?
In Figure 4 above, should the firm shut down? Why or why not?
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Concept Group 5: Perfect Competition in the Long Run—Constant Cost & Increasing Cost Industries
Simulation: Candy Markets Activity
Complete the Organizer Below
Type of Market
Number of
Sellers
Barriers to
Entry
Type of
Product
Competition
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Video Lesson:
 Perfect Competition: https://www.khanacademy.org/economics-finance-domain/microeconomics/perfect-competitiontopic/perfect-competition/v/perfect-competition
66.
67.
68.
69.
70.
What is a “perfectly competitive industry”?
Define “constant cost industry.”
In a constant cost industry, how do costs change in the long-run?
In an increasing cost industry, how do costs change in the long-run?
Use the graph below to answer the following questions: Where is the profit maximization point? How do you know?
What output should be produced? What is TR? What is TC? How much is the profit or loss? Where is the shutdown
point?
71.
72.
73.
74.
75.
76.
Draw a graph that shows MC, ATC, AVC, and MR to show that as price increases, quantity increases.
Draw a graph that shows how to find the supply curve from the MC and AVC curves.
How is the long-run different from the short-run in a perfectly competitive industry?
Define normal profit.
If a firm is making normal profit, is their accounting profit positive, negative, or zero? How do you know?
Assume that the firm is in a constant-cost industry. Use the graph below to answer the following questions: Do these
graphs show a firm in the long-run or short-run? What will firms do in the long-run? What happens to P and Q in the
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industry? Show what happens to the industry on the graph. What happens to ATC in the firm? What happens to P and Q
in the firm? Show what happens to the firm on the graph.
77. Assume that the firm is in a constant-cost industry. Use the graph below to answer the following questions: Do these
graphs show a firm in the long-run or short-run? What will firms do in the long-run? What happens to P and Q in the
industry? Show what happens to the industry on the graph. What happens to ATC in the firm? What happens to P and Q
in the firm? Show what happens to the firm on the graph.
78. Explain the difference between an increasing-cost industry and a constant-cost industry.
79. Redo #76 and #77, but assume that the firms are now in increasing cost industries.
80. Draw a graph to show an industry and firm in long-run equilibrium.
Concept Group 6: Efficiency
81. Differentiate between productive and allocative efficiency. Draw a PPF to demonstrate this concept.
82. Explain how to find productive efficiency in a firm. Draw a firm that is producing at the productively efficient point.
83. Explain how to find allocative efficiency in a firm. Draw a firm that is producing
84. Draw a firm in long-run equilibrium. Explain why this point is allocatively and productively efficient.
6
Multiple Choice Practice
Questions 1 and 2 are based on the chart below, which gives a firm’s total cost of producing different levels of output.
Output
0
1
2
3
4
Total Cost
$9
18
23
26
34
5
41
1. The marginal cost of producing the fifth unit of output is
A. $ 7
B. $8
C. $34
D. $41
E. impossible to determine from the information given
2. The total variable cost of producing one unit of output is
A. $9
B. $10
C. $11
D. $18
E. impossible to determine from the information given
3.
A firm employs variable amounts of labor to a fixed amount of capital to produce output. If the daily wage paid to labor decreases, how
does this affect the firm’s costs?
Total Variable Cost
Total Fixed Cost
Total Cost
A.
Decrease
No change
Decrease
B.
Decrease
Decrease
Decrease
C.
Increase
Decrease
No change
D.
Increase
No change
Increase
E.
Increase
Increase
Increase
4. Diminishing marginal returns to short-run production begin when
5.
A.
the average product of labor begins to fall.
B.
the total product of labor begins to fall.
C.
marginal product of labor becomes negative.
D.
average variable cost begins to rise.
E.
marginal product of labor begins to fall.
The table shows how hiring increasing amounts of labor to fixed amounts of capital affects the hourly output of a clothing factory. Based on
this table of production data, which of the following can be said?
A.
Diminishing marginal returns begin with the first worker hired.
B.
Marginal cost begins to rise at the 6th worker hired.
Units of Labor
Total Product (TPL)
0
0
1
5
C.
Total product is maximized at the 3rd worker hired.
2
12
D.
Diminishing marginal returns begins with the 3rd worker hired.
3
27
E.
Average product begins to decline with the first worker hired.
4
17
5
12
7
6.
If the average variable cost of a quantity of 10 is $15,
what is the value of $Y in the figure?
7.
A.
$250
B.
$350
C.
$25
D.
$1,000
E.
$35
If the average variable cost of a quantity of 10 is $15,
what is the value of $X in the figure?
8.
9.
A.
$150
B.
$250
C.
$350
D.
$1,000
E.
$25
If the average variable cost of a quantity of 10 is $15, at the quantity of 10, what is the value of $(Y-X)?
A.
$100
B.
$25
C.
$15
D.
$25
E.
$250
Label the curves below.
10. The shutdown point for this perfectly competitive firm is any point below curve ___.
A.
