## Friday, April 3, 2015

### 2014 AP Microeconomics FRQ #1

2014 AP Microeconomics FRQ #1

How you will feel if you
study hard for the test.

(a) Using the numbers given in the graph, identify each of the following for the profit-maximizing monopolist.

(i) The quantity produced.

If its a profit-maximizing monopolist,, then profit - max is where MR = MC.

Answer - MC=MR @ a quantity of 4

(ii) The price.

Where MR=MC and then follow a straight line straight up until you run into the demand (price) curve and then left until the vertical axis,,, now read the price.

Answer - the price is \$40

(iii) The allocative efficient quantity.

You must know what allocative efficiency is... Monopoly Cheat Sheet.

Allocative Efficiency is where the MC curve intersects with the demand(price) curve. They want to know at what quantity that is. Allocative Efficiency (P = MC)

Answer - The MC curve intersects the D curve at a quantity of 8,,

(b) At the profit-maximizing quantity from part (a) (i), is the monopolist experiencing economies of scale? Explain.

Economies of Scale -  are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output

Translation - with economies of scale we are producing more output and our marginal costs must be decreasing.

Remember this graph below.
Look closely and you will see that the LRAC, (Long-Run Average Cost) curve. Notice that it is downward sloping in the Economy of Scale section,, flat in the Constant-Cost section & upward-sloping in the diseconomies of scale section.

Now look again,, at your graph.
The LRATC curve is flat,, our Marginal costs per unit of output are constant. Not decreasing.

Answer - This firm is not experiencing economies of scale as the LRATC is not downward sloping.

(c) Now assume that the monopolist produces at 10 units. Using the numbers given in the graph, calculate each of the following (show your work).

(i) The monopolists profit.

When the monopolist produces 10 units, the price he receives for each unit is \$10. Remember, the monopolist can choose the quantity produced or the price but not both. So his total revenue is \$100 dollars. But we see that the monopolists ATC (MC) is \$20 dollars a unit. If the monopolist is being forced to supply 10 units at \$10 each,, yet each unit is costing him \$20 dollars,, then he is loosing \$10 dollars on each unit he produces,, or a total loss of \$100 dollars.

Answer - the monopolists economic profit is a negative \$100.
(\$10 - \$20) x 10 = -\$100         (P - ATC) x Q

(ii) The consumers surplus.

Remember, at a quantity of 10 units the consumer surplus is the large triangle (Area = 1/2 b x h)

Answer = CS = 1/2 (\$60 - \$10) x 10 = \$250

Tricky,, tricky,,

So, Deadweight loss can be thought of as the opposite of efficiency (allocative efficiency) specifically.  If allocative efficiency is where P=MC the we can see that our MC > P is an inefficiency. If we have a situation where MC's are greater than price we are overproducing the good. Resources going into the extra production of this good & should be allocated to something more valued by society. Check out my post on efficiency.

Instead of what most students are use to P > MC,, with the DWL being on the left side of P=MC because monopolists are profit maximizers. The DWL would be shaded in on the right side of where P=MC.

Answer - DWL - 1/2 (\$20-\$10) x (10-8) = \$10

(d) What quantity is Demand unit elastic?

Monopoly Cheat Sheet -

Notice, that at the top of the TR curve , where revenue is maxed,,, is also where the MR=0, unit elasticity is where MR = 0.
Now ,, you just have to find the quantity where MR = 0.

Answer - at a quantity of 6, MR = 0 and at that quantity is unit elasticity.

(e) Suppose the monopolist perfectly price discriminates and chooses the quantity that maximizes profit. Determine the dollar value of each of the following.

(i) The monopolist's profits.

 A Perfect Price Discriminating Profit Maximizing monopolist charges every one of its customers the most that they are willing to pay for the good. Goods are supplied and charged for at the quantity where the MC = P or allocatively efficient quantity.
Answer - 1/2[(\$60 - \$20) x 8] = \$160,,,   remember that with a horizontal MC curve that the profit for the monopolist is a triangle, (Area = 1/2 b x h )

(ii) The consumer's surplus.

Notice the difference between a single price monopolist and a price discriminating monopolist,,, there is no consumer surplus with a price discriminating monopolist.

Answer  - there is no consumer surplus = 0.

How you will feel if you
don't study for the test.