Practice a College Board-style free response question on Production, Cost, and the Perfect Competition Model. Write your response, then reveal the model answer to see exactly what earns each point.
Free Response Question · Unit 3 · Profit Maximization & the Shutdown Decision
A perfectly competitive firm has the following short-run cost and revenue data at its current price of $30 per unit.
Quantity
Marginal Cost ($)
Average Total Cost ($)
Average Variable Cost ($)
40
22
34
26
41
26
33
25
42
30
32
24
43
35
33
25
A
Identify the profit-maximizing quantity of output for this firm. Justify your answer.
✓ Model answer (earns the point)
The profit-maximizing quantity is 42 units. Because this firm is perfectly competitive, MR = P = $30. The firm should produce where MR = MC, and at Q = 42, MC = $30, which exactly equals MR.
Why it scores: Identifies the correct quantity (42) AND explicitly applies the MR = MC rule, noting that MR = P for a perfectly competitive firm. Just stating "42" without the MR = MC justification would not earn full credit.
B
Calculate the firm's economic profit (or loss) per unit at the profit-maximizing quantity. Show your work.
✓ Model answer (earns the point)
Profit per unit = Price − ATC = $30 − $32 = −$2 per unit (an economic loss of $2 per unit).
Why it scores: Uses the ATC at the profit-maximizing quantity (Q=42, ATC=$32), not at a different quantity, and correctly identifies the result as a loss (negative profit per unit) since price is below ATC.
C
Should this firm continue producing in the short run, or should it shut down? Justify your answer using the data provided.
✓ Model answer (earns the point)
The firm should continue producing in the short run. Even though the firm is taking an economic loss of $2 per unit, the relevant comparison for the shutdown decision is price versus average variable cost, not average total cost. At Q = 42, AVC = $24, and price ($30) is above AVC. This means the firm is covering all of its variable costs and also contributing $6 per unit ($30 − $24) toward its fixed costs. Shutting down would mean losing all fixed costs, which is a larger loss than continuing to operate and covering part of those fixed costs.
Why it scores: Correctly identifies that the shutdown decision compares price to AVC (not ATC), shows that P > AVC at the relevant quantity, and explains why operating at a loss is still better than shutting down (partially covering fixed costs vs. losing all of them).
How to score points on AP Microeconomics FRQs
Always state the MR = MC rule explicitly when identifying a profit-maximizing quantity — don't just give the number.
Use the right average cost for the right question. Profit calculations use ATC; the shutdown decision uses AVC. Mixing these up is the most common error on this topic.
Show your arithmetic. Profit per unit = P − ATC. Total profit = (P − ATC) × Q. Always show which numbers you're using.
Explain why operating beats shutting down when P > AVC — the key idea is partially covering fixed costs vs. losing all of them.
Be concise but complete. 2–4 sentences per part is usually enough. Avoid filler — every sentence should add something a grader can mark.