2012 Microeconomics Exam FRQ #3

2012 Microeconomics Exam FRQ #3

Watch me answer this question https://youtu.be/PWN6_fSDgiM

(a) at the world price of $2 per pound, how much sugar is imported?

Ok, at $2 price 14m pounds is demanded (look at the demand curve),,, and at $2 then 2m pounds is supplied (look at supply curve).

Answer - One point is earned for stating that Loriland is importing 12 million pounds.

(b) Suppose that Lorillard imposes a per unit tariff on sugar imports and the new domestic price including the tariff is $4.

(i) Identify the new level of domestic production.

 Answer - One point is earned for identifying the new level of domestic production as 6 million pounds. 

(ii) Calculate the domestic consumer surplus for Lorillard. Show your work..

Answer - One point is earned for calculating the domestic consumer surplus as $25 million and showing the work: 1⁄2 [($9 - $4) × 10] = $25 

(iii) Calculate the total tariff revenue collected by the government. Show your work.

Answer - One point is earned for calculating the revenue from the tariff as $8 million and showing the work: ($4 - $2) (10 - 6) = $8. 

(c) Given the world price of $2, what per-unit tariff maximises the sum of domestic consumer surplus and producer surplus?

Consumer surplus is maxed with no tariffs,,, and producer surplus is maxed when all the international producers are able to sell in the country (without a tariff).

Answer - One point is earned for identifying the per-unit tariff that maximizes the sum of consumer and

producer surplus as $0. 

Ha..

2012 Microeconomics Exam FRQ # 2

2012 Microeconomics Exam FRQ # 2

Watch me answer it on Youtube https://youtu.be/pu9aX-eOWYg

(a) The table above shows Theresa's marginal utility from bagels and toy cars.
(i) What is here total utility from purchasing three toy cars?

So simple it's easy to get wrong... overthinking again?

3 toy cars (10+8+6) = 24 utils

Answer - One point is earned for determining the total utility, which is 24. 

(ii) Theresa's weekly income is $11, the price of a bagel is $2 dollars, and the price of a toy car is $1.

What quantity of bagels and toy cars will maximise Theresa's utility if she spends her entire weekly income on bagels and toy cars?

Explain using marginal analysis.

First, you must know the formula..

Then make a chart------

If you get to a place where both purchases have the same utility then you will be indifferent,, either one will do as long as you have cash to spend.

or

Using Marginal Analysis

MU/PB = 6/2 = 3 and MU/PTC = 3/1 = 3

the marginal utility per dollar spent on bagels equals the marginal utility per dollar spent on toy cars.  

Answer - One point is earned for stating that three bagels and five toy cars will be purchased.

Answer - One point is earned for explaining that with this combination of bagels and toys, the marginal utility per dollar spent on bagels equals the marginal utility per dollar spent on toy cars.   

Using Marginal Analysis

MU/PB = 6/2 = 3 and MU/PTC = 3/1 = 3

(b) Assume that the price of wheat, an input for the price of bagels, increases. Will Theresa's demand for bagels increase, decrease, or remain unchanged. Explain.

Remember, that input prices affect suppliers of a good,, not demanders.. So, Theresa will not change her demand for bagels if the price of wheat increases.

Answer - One point is earned for stating that Theresa’s demand for bagels will not change because the increase in the price of wheat will affect the supply of bagels, not the demand.

(c) Suppose that Theresa's income elasticity for bagels is -0.2. Does the value of Theresa's income elasticity indicate that bagels are a normal good, inferior good, substitute, or compliments?
  

Answer - One point is earned for stating that bagels are inferior goods.

(d) Suppose the price of toy cars increase by 10%. Theresa buys 5% fewer toy cars and 4% less of a different toy, blocks. Calculate the cross-price elasticity