2016 AP Microeconomics FRQ # 1
(A) In the market for bananas, the equilibrium price is $1.00 per pound, and the equilibrium quantity is 1,000 pounds per week. Suppose the government imposes a price floor on bananas at $1.20 per pound, causing the quantity supplied to increase to 1,500 pounds a week.
(I) Would the price floor result in a shortage, a surplus, or neither? Explain.
The price floor causes the price to increase, which sends a signal to producers (suppliers) to produce more but consumers will reduce their purchases due to the higher price causing the quantity demand to decrease. So, a surplus would occur.
(II) Calculate the price elasticity of supply if the price increases from $1 to $1.20 per pound. Show your work.
Use either the midpoint formula or the alternative formula as the College Board accepts both.
Midpoint Formula Alternative Formula
(III) Between $1 & $1.20, is the supply elastic, unit elastic, or inelastic? Explain.
From the Elasticity - cheat sheet,
So, a PES of 2 or 2.5 is obviously greater than 1 and therefore is Elastic.
(B) Bananas are an input for muffins.
(I) Draw a correctly labeled graph (CLG) of the market for muffins indicating the equilibrium price and quantity, labeled P0 & Q0, respectively.
(II) On the graph drawn in part (B) (I), show the increase in the price of banana's on the muffin market, labelling P1 & Q1.
An increase in the price of bananas is considered an increase in input cost for muffins as bananas are an input (resource) cost for muffins. Therefore the price of muffins will increase and the quantity of muffins sold will decrease.
(III) On the same graph, completely shade the area that represents the change in the consumer surplus caused by the change in the price of bananas.
(C) In the market for coffee, the equilibrium price is $3.00 per cup and the equilibrium quantity is a 100 cups per week. The cross-price elasticity of coffee with respect to muffins is -2.
(I) Are coffee and muffins normal goods, inferior goods, complimentary goods or substitute goods?
Coffee and muffins are complementary goods.
(II) Assume the supply of coffee is perfectly elastic. Using the equilibrium price and quantity given above, draw a correctly labelled graph for the coffee market and show the impact of the increase in the price of muffins on the coffee market.
(III) Given the original quantity 100 cups of coffee per week, if the increase in the price of muffins is 10%, calculate the new equilibrium quantity in the coffee market. Show your work.
The cross-price elasticity is the responsiveness of the quantity demand to a change in price.
As the price of muffins goes up by 10% the demand for coffee will decrease as muffins and coffee are compliments. Recognise that the price of coffee does not increase as the supply is perfectly elastic.
The question is to calculate the new quantity sold in the coffee market.