2015 AP Microeconomics Exam FRQ #3

2015 AP Microeconomics Exam FRQ #3

Watch me answer it here

https://youtu.be/2cVGLqggiwM

(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? 

A 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

Watch me answer it here

https://youtu.be/z4nNjKCJOkg

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

Check the Oligopoly Cheat Sheet

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.