Monday, December 26, 2016

2010 B Micro FRQ #1

2010 B Micro FRQ #1

(A) Assume that the private firm owns the bridge and maximises profits. Determine the output and price.

This is why we learn the MR=MC rule and apply it to all maximising profit companies. Look for MR=MC and follow the lines, even when the college board thinks up a strange question like this.

(B) Now assume that a municipality owns the bridge and sets the price to achieve allocative efficiency . Determine the output and price.

From the Monopoly Cheat Sheet here.

Recognise and understand that Allocative Efficiency is where P = MC.

(C) At a price of $1, is the municipality's accounting profit positive, negative or zero? Explain.

Understand Accounting Profit: Profit Cheat Sheet Here.

Remember that Zero Economic Profit is positive accounting profit. At a price of $1, P = ATC.
This is a fair return or break-even price the monopolist will be making a normal or zero economic profit.

(D) Suppose the municipality sets a break-even price that generates revenue just to cover all economic costs.

(i) Based on the graph, determine break-even output.

(ii) At the output you determined in part (D)(i), is the demand relatively elastic, relatively inelastic, perfectly elastic, or perfectly inelastic or unit elastic.

(E) If a company provides access to the island via watercraft, what will happen to each of the following?

(i) The demand curve for bridge crossing.
Substitution causes the demand curve to shift to the left.

(ii) The profit maximising output.

If demand falls then output necessarily falls.

(F) Suppose the long-run average total cost curve is strictly downward sloping, would it be efficient to build a second bridge? Explain.

I have no problem stating that this problem is poorly worded and stumped quite a number of teachers of economics. Along with myself.

Take a step back and think about what you know:

1) The demand for this good is inelastic
2) Fair Return/ Break-Even price is $1
3) A competing water taxi will reduce demand for our bridge#1
4) The socially optimal quantity (SOQ) is 4 autos at a price of zero
5) To get more people to cross our bridge you would have to pay them - also inefficient
6) Building bridge #2 with a price of zero will just attract autos away from Bridge #1, & increase fixed costs and therefore Average Total Costs
7) This will raise Bridge #1's ATC's as the Demand curve for Bridge #1 shifts leftward.
8) Overall the municipality's ATC's will increase = inefficiency

I think,,, that the clue here is the understanding that allocative efficiency (Socially Optimal Quantity) is produced at a quantity of Q4. with a price of zero. Remember that the quantity is the number of cars crossing the bridge during the day and at a price of zero,, 4 autos cross that bridge. This is what society values as it is the SOQ and allocatively efficient level of production ..

Saying it another way,,,, If with one bridge at a price of zero demand is met. Then if we build a second bridge, the demand curve for bridge #1 will shift leftward (substitute) and its ATC's increase.

Saying it another way,,, There is no demand for a second bridge as the first bridge serves the socially optimal quantity (4) without raising the price above zero... in essence, because they are in the economies of scale section of the LRATC curve there is no reason to increase fixed costs (build another bridge) as the costs are still falling with increased production,,,, There is no reason to increase our fixed costs (bridge #2) until we have the need or demand.

One more point,, Obviously we want to produce were our ATC curve is lowest and as we are experiencing economies of scale we want to produce more but this is only efficient if there is enough demand. There isn't enough Demand. If we build a second bridge our fixed costs will increase and therefore our ATC will increase. This would makes us less efficient.

Friday, December 23, 2016

Students in Malta crushing my blog.


Here is a shout out to all of the QSI students in Malta studying for the AP economics exams.

I'm sitting here in Columbia SC listening to the Bay Retro radio station in Malta.

Marie Louise Coleiro Preca would like you to get a 5
If your studying AP Economics and want your picture added to this page,, send me a picture of yourself studying economics, draw a graph on a window, wall, book, floor and have it added.

Send pictures here  -

2010 AP Microeconomics FRQ #1

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. 

Tuesday, December 20, 2016

Perfect Competition Cheat Sheet Updated 12/20/2016

Perfect Competition Cheat Sheet Updated 12/20/2016

I added 2 small parts - Why? doesn't the perfectly competitive firm raise its price. (In the perfectly competitive market there are thousands of firms, each competing with each other, and all goods are the same (homogenous). If you raise your price then there are so many competitors that your customers will just buy from someone else... Yes, even if you raise the price by a penny.... This doesn't work as well in the real world,, but the AP exam isn't the real world)

- Why? doesn't the perfectly competitive firm lower its price? (In the perfectly competitive market the perfectly elastic MRDARP curve. Perfectly elastic demand implies that the firm can sell all it wants at the market price... I'm gonna write that again,, the firm can sell all it wants at the market price... Why would I ever lower my price if I can sell all I want,, everything I make,,, anything that I build at the higher price????

I added this because so many of the people I'm tutoring this year,, seem to miss these simple points.

Monday, December 19, 2016

2010 B Micro FRQ #2

2010 B Micro FRQ #2
Make a Chart

(A) Calculate the Marginal (physical) product of the third worker.

For the AP marginal physical product is often just marginal product. 
Understand that the MRP is MP x P (price of the good) so, with an MRP of $450 and a price of $5
then the marginal product must be 90. 

The marginal product of the 3rd worker is 90.

(B) Define the law of diminishing marginal returns and explain why it occurs.

From the Resource Costs (Labor) Cheat Sheet here.

((The overuse of a fixed input,, I don't know exactly what that means.)) 

Example, you have a coffee cart and it can reasonably fit three people inside to make drinks, take the money etc. If you try and add 5 people into the cart, they will bump into each other, actually the large number of people in a small space may limit or even decrease production. Labor is the variable inputs and the coffee cart is the fixed capital.

(C) Diminishing marginal returns first occur with the hiring of which worker for the firm.

Hiring of the 3rd worker as MRP/MP decreases with the hiring of #3.

(D) What is the highest daily wage the firm is willing to pay the fifth worker?

The 5th worker will be paid no more than she will bring in. So the 5th worker makes/brings in $300,, so the firm will not pay her more than that or they would be incurring a loss on the hiring of #5 worker.

(E) What will happen to the demand for labor if the market price of the product increases?

If the price of the product increases then the MRP will increase/shift right, and more labor will be demanded as we will want to produce more of this good.

Resource Costs (Labor) Updated Cheat Sheet

Resource Costs (Labor) Updated Cheat Sheet
If you need a copy of a cheat sheet - email

Saturday, December 17, 2016

2010 Micro FRQ #3

2010 Micro FRQ #3

(A) Using the labelling on the graph, identify the area representing each of the following at the market equilibrium.

(i) Consumer surplus
(ii) Producer surplus

(B) Assume that the production of each unit of candy creates a 
negative externality equal to (p5-p2),
Identify the socially optimal quantity.

(((Production of candy))???    What does a negative production externality look like.

Market Failure Cheat Sheet here.

(C) Assume that the government imposes a pr-unit tax of (p5-p2) to correct for the negative externality. Show.

(i) Consumer surplus
(ii) Dead Weight Loss