2011 AP Microeconomics FRQ #3

2011 AP Microeconomics FRQ #3

Watch me answer it here

https://youtu.be/Wpun2Ho1p4A

(b) Assume that a lump-sum tax is imposed on the producers of good x. What happens to the deadweight loss. Explain.

Dead weight loss is inefficiency,, in that someone (Third party) is being harmed and is not being compensated. The government steps in and (theoretically) taxes the producers causing them to internalise the cost of the externality. In theory, the costs of the producer increases and production decreases.

A lump-sum tax is viewed by producers as a fixed cost,, a cost of doing business with no connection to output. Fixed costs have to be paid if you produce or not. So, a lump-sum tax will not change or affect the variable costs (marginal costs) of a producer. Therefore, the firm who pays a lump-sum tax will not alter its amount of production. There will be no change in quantity produced and therefore would be ineffective as an incentive to get a producer to internalise the cost and produce less quantity of the negative externality.

IF marginal costs do not shift then the firm will stay at that profit max quantity. 

Answer - One point is earned for stating that the deadweight loss does not change because marginal cost does not change.

2011 AP Microeconomics Exam FRQ #2

2011 AP Microeconomics Exam FRQ #2

Watch me answer it here

https://youtu.be/c8o-Duxh7pE

2. Assume (perfectly competitive). Typical firm is earning positive economic profit in the short-run.

(a) Draw a CLG for the typical firm.

Answer

One point is earned for a correctly labeled graph with a horizontal demand curve at the equilibrium price, PE.

One point is earned for showing the equilibrium quantity, QE, at MR = MC.

One point is earned for showing that ATC is below demand or MR at Q. 

(b) Assume there is an increase in the market wage rate for labor, variable input. Show on your graph in part (a) the effect of the wage increase on the marginal cost curve in the short run.

The MC curve shifts left,,, (MC, think VC or wages)

(c) Assume the avocado producers hire labor from a perfect competitive labor market. Draw a graph of the labor supply and demand for a typical firm and label the supply curve MFC and the demand curve MRP. Assume the market wage rate increases form w1 to w2. Show the effect of a wage increase on the graph, the initial quantity of laboured hired at QL1 and the new quantity of labor at QL2.

Since the firm can hire its labor in a perfectly competitive labor market, the wage rate is determined by the market rate and it is a horizontal line. (They can hire all they want at that price)

Answer - One point is earned for drawing a correctly labeled graph with a horizontal MFC1 curve at w1 and a downward-sloping MRP curve and showing QL1. One point is earned for shifting the MFC curve up to w2 and showing the new equilibrium quantity of labor hired, QL2, which is smaller than QL1. 

2011 AP Microeconomics Exam FRQ #1

2011 AP Microeconomics Exam FRQ #1

Watch me answer it here

           https://youtu.be/U7lTP-vGStA

(a) Assume that the monopolist wants to maximise profits. Using the labelling on the graph, indicate the monopolist's price.

Profit max = MR = MC

Answer - One point is earned for identifying the profit-maximizing price as $24. 

(b) When the output is $8, what is the profit per unit?

Profit per unit  = TR - TC/ # units

TR = 8 x 24 = 192

ATC @ 8 units of production (follow the line up until you bump into the ATC curve.

ATC @ 8 units = $18 per unit or (8x18 = 144)

TR - TC = (192 - 144 = 48)

48/8 = 6

Profit per unit = $6

Answer - One point is earned for identifying the profit per unit as $6.

(c) Assume the monopolist is maximising profit. Is allocative efficiency achieved.

Demand = Price

 Answer - One point is earned for stating that allocative efficiency is not achieved because 

price is not equal to MC or MC is not equal to demand. 

(d) Between the price of $16 & $18, is the monopolist in the elastic, inelastic or unit elastic section of the demand curve?

Answer - One point is earned for stating that the demand is inelastic because total revenue increases as price increases from $16 to $18, or because the price elasticity of demand within the price range is less than 1, or because marginal revenue is negative. 

(e) Assume the regulators set an output of 11 units.

(i) Is the monopolist earning positive economic profits?

(ii) Is the monopolist earning positive accounting profits?

If the monopolist is forced to produce 11 units he will just be covering his costs, accounting profits will be covered (explicit) but implicit costs (opportunity costs) will not be covered. As there is no entrepreneurial profit.

Answer - One point is earned for indicating that the monopolist is not earning positive economic profit, because price equals average total cost. One point is earned for indicating that the monopolist is earning positive accounting profit. 

(f) Assume the regulator imposes a price ceiling of $22.

(i) What is the marginal revenue for the 8th unit?

(ii) What quantity will be produced?

Answer - One point is earned for stating that the marginal revenue of the 8th unit is $22.
One point is earned for stating that 9 units will be produced. 

(g) Assume instead that the monopolist practises first-degree price discrimination (also called perfect price discrimination).

(i) What quantity will be produced?

(ii) What will be the consumers surplus.

8 units produced.

10 units produced

Perfect Price Discrimination = More profit

Each customer is charged the max he will pay, so zero consumer surplus

MR is the Market Price since the firm doesn't have to lower the price to sell more, P = MC = MR

More output produced so (10 units produced), Greater allocative efficiency

Answer - One point is earned for stating that 10 units will be produced.

One point is earned for stating that the consumer surplus is zero.