Econowaugh AP: 04/28/20

ALL Perfect Competition FRQ's

2017 AP Microeconomics Exam

(A.) Draw a side-by-side graph of the corn market & firm that is perfectly competitive.

(i) Show Equilibrium price and quantity

(ii) Show the profit maximizing quantity with the firm earning zero economic profits.

The firm is producing at Profit Max (MR = MC)
The firm is earning Zero Economic Profit (Break-Even) (P = ATC)
All Explicit and Implicit costs are covered

(B.) Assume the demand for ethanol increases. Show what will happen to the following.

(i) The market price and quantity for corn.

(ii) The area of profit or loss earned by the corn farmer , shaded.

As the Demand for Ethanol increases
the Demand for Corn increases also, as Ethanol uses corn in its production
Demand for corn increases and price of corn increases
As the price of corn increases the Firm makes Positive Economic Profits and the firms quantity increases
as it has a new Profit Max (MR = MC)

(C.) Relative to your answer in part B, what will happen to the price and quantity of corn in the long-run? Explain.

If we are making Positive Economic profits in the short-run,

this attracts firm to enter the market in the Long-Run

As firm enter the Supply of corn increases and the

price of corn falls the firms quantity decreases

but the market for Corn has an increase in quantity

We return to long-run equilibrium making zero economic profits

(D.) Soybeans are produced in a perfectly competitive market. Assume farmers can grow either soybeans or corn. What happens to the price of soybeans in the next planting season if the price of corn increases? Explain.

If the Price of corn increases farmers are now making higher profits on corn,

therefore they will plant more corn and less soybeans

less supply of soybeans means higher prices for soybeans

(E.) Assume the gov't sets a binding price on the price of corn. Draw a graph of the Corn Market showing the amount purchased.

Recognize that Qp the amount purchased is based on the amount supplied
doesn't matter how much is demanded,, if it ain't supplied you can't purchase it.