Tackle the Test: Free-Response Questions

1. Question

   Draw a correctly labeled graph for a monopolistically competitive firm that is taking a loss in the short run. Shade the area that represents the firm’s loss.

   Rubric for FRQ 1 (7 points)

   

   1 point: Correctly labeled axes

   1 point: Downward-sloping demand curve

   1 point: Marginal revenue curve below the demand curve

   1 point: Loss-minimizing quantity below where MC = MR

   1 point: Loss-minimizing price on demand curve above where MC = MR

   1 point: U-shaped average total cost curve above the demand curve at every quantity

   1 point: Correct loss area shaded

2. Question

   Draw a correctly labeled graph for a monopolistically competitive firm in long-run equilibrium. Label the distance along the quantity axis that represents excess capacity.(6 points)

   Rubric for FRQ 2 (6 points)

   

   1 point:Correctly labeled axes

   1 point:Downward-sloping demand curve and

   marginal revenue curve below the demand curve

   1 point:Quantity below where MC = MR

   1 point:Price on demand curve above where MC = MR

   1 point:U-shaped average total cost curve tangent

   to the demand curve at the firm’s price level

   1 point: Correct excess capacity distance labeled