## Thursday, April 23, 2015

### 2011 AP Microeconomics Exam FRQ #1

2011 AP Microeconomics Exam FRQ #1

(a) Assume that the monopolist wants to maximise profits. Using the labelling on the graph, indicate the monopolist's price.

Profit max = MR = MC

Answer - One point is earned for identifying the profit-maximizing price as \$24.

(b) When the output is \$8, what is the profit per unit?

Profit per unit  = TR - TC/ # units

TR = 8 x 24 = 192
ATC @ 8 units of production (follow the line up until you bump into the ATC curve.
ATC @ 8 units = \$18 per unit or (8x18 = 144)
TR - TC = (192 - 144 = 48)
48/8 = 6
Profit per unit = \$6

Answer - One point is earned for identifying the profit per unit as \$6.

(c) Assume the monopolist is maximising profit. Is allocative efficiency achieved.

 Demand = Price

Answer - One point is earned for stating that allocative efficiency is not achieved because
price is not equal to MC or MC is not equal to demand.

(d) Between the price of \$16 & \$18, is the monopolist in the elastic, inelastic or unit elastic section of the demand curve?

Answer - One point is earned for stating that the demand is inelastic because total revenue increases as price increases from \$16 to \$18, or because the price elasticity of demand within the price range is less than 1, or because marginal revenue is negative.

(e) Assume the regulators set an output of 11 units.
(i) Is the monopolist earning positive economic profits?
(ii) Is the monopolist earning positive accounting profits?

If the monopolist is forced to produce 11 units he will just be covering his costs, accounting profits will be covered (explicit) but implicit costs (opportunity costs) will not be covered. As there is no entrepreneurial profit.

Answer - One point is earned for indicating that the monopolist is not earning positive economic profit, because price equals average total cost. One point is earned for indicating that the monopolist is earning positive accounting profit.

(f) Assume the regulator imposes a price ceiling of \$22.
(i) What is the marginal revenue for the 8th unit?
(ii) What quantity will be produced?

Answer - One point is earned for stating that the marginal revenue of the 8th unit is \$22.
One point is earned for stating that 9 units will be produced.

(g) Assume instead that the monopolist practises first-degree price discrimination (also called perfect price discrimination).
(i) What quantity will be produced?
(ii) What will be the consumers surplus.

 8 units produced.

 10 units produced

Perfect Price Discrimination = More profit
Each customer is charged the max he will pay, so zero consumer surplus
MR is the Market Price since the firm doesn't have to lower the price to sell more, P = MC = MR
More output produced so (10 units produced), Greater allocative efficiency

Answer - One point is earned for stating that 10 units will be produced.
One point is earned for stating that the consumer surplus is zero.