## 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.

### 2014 AP Macroeconomics Exam FRQ #3

2014 AP Macroeconomics Exam FRQ #3

Even this guy could get a five.

3. The US and South Korea are trading partners, and the US has a zero current account balance. Assume now that the inflation rate in the US decreases relative to the inflation rate in South Korea.
(a) Based on the decrease in the inflation rate in the US, will US exports to South Korea increase or decrease?
Check the FOREX cheat sheet -

If the inflation rate (PL) in the US decreases,, the price level PL is falling,,, US goods are becoming cheaper and thus more affordable compared to South Korean goods. South Koreans import more US goods,,, the US exports more of its cheap goods to South Korea.

#### (b) Based on the change in the US exports in part (a) answer each of the following.

(i) Will the US current account balance remain at zero, be in surplus, or be in deficit.

FOREX - Cheat Sheet

Answer - if the current account is at zero,, and the US exports increase,, then exports will be greater than imports, so the US's current account balance will be in surplus.

(ii) What will happen to the real gross domestic product in the US in the short-run?

Answer - If exports increase, then AD will increase,, therefore the R-GDP will increase.

(c)  The South Korean currency is the won. Draw a CLG of the foreign exchange market for the US dollar. Show the effect of the lower inflation rate in the US on the won price per US dollar.

If the US price level is falling, then US goods are getting cheaper relative to the South Korean goods, therefore the Koreans import more US goods. The S. Koreans trade won for US goods, therefore there is a surplus of won in the FOREX market,, the won's value decreases.

On the other side - the US exports goods, to be able to buy these US goods the S. Koreans must exchange their won for US dollars,, causing a higher level of demand for US dollars,, therefore the US dollar appreciates relative to the won.

The important part to recognize ion this question is that the college board is asking for the price of won per dollar... So the horizontal axis will be in dollars.

You could either show the above,, a demand increase or a supply decrease,, either will get you the points,, as long as they show the number of won per dollar to be increasing.

Answer - draw a CLG of the FOREX,, show (arrows) of a shifting right of the demand curve (increase) or a leftward shift of the supply curve (decrease),, and an increase of the won/dollar ratio.

I told you I would get a 5.

### 2014 AP Macro Exam FRQ question 2

2014 AP Macro Exam FRQ question 2

2. The Federal Reserve can influence the supply of money.

(a) Assume the Federal Reserve targets a lower federal funds rate.
(i) What open market operation can the Federal Reserve use to achieve a lower target?

The Federal reserve has three tools at their control,,, OMO Open market operations (buying and/or selling bonds), reserve requirement (increase /decrease), discount rate (increase/decrease).
1st you must know what the federal funds rate is -  cheat sheet.

The Federal Funds Rate is the interest rate that commercial banks charge one another in loaning out their excess reserves.

The example above shows an increasing Federal funds rate,, we want a decreasing Federal Funds rate.

Answer - if the Fed was to buy bonds,, the MS, increases and the Nom. IR, Nominal interest rate decreases,, thus lowering the rate of interest the commercial banks will charge each other in loaning out their excess reserves.

(ii) Given your answer to part (i) what will happen to the price of bonds.

If the Fed buys bonds,,, the price of bonds will increase.  The easiest way to understand this is to think about supply and demand,, demand for bonds goes up... price of bonds increase.

Answer - if the fed is buying bonds then the price of bonds is increasing.

(b) Using a correctly labeled graph of the money market, show the effect of the open market operation fro part (a) (i) on the nominal interest rates.

Cheat sheet -

You must know how to draw and label a money market graph from memory.

Answer - if the fed is buying bonds,, then it is paying for those bonds in cash,,, citizens are giving up their bonds and receiving cash. The money supply is therefore increasing. As the money supply increases nominal rates are falling.  Look Below.

(c) Assume the Federal reserve buys government bonds from commercial banks. Based only on this transaction, will the level of required reserves in the commercial banks increase, decrease, or remain the same?

You should understand that the required reserves are required for customers demand deposits (checkable accounts),, cash from selling assets does not effect the banks reserve requirements.

Answer - Fed's purchase of bonds will not initially affect commercial banks required reserves.

(d) another monetary policy action involves changing the discount rate. Define the discount rate.

Answer - the discount rate is the interest rate that the Fed charges banks for borrowing from it's discount window.

How I would have looked at the college board
after Reading some of these questions.