1
B.
2
C.
3
D.
4
E.
0g
8
11. Which of the following statements about a firm’s production function are true?
I.
When total product is at its maximum, marginal product is zero.
II.
When total product rises, marginal product is rising.
III.
When marginal product is greater than average product, average product is rising.
IV.
When marginal product is less than average product, average product is falling.
A.
I and II only.
B.
II and III only.
C.
II and IV only.
D.
I, III, and IV only.
E.
I, II, III, and IV.
12. A firm’s short-run marginal cost curve will eventually increase because of
A.
more efficient production.
B.
economies of scale.
C.
diseconomies of scale.
D.
diminishing marginal returns.
E.
increasing marginal returns.
13. Assume that in the short run at the profit-maximizing output, the price is lower than average variable cost. The perfectly competitive firm
should
A.
increase its price.
B.
decrease its price.
C.
increase its output.
D.
decrease its output.
E.
shut down.
14. If the average variable cost of producing five units of a product is $100 and the average variable cost of producing six units is $140, then
the marginal cost of producing the sixth unit is
A.
$140.
B.
$2.
C.
$250.
D.
$340.
E.
$410.
15. Assume that a perfectly competitive firm is operating where marginal revenue is greater than marginal costs. To increase profits, the firm
should
A.
increase production.
B.
decrease production.
C.
increase price.
D.
decrease price.
E.
do nothing.
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Questions 16-20 refer to the graph below.
16. If the firm is in short-run equilibrium at a price of A, a perfectly competitive firm will maximize profits by producing at which of the
following levels of output?
A.
R
B.
F
C.
P
D.
N
E.
E
17. At which price(s) will this firm make an economic profit
A.
A
B.
B
C.
C
D.
A&B
E.
C&D
18. Which price-quantity combination represents long-run equilibrium for this perfectly competitive firm?
A.
A&N
B.
B&F
C.
C&F
D.
D&R
E.
E&R
19. According to the graph above, if the firm is producing at F, the firm is
A.
making normal profits because the price just covers the average total cost.
B.
losing money because the firm is operating at the shutdown point.
C.
making profits because the price is above average variable cost.
D.
making normal profits because the price is above average variable cost.
E.
losing money because the price does not cover the fixed cost.
10
20. In the short run, the firm will stop production when the price falls below
A.
0A
B.
0B
C.
0C
D.
0D
E.
0E
21. In the graphs above, which of the following ways are the industry supply curve and the equilibrium price most likely to change in the long
run?
Industry Supply Curve
Equilibrium Price
A.
Decrease
Decrease
B.
Decrease
Increase
C.
Increase
Decrease
D.
Increase
Increase
E.
Not change
Decrease
Answers:
1. A
2. A
3. D
4. E
5. C
6. A
7. A
8. A
9. 1-MC, 2-ATC, 3-AVC, 4-AFC
10. C
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
D
D
E
D
A
C
D
C
A
D
B
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Extended FRQ Practice
1.
2008 #1
2.
2011 B #1
12
3.
2010 A #1
4.
2006 B #2
13
Production Costs Activity: Houses of Cards
Overview
Your goal in this activity is the same goal of every business, to make ____________. You
will remember that profit is the difference between total revenue and total cost. There is only
two ways to increase profits. You can _______________ total revenue or you can
_______________ total costs. Your assignment is to earn the most profit as you make a
tower made only of toothpicks and mini-marshmallows. Good luck.
Group Responsibilities
1. Planner- makes final design and strategy decisions
2. Purchaser- maintains invoice and purchases raw materials
3. Builder- oversees construction of the tower
4. Manager- organizes labor and materials and keeps track of time limits




Revenue
Price of every inch below 5 inches= $1,000
Price of every inch above 5 inches = $2,000
Integrity Bonus (ability to stand alone for 10 seconds) =$2,000
Strength Bonus (ability to hold a sheet of paper on top for 5
seconds) = $3,000
Definitions of Key Terms
 Total Revenue (TR) Fixed Costs (FC) Variable Costs (VC) Total Cost (TC)-
Fixed Costs (Overhead)
Rent (Desk) $500
Property Tax $100
Insurance $100
Opportunity Cost
Cost of Variable Resources
1 Index Card
$100
1 Piece of Tape
$50
Holiday Consulting
$500
Damaged/Unused
$100
Materials
each
Total Fixed Costs->
14
PURCHASING INVOICE FOR VARIABLE RESOURCES
Item(s)
ex: Index cards
Quantity
8
Individual Price
$100 each
Total
$800
Add Damaged/Unused Materials
($100 Each)
Total Variable Costs
Total Fixed Costs
Total Cost (TC)
Total Revenue
Height Revenue below 5 inches
Height Revenue above 5 inches
Integrity Bonus
Strength Bonus
Total Revenue (TR) 
Determine your Economic Profit by subtracting Total Costs from Total Revenue:
(Profit = TR-TC)
Total Economic Profit
15