Sunday, April 12, 2015

2012 Microeconomics Exam FRQ #1

2012 Microeconomics Exam FRQ #1

Don't give up,, you can do it!!!

1. Steverail, the only provider of train service operating between two cities, is currently incurring economic losses.

The only provider = Monopoly
incurring losses = draw a monopoly graph showing a loss

(a) Using a CLG, show each of the following.

(i) Steverail's loss-minimizing price and quantity, labeled Pm and Qm, respectively.
(ii) The area of economic losses, shaded.
(iii) The allocatively efficient quantity, labeled Qe.
(b) If Steverail raises the price above Pm, identified in part (a) (i), would total revenue increase, decrease, or not change.

Ok, I have drawn a total revenue curve on the bottom of the monopoly curve for Steverail's business.
If you know that where MR = 0 is unit elasticity then you know that the Demand curve above unit elasticity is the elastic section. In the elastic section of the demand curve,  if a monopolist raises his price his revenue will decrease.

Monopoly Cheat Sheet

Answer - One point is earned for stating that the total revenue would decrease because the demand is price elastic in that range of the demand curve where MR > 0.

(c) Assume a per-unit subsidy is provided to Steverail.

(i) Will Steverail's quantity increase, decrease, or not change? Explain.

Per-unit subsidies are viewed as Variable Costs (VC) and therefore shift the MC curve right and the ATC curve down. Quantity is increased and prices fall. A shifting of the MC curve also means that there is a new profit-max (MR = MC), hence the new lower price and greater quantity.

Why is the Per-Unit Subsidy considered a variable costs,,, because you only get the subsidy based on the amount you produce. If you don't produce you get nothing,,, so the amount of the subsidy you receive is variable.

Answer - One point is earned for stating that the quantity will increase because the subsidy will cause the MC curve to shift downward and intersect the MR curve at a larger quantity.

(ii) Will consumer surplus, increase, decrease, or not change?

A lower price will increase consumer surplus.

Answer - One point is earned for stating that the consumer surplus will increase.

(d) Assume instead that a lump-sum subsidy is provided to Steverail. For the short-run answer the following.

(i) Will the dead weight loss increase, decrease, or remain unchanged? Explain.

Ok,, so let me paint a picture. You are operating a coffee shop outside of your high school. On day a man stops by and gives you a $1,000 dollars (subsidy)... Does this effect what you pay your employees? Does this cause you to sell more coffee/ less coffee? No it doesn't,, your employees keep selling the same amounts of coffee as before. You now just have an extra $1,000 dollars in your pocket.

Deadweight loss is an inefficiency in that profit maximizing monopolies produce where MR = MC, and we know that at P = MC is allocative efficiency (no DWL)... So a lump-sum subsidy causes no change in quantity produced and does not effect DWL, society is no better off, but it does make you $1,000 richer.

Answer - One point is earned for stating that the deadweight loss will not change because the lumpsum subsidy does not change the profit-maximizing quantity.

(ii) Will Steverail's economic losses, increase, decrease or not change?

A lump-sum subsidy will decrease the loss,,, money in your pocket will decrease your overall losses.

Answer - One point is earned for stating that economic losses will decrease. 

2012 AP Macroeconomics Exam FRQ # 3

2012 AP Macroeconomics Exam FRQ # 3

(a) Draw a CLG of short-run AS, LRAS and AD. Show each of the following.

(b) Assume that there is an increase in exports from Andersonland. On your graph in part (a), show the effect of higher exports on the equilibrium in the short-run, labeling the new equilibrium output and price level Y2 and PL2, respectively.
(c) Based on your answer in part (b), what is the impact of higher exports on real wages in the short-run? Explain.

In the short-run is what you have to have noticed,,,, as wages can't adjust in the short-run,,, therefore if the price level is increasing and wages are not,,  real wages are falling.

Answer - One point is earned for stating that real wages will fall because the price level has increased and the nominal wages are fixed in the short run.

(d) As a result of an increase in exports, export oriented industries increase expenditures on new container ships and equipment.

(i) What component of aggregate demand will change?

New container ships and equipment are increases in capital and therefore Investment will increase.

Answer - One point is earned for stating that the investment component of AD will change.

(ii) What is the impact on the Long-run aggregate supply? Explain.

Think of increases in the capital stock as increasing efficiency and productivity and increasing the potential output of the economy.

Answer - One point is earned for stating that the long-run aggregate supply curve will shift to the right because the capital stock has increased.