## Monday, December 12, 2016

### 2010 AP Micro FRQ#2

2010 AP Micro FRQ #2

(A) Using a CLG of the factor market for machines and the John Lamb Company, showing each of the following.

(i) The equilibrium rental price of machines in the factor market, labeled PR.

(ii) John Lamb's equilibrium rental quantity of machines, labeled as QL.

Understand that no matter if machines or labor we label the graphs the same. The college board is just checking to see if you know how to draw the Resource (factor) market graph.

Resource (Labor) Cheat Sheet here.

You also needed to know that a perfectly competitive (factor) market which will give us that perfectly elastic MRP curve for John Lamb's company.

(B) Assume the popularity for widgets declines decreasing the demand for widgets. What will happen to each of the following?

(i) Marginal product curve for machine hours.

Know what marginal product is:

from the Output and Costs, Cheat Sheet, here.

This is tricky -  understand that MP doesn't change for machines. The first machine makes 10 widgets an hour, the second machine makes 10 widgets and hour and so on...

(ii) Marginal Revenue Product curve for machine hours. Explain.

The MRP will decrease. As the demand for machines decreases, the price for the machines will fall. Since the formula for MRP = MP x P (of the good) and price of the good (widgets) decreases because the demand falls. The MRP shifts left.

From the Resource Costs Cheat sheet:

(C) John Lamb is employing the cost-minimisation combination of inputs (labor/machines). The marginal product of labor is 28 widgets per worker hour and the wage-rate is \$14 an hour. The
marginal product of the machine is 60 widgets per hour. What is the rental price per hour?

I did a blog post specifically on Least Cost Rule here.

Understand that the price of labor is the wage (MRC)

### 2010 Macro FRQ #3

2010 Macro FRQ #3 Mauricio Macri President of Argentina

(A) How will the transaction above affect Argentina's aggregate demand?

Argentina's imports will increase, therefore aggregate demand will decrease.

(B) Assume the US current account balance with Argentina is initially zero. How will the transaction above affect the US current account balance? Explain.

Balance of Payments Cheat Sheet here.

The US account balance will be a surplus as the US will have exported goods to Argentina. We will have a surplus in out current account and a deficit in the financial or capital account.

(C) Using a CLG of the FOREX market for the US dollar. show how a decrease in the US financial investment in Argentina affects each of the following.

(i) The supply of US dollars.
(ii) The value of the US dollar relative to the Peso.

Understand, that if the Argentinians are buying US goods they must go to the FOREX to buy US dollars as US suppliers do not accept Argentinian Pesos. So as Argentinians dump their money into the FOREX to buy US dollars the supply of US dollars in the FOREX decreases.

Obviously, when there is less of something the value of it increases. The value of the US dollar increases relative to the Peso.

(D) Suppose the inflation rate in the US is 3% and 5% in Argentina. What will happen to the value of the Peso relative to the US dollar as a result of the inflation rate difference? Explain.

Careful here as the college board is asking about the inflation rate (Price Level) not the interest rate as they do for so many of these problems.

If the US price level (inflation rate) is less than Argentinas then the prices of US goods are increasing at a slower rate than Argentinas goods. So relatively, US goods are going to be cheaper than the Argentinian goods.

If US goods are cheaper than the Argentinian goods, relatively. Then Argentinians are going to purchase (import) more US goods. Again, they have to buy US dollars to purchase US goods. As they do this the supply of Argentinian Pesos increase in the FOREX market. A larger supply means that the Argentinian peso will loose value against the US dollar.