Thursday, May 5, 2016


2003 AP MICRO EXAM (Question 1)

(a) Using a correctly labeled side-by-side graphs for the smoke alarm market and J & P is currently earning  short-run positive economic profits.

(i) Price
(ii) Output

(b) In the graph in part (a) for J & P, indicate the area of iconic profits that J&P Company is earning in the short-run.

(c) Using a new set of correctly labelled side-by-side graphs for the smoke alarm market and J&P Company, show what will happen in the long-run to each of the following.

(i) Long-run equilibrium price & quantity in the market.
(ii) Long-run equilibrium price & quantity for J&P Company
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(d) Assume that the purchase of smoke alarms create positive externalities. Draw a CLG of the smoke alarm market.

 I like my graph better,, positive consumption externalities 

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(e) Identify one government policy that would be implemented to encourage the industry to produce the socially optimal quantity.


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