Fiscal Policy Cheat Sheet (updated) 1/31/2017

Fiscal Policy Cheat Sheet (updated) 1/31/2017

Big change here - simply the fact that when the Interest Rate increases, investment decreases.

This happens in the short-run and the long-run.

I haven't really pinned down the differing ways the College Board asks this question. 

Since firms can't buy equipment/factories (capital goods) in the short run the the question tends to be non specific. Asking about Growth.

Some questions specifically want to know about long run growth.

2012 Multiple Choice (Basic)

2012 Multiple Choice (Basic)

(PPC, Comparative Advantage, Supply & Demand)

Can't happen,, but I like Chuck Norris.

Answer  - (C) amount that must be given up, 

(sacrificed, foregone, lost, given-up)

Answer  - (E) increasing opportunity costs

Basic Cheat Sheet here.

Answer  - (A)

Understand that a Country can have absolute advantage in production of a good and have comparative advantage in the good.

A country can have absolute advantage in both goods,

but a country can only have a comparative advantage in one good.

I guess there can also be no comparative advantage.

Comparative advantage cheat sheet here. (I'm finding this sheet isn't working for me)

Answer  - (A) - 5000

Economic Profit (includes implicit costs)

Implicit costs are the costs to the firm of paying the entrepreneur to stay in this business,,, in essence,, the entrepreneur must make enough of a return on his investment to stay in this line of business.

Sally could have had a salary of $25,000 and rented her building for $10,000 - these are costs

Her accounting costs were $125,000 and the $35,000 (foregone salary and rent) = $160,000

Profit = TR - TC

Sally's total costs  = 125k (explicit costs) + the 35k (implicit included) = $160,000

and Total revenues = $155,000

TR(155k) - TC(160k) - $-5000

Therefore Sally actually lost -5000 on her investment

Answer  - (B)

Answer  - (D)

Salary given up, foregone, lost, sacrificed = $12,000

Yearly Cost of school = $4,600

Total opportunity cost = $16,600

Answer  - (A)

If nothing is sacrificed, foregone, given-up or lost then it is a free good.

Carl Menger

2012 Multiple Choice (Supply & Demand)

2012 Multiple Choice (Supply & Demand)

 I like it...

Answer - (B) increasing demand for pretzels and therefore  the price of pretzels

Answer - (D) decrease decrease

This question is a bit confusing,,, but answer me this....

If I give you money to hire city workers,,,, what will happen to the demand for rural(country) workers

The demand for rural workers will decrease,,, 

Price (wage rate) will fall as demand has decreased for rural workers

and quantity demanded for rural workers will fall (as will their total hours of work)

Answer - (B)

Look closely at the marginal utility curve,,,,, it is downward sloping
Utility (value, satisfaction, benefit) falls with each unit consumed.

Answer - (C)

(A) Less supply of oranges, price increases

(B) Price apples increases, demand for oranges increases, price for oranges increases

(C) Oranges cause cancer, demand for oranges decrease, price decreases

(D) Supply oranges decrease, price increases

(E) Advertising increases demand, price increases

Answer - (D) decrease because hamburgers and onions are complements

Answer - (A)

This question should really be in the Government intervention section for indirect taxes.

If the price is higher due to a tax.

Consumers now pay more for the good, their surplus has decreased

Producers receive less for the good, their surplus has decreased

(((Total surplus is maximised where D=S, at market equilibrium)))

Answer - (C)

In explaining the diamond-water paradox, marginalists explain that it is not the total usefulness of diamonds or water that determines price, but the usefulness of each unit of water or diamonds. It is true that the total utility of water to people is tremendous, because they need it to survive. However, since water is in such large supply in the world, the marginal utility of water is low. In other words, each additional unit of water that becomes available can be applied to less urgent uses as more urgent uses for water are satisfied.

Therefore, any particular unit of water becomes worth less to people as the supply of water increases. On the other hand, diamonds are in much lower supply. They are of such low supply that the usefulness of one additional diamond is greater than the usefulness of one additional glass of water, which is in abundant supply. Thus, diamonds are worth more to people. Therefore, those who want diamonds are willing to pay a higher price for one diamond than for one glass of water, and sellers of diamonds ask a price for one diamond that is higher than for one glass of water.

Conversely, a man dying of thirst in a desert would have greater marginal use for water than for diamonds so would pay more for water, perhaps up to the point at which he was no longer dying.

Answer - (A)

Supply and demand cheat sheet here.
A lower priced good (downward sloping demand) causes us to have higher purchasing power (it's like our income increased) and the ability to substitute a lower priced good for a higher priced good increases our purchasing power (the amount of goods we can buy for a dollar) both effects increase our purchasing power and hence,,, our incomes.

2012 Multiple Choice (Output & Costs)

2012 Multiple Choice (Output & Costs)

Answer - (B) rise initially, but eventually fall

Answer - (D) Average fixed costs

Understand that AFC = FC/Q

Example - FC = $100 and we produce 10 units then AFC = $100/10 = $10 meaning that each unit we produce covers $10 of the fixed costs.

If....

FC = $100 and we produce 1000 units then AFC = $100/1000 = $.1 or 10 cents. meaning that each unit produced covers $.1 or 10 cents of the fixed costs.

