Tuesday, November 4, 2014

Monopoly 7 - Lump-Sum & Per-Unit

Monopoly 7 - Lump-Sum & Per-Unit

The AP exam will often ask you to correctly graph a monopoly firm's profits or loss and then evaluate what happens if a per-unit/lump-sum tax or subsidy is imposed/provided. 

You must know how to answer what happens to the firms, quantity, price, profits, consumer surplus, DWL, losses due to a per-unit or lump-sum.

Remember, a lump-sum is treated/viewed as a Fixed Cost (FC) and therefore will shift the ATC curve up(tax) or down (subsidy) but it will not effect the MC marginal cost curve.

*It appears that Subsidy and Tax are only asked/answered for short-run.  

Lump-Sum Subsidy - Monopoly 
Q- No change - (as MC not effected)
P - No change - (as MC not effected)
CS - No change - (as MC not effected)
DWL - No change - (as MC not effected)
Profits (increase) Losses (decrease)






















Lump-Sum Tax - Monopoly
Q- No change - (as MC not effected)
P - No change - (as MC not effected)
CS - No change - (as MC not effected)
DWL - No change - (as MC not effected)
Profits (decrease) Losses (increase)






















A per-unit tax is treated as a VC, variable cost and will shift the ATC up(tax) or down(subsidy) but it will also shift the MC curve left(tax) or right(subsidy).

Per-Unit Tax - Monopoly (graph to come)
Q - Decrease (MC will shift left and up)
P - Increase (MC will shift left and up)
CS - Decrease
Profits (decrease) Losses (increase)
DWL - Increase (less supplied DWL increases) “Quantity levels less than or greater than the efficient quantity create efficiency losses (or deadweight losses).”

Q is decreasing, price is increasing, profits (decrease) Losses (increase), DWL has increased as less is produced.


Per-Unit Subsidy - Monopoly (graph to come)
Q - Increase (MC will shift right and down)
P - Decrease (MC will shift right and down)
CS - Increase
Profits (increase) Losses (decrease)
DWL - Decrease (more supplied DWL decreases)  “Quantity levels less than or greater than the efficient quantity create efficiency losses (or deadweight losses).”

Q is increasing,  price is decreasing, profits (increase) Losses (decrease), DWL has decreased as less is produced.


Notice, the farther from Socially Efficient Quantity,, DWL increases. (anyone know something different, leave a comment)

 2012 AP Economics Exam FRQ, Q1

























2007 AP Microeconomics Exam















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