2010 AP Microeconomics FRQ #1
(A) Assume that Farmer Roy is making zero economic profit in the short-run. Draw a correctly labeled side by side graph for the corn market and for Farmer Roy and show each of the following.
(i) The equilibrium price and quantity for the corm market.
(ii) The equilibrium quantity for farmer Roy , labeled QF1.
(B) Is Farmer Roy's corn, is the demand perfectly elastic, perfectly inelastic, relatively elastic or relatively inelastic or unit elastic? Explain.
So, you must have recognised by this point that the MR curve is the Demand curve for a Perfectly Competitive industry. Therefore "putting your thinking cap on" the Demand for Farmer Roy's corn is perfectly elastic.
MORE IMPORTANT: is for you to understand why Farmer Roy doesn't raise his price? IF Farmer Roy raises his price, then there are thousands (theoretically) of other firms that would have a lower price and therefore Farmer Roy's revenues would fall to zero.
What if Farmer Roy decides to lower his price? (bit harder to conceptualize), If Farmer Roy can sell all he wants at the price of PM1, then how would lowering his price get him any benefit... again, he can sell all he wants at that price,, lowering his price will not increase sales.....
Perfect Competition Cheat Sheet Updated here.
(C) Corn can be used as the input in the production of ethanol. The demand for ethanol has significantly increased.
(i) Show on your graph in part (A), the effect on the increase in demand for ethanol on the market price and the quantity of corn in the short-run, labelling the equilibrium price and quantity.
(ii) Show on your graph in part (A), the increase in the demand for ethanol on Farmer Roy's quantity of corn in the short-run.
(iii) How does the average total cost for Farmer Roy at QF2, compare with PM2?
I dislike this question, as it seems to be confusing and doesn't really test your knowledge of economics. This question is simply asking where geographically the ATC is at in reference to the new price. The ATC curve was tangent at Pm1, zero economic profit was being earned but when the price rises to Pm2 the ATC is lower meaning that positive economic profits are being earned.
(D) Corn is also an input in the production of cereal. What is the effect of the increased demand for ethanol on the equilibrium price and quantity in the cereal market in the short-run? Explain.
If there is an increase in the demand for ethanol then the demand for corn must increase. If the demand for corn increases then the price of corn must increase and therefore the price and quantity of cereals must increase as corn in an input for cereals.