Answer -(E) Its marginal cost is $6, and its average variable cost is $5.50

Understand that this is a perfectly competitive firm in long-run equilibrium,

this means that P=MC & P = min ATC

Total revenue is $600 and TR = P x Q

Quantity = 100 so Price must be $6

So if P = $6 then MC must equal $6 as P=MC

If P = min ATC then ATC at this level of production = $6

AFC = FC/Q

So, AFC = $50/100 = $.50 or 50 cents each unit

If ATC = AFC + AVC

&

ATC $(6) = AFC$(.50)

and ATC - AFC = AVC

Then AVC = $6 - $.50 = $5.50

Answer - (D) $400

AVC = VC/Q

Q = 5

 then ?/5 = an AVC of $100

VC = 500

500/5 = AVC $(100)

now,, with output of one more unit #6, AVC increases to $150

AVC = VC/Q

Q = 6

AVC = $150

so, ?/6 = $150

900/6 = AVC $(150)

&

900 = VC at output of 6 units

500 = VC at output of 5 units

MC = change in VC/ change in Q (output)

Change in VC = 400/ change in output  = 1 unit

400/1 = 400

Answer - (D) Output increases at an decreasing rate, 

and the cost of producing each additional unit of output increases

Understand that the College Board is trying to see if you recognise the effect of adding more labor (variable costs) to a fixed factor of production (factory)

Diminishing Returns/Productivity

As you add more inputs (labor, variable costs) 

to a fixed factor of production (factory, machinery)

revenues/output increase at a increasing rate initially, but at some point revenues/output decrease decrease the rate of increase, and will eventually decrease.

Answer - (E) Economic profits are zero because price equals average total cost

AVC = $35

AFC = $30

ATC = $65 & P = $65 & MC = $65

Long-Run Equilibrium = P=MC=ATC

at LR Equilibrium a firm is making zero economic profit

Answer - (D) Average revenue is less than average variable cost

Understand and draw your graphs with your Demand curve labelled the AR curve.

IT is,,, and therefore will make sense once drawn.

Answer - (E) greater than zero

Understand that if total revenue is increasing as output increases we must be operating in the elastic section of the demand curve.

As the lower section of the demand curve (that is where MR is negative) is inelastic

2012 Multiple Choice (Elasticity)

2012 Multiple Choice (Elasticity)

Answer - (C) The demand for peanuts must be price inelastic

Understand - If a portion of the peanut crop is destroyed then the price of peanuts will rise. If even with the rise of the price for peanuts, total revenue increases then the demand for peanuts must have been in the inelastic section of the demand curve.

from the Elasticity Cheat Sheet here.

Answer - (D) relatively inelastic (demand for labor)

This one tricked me.....

Understand - (((What they are saying!!))

The change in the price of labor is larger than the change in the quantity fired.

Answer - (C) Unit elastic

P x Q = TR (total revenue)

$8 x 400 = $3200(TR)

or

$4 x 800 = $3200(TR)

Therefore - Unit Elastic

2012 Multiple Choice (Public Goods)

2012 Multiple Choice (Public Goods)

Answer - (D) National Defense

Understand: public good - An item whose consumption is not decided by the individual consumer but by the society as a whole, and which is financed by taxation.

A public good (or service) may be consumed without reducing the amount available for others, and cannot be withheld from those who do not pay for it. 

From the Market Failure cheat sheet here.

One more thing - often the questions ask about the marginal cost of public goods.

The marginal cost of a public good is zero.

Adding one more person to our National Defense is zero.

2012 Multiple Choice (Monopoly, Natural Monopoly, Monopolistic Competition)

2012 Multiple Choice 

(Monopoly, Natural Monopoly, Monopolistic Competition)

Monopoly Cheat Sheet here

Monopolistic Competition Cheat Sheet here

Natural Monopoly 

Answer - (C) Long-Run ATC decrease as output increases

This is a recognition problem,

What is a natural monopoly?

For a natural monopoly the long-run average cost curve (LRAC) falls continuously over a large range of output. The result may be that there is only room in a market for one firm to fully exploit the economies of scale that are available

There are several interpretations of what a natural monopoly us

1. It occurs when one large business can supply the entire market at a lower price than two or more smaller ones
2. A natural monopoly is a situation in which there cannot be more than one efficient provider of a good. In this situation, competition might actually increase costs and prices
3. It is an industry where the minimum efficient scale is a large share of market demand such there is room for only one firm to fully exploit all of the available internal economies of scale
4. An industry where the long run average cost curve falls continuously as output expands
5. Private utilities are natural monopolies in local markets

The key point is that a natural monopoly is characterized by increasing returns to scale at all levels of output – thus the long run cost per unit (LRAC) will drift lower as production expands. LRAC is falling because long run marginal cost is below LRAC. This can be illustrated in the diagram above. There may be room only for one supplier to reach the minimum efficient scaleand achieve productive efficiency.

Monopoly

Answer - (A) exit if conditions do not improve in the long-run

The firm is making losses, but shouldn't shut-down as it is still covering its fixed costs.

Monopoly

Answer - (B) produces to little output and sets a price above marginal costs

 Monopoly Competition

Answer - (C) P = ATC, MR = MC, and P > MC

Recognition Problem

The ATC curve is tangent to the Demand curve, it does operate at profit max (MR = MC), and price is greater than MC, therefore not allocatively efficient.

Monopolistic Competition

Answer - (B) make the demand for its product less elastic

Advertising in a Monopolistically Competitive market is a way

to entice customers to buy the firms products. 

It also attracts customers away from other firms.

If customer know about your products, then the assumption is that the firms demand curve is a bit more inelastic.

Amos Web does a fairly good job of explaining this concept.

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopolistic+competition,+advertising 

I need to do a better job on my cheat sheets for 

monopolistically competitive, natural monopolies, regulated monopolies