Wednesday, June 10, 2015

2015 AP Microeconomics Exam FRQ #3

2015 AP Microeconomics Exam FRQ #3

(a) Calculate the total producers surplus at the market equilibrium price and quantity. 

Area of triangle   = (h * b/2)  or (1/2 height * base)

so, 20 (height) X 20 (base)/ 2 = 20*20 =400/2 = 200

Answer - 20*20 = 400/2 = 200 (total producers surplus)

AP - Answer - One point is earned for calculating the total producer surplus as (1/2 × 20 × 20) = $200.

(b) If the government imposes a price floor at $16, is there a shortage, surplus or neither?

Remember (floors are high and ceilings are low). A price floor set below the equilibrium price will have no effect as the market will clear.

Answer - at a $16 price floor neither a surplus or a shortage will occur because the $16 is below the equilibrium price,, it is not an effective or binding price floor.

AP - Answer - One point is earned for stating that imposing a price floor at $16 is ineffective and will not create a surplus or a shortage in the market because it is set below the equilibrium price, or because it is not binding 

(c) If instead the government imposes a price ceiling at $12, is there a shortage, a surplus or neither? 

price ceiling is a government-imposed price control or limit on how high a price is charged for a product. 

So, the highest price that can be charged for the widgets is $12. At the low price of $12 suppliers will only provide 12 units of this good,, but at the low price of $12 people will demand 24 units. So there will be a shortage.
AP - Answer - One point is earned for stating that imposing a price ceiling at $12 will create a shortage because quantity demanded is greater than quantity supplied, or because the price ceiling is binding. 

(d) If instead the government restricts the market output to 10 units, calculate the deadweight loss.
Understand that a 10 unit restriction on output is represented by a perfectly inelastic supply curve at the 10 unit quantity. All the people/quantity to the right of the 10 unit limit will not be served/produced,, thus it is allocatively inefficient and therefore the efficiency is represented by deadweight loss. 

Area of Triangle = b*h/2

height = 40-10 = 30
base = 20-10 = 10

30*10 = 300/2 = 150

AP - Answer - One point is earned for calculating the deadweight loss as $150 and for showing:
(1/2 × 30 × 10) or
(1/2 × 10 × 10) + (1/2 × 20 × 10) or
$50 + $100 

(e) Assume the price decreases from $20 to $12.
(i) Calculate the PED
(ii) Is demand perfectly elastic, relatively elastic, unit elastic, perfectly inelastic or relatively inelastic?

2015 AP Microeconomics Exam FRQ #2

2015 AP Microeconomics Exam FRQ #2

(a) Does each shop have a dominant strategy to set a high price, low price, or  does it have no dominate strategy?

So, While looking at my cheat sheet,, I'm not really sure I like the definition I have included. My understanding is that a dominate strategy is that no matter the actions of the other participant the same action occurs. In essence,, we do the same thing no matter what the other player does. I'm not sure the understanding of this is clear in the definition above... (summer work)

No matter what Quick does,, Bread should go Low,,, therefore Bread has a dominate strategy to go low. Bread always goes low.

Answer - Bread has a dominate strategy to go low,, Quick should do the opposite of whatever Bread does., so it has no dominate strategy.

Answer - AP- One point is earned for stating that Breadbasket has a dominant strategy of setting a low price but Quicklunch does not have a dominant strategy. 

(b) If the two shops don't cooperate on setting prices, what will be the profit for each shop.

Bread will choose Low, because $120 is the highest daily profit it can attain while not cooperating with Quick.

Quick will choose High, because $80 is the highest daily profit it can attain while not cooperating with Quick.

Answer - If there is no cooperation (setting prices) then their payoff will be from the left lower quadrant box,, $120 & $80.

Answer - AP - One point is earned for correctly identifying the profit for Breadbasket is $120 and the profit for Quicklunch is $80. 

(c) The town (politician) government is concerned that food prices are to high (and there is an upcoming election). It (he/she) decides to give a daily subsidy (taxpayer monies) of $20 to any shop that chooses to set a low price for its food items. Redraw the payoff matrix under the new government scheme.

