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AP Microeconomics › Unit 3

AP Microeconomics Unit 3: Production, Cost, and the Perfect Competition Model

22 to 25% of the exam · 180 practice questions · 12 free-response questions

How do firms decide how much to make? This unit builds cost curves from the production function, then uses them to find profit-maximizing output where marginal revenue equals marginal cost. You will draw side-by-side graphs of a competitive firm and its market, and show long-run entry and exit. Calculations often involve average total cost and economic profit. Students regularly forget that economic profit subtracts implicit costs, so zero economic profit is normal. Another slip is basing the shutdown rule on average total cost instead of average variable cost.

Practice this unit

White belt covers core terms and foundational ideas, Regular is set at exam level, and Black belt has harder multi-step questions.

Topics in this unit

• 3.1 The Production Function (24 questions)
• 3.2 Short-Run Production Costs (35 questions)
• 3.3 Long-Run Production Costs (24 questions)
• 3.4 Types of Profit (16 questions)
• 3.5 Profit Maximization (23 questions)
• 3.6 Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market (27 questions)
• 3.7 Perfect Competition (31 questions)

Free-response questions

• A Competitive Firm: Short-Run Profit and Long-Run Entry (Long question, 10 points)
• Cost Curves, Profit, and the Shutdown Point (Long question, 10 points)
• Workers and Loaves: Diminishing Returns and Cost (Short question, 5 points)
• A Rent Increase or a Tax per Unit (Short question, 5 points)
• Produce or Shut Down? (Short question, 5 points)
• Demand Rises in a Competitive Market (Long question, 10 points)
• Economies of Scale (Short question, 5 points)
• A Firm With a Loss (Long question, 10 points)
• Four Competitive Firms (Short question, 5 points)
• Reading a Cost Table (Short question, 5 points)
• Accounting Profit Versus Economic Profit (Short question, 5 points)
• When Entry Raises Input Prices (Short question, 5 points)

Sample questions

These are taken from the Regular set, with the answer and explanation shown.

Topic 3.2 Short-Run Production Costs

1. The rent on a firm's factory rises. In the short run, which of the following curves shift?

1. AMC and AVC only
2. BATC and AFC only
3. CMC, AVC, and ATC
4. DMC only
5. EAVC only

Answer: B. Rent is a fixed cost. A higher fixed cost raises AFC and ATC, but does not change variable costs, AVC, or MC.

Common trap: Shifting MC because total costs went up.

Topic 3.4 Types of Profit

2. Which of the following would raise a firm's economic profit without changing its accounting profit?

1. AThe firm pays its workers a lower hourly wage
2. BThe firm raises its price
3. CThe firm's rent decreases
4. DThe firm sells more output
5. EThe owner's best outside job offer pays less

Answer: E. A lower-paying best alternative reduces implicit costs, raising economic profit. It does not change any money payments, so accounting profit is unchanged.

Common trap: Choosing a change in revenue or explicit costs, which changes both profits.

Topic 3.7 Perfect Competition

3. A perfectly competitive industry has constant costs. A decrease in market demand will, in the long run, lead to

1. Amore firms and a higher price
2. Bmore firms and a lower price
3. Cfewer firms and a higher price
4. Dthe same number of firms and a lower price
5. Efewer firms and the same price as before

Answer: E. Lower demand cuts the price and causes losses. Firms exit until the price returns to minimum ATC. With constant costs, the long-run price is the same, but there are fewer firms.

Common trap: Thinking the long-run price stays lower.

Start practicing Unit 3 →