Make a new chart adding $20 to the firms that offer the low price.
Then make a new word chart to answer the following questions:

Once your charts are created,, then go and answer the questions.

(i) Would Quick choose to set a high price or a low price? Explain using values.

(ii) Would Bread's profits, decrease, increase or stay the same? Explain.

Friday, June 5, 2015

2015 AP Microeconomics FRQ #1

2015 AP Microeconomics FRQ #1

(a) Is the market price greater than, less than, or equal to the firms price? Explain.
       So, if it is a perfectly competitive industry,, (Price taker) the firm can't raise its price as all other firms would then be selling the exact same product at a cheaper price and sales would plummet. The perfectly competitive firm also has no incentive to lower its price as it can sell all it wants at that price. The perfectly competitive firm therefore will have a price that is equal to the market price.

Answer - The firms price will be equal to the market price.

(b) Draw a CLG for both the market and a typical firm and show the following:
(i) Market price and quantity, labeled Pm and Qm.
(ii) The firms quantity, labeled Qf.
(iii) The firms average revenue curve, labeled AR.
(iv) The firms average total cost curve, labeled ATC.
(v) The area representing total cost, shaded completely.

(c) If one firm in the market were to raise its price, what will happen to its total revenue? Explain.
If one firm decides to raise its price sales of its product will plummet as all of its competitors will have the same product at a lower price, therefore its total revenues will theoretically fall to zero. 

Answer - total revenue will fall
Answer - One point is earned for stating that the firm’s total revenue will fall to zero, because quantity decreases to zero, or because the firm is a price taker, or because the firm is facing a perfectly elastic demand, or the firm loses all of its customers, or the firm has no market power. 

(d) Now suppose the market is in long-run equilibrium. The government gives a lump-sum subsidy to each firm producing in the industry. Indicate wether each of the following will increase, decrease, or remain the same.

(i) The firms quantity in the short run. Explain.
As a lump-sum subsidy does not effect the MC curve of the firm so we can conclude that quantity of the firm will not decrease or increase.

Imagine that you own a coffee cart out in front of the school. Every day students file buy and buy approximately 100 cups of coffee from your cart. You pay Alice to handle the orders and take the money while you make the coffee. The school principal likes your ingenuity and determination so much that he gets the school board to give a $1,000 donation to your small business. (Of course he takes a photo shoot of him handing you the check with his arms around you. The school paper has this photo with the caption, "Supporting Student Innovators"). Now, you have an extra $1,000 dollars of cash in your pocket. Question? Does that money in your pocket increase the amount of coffee the students will drink? NO,, Will you pay Alice more money because the principal handed you $1,000? NO,,, So, if there is no increase in demand for your coffee and the wages you pay Alice don't increase (variable costs, marginal costs) then why would you increase your production of coffee.

Answer - A lump-sum subsidy will not effect your marginal costs and therefore will not effect your quantity produced.

(ii) The market price and quantity in the long-run. Explain.

Ok, so the school principal is handing out $1,000 to student innovators. You have received your $1,000 for your initiative, while the $1,000 has not increased your production it has increased your profit. You are $1,000 dollars richer. Now the principal feels so strongly about supporting young innovators that he offers a $1,000 to anyone who opens a coffee cart. Hang Yuk decides he would like to get in on this action (profits attract competitors) so he builds his own coffee cart and starts competing with you in supplying coffee to students in the morning. Now,, there are two coffee carts supplying coffee to students in the morning and an increase in the supply of a good tends to drive prices lower while lower prices are an incentive for consumers to consume more coffee.

Answer - The market price will fall with more suppliers and with more suppliers comes a higher quantity produced.

Answer - 
  • One point is earned for stating that the firm’s quantity will remain the same in the short run and for
    explaining that MR or MC will not change in the short run. (Or, because the lump sum subsidy has
    no effect on marginal revenue and/or marginal cost, or that only fixed costs will be affected.)
  • One point is earned for stating that the market price will decrease and the quantity will increase.
  • One point is earned for the explanation that positive profits lead to entry of new firms that will
    increase the industry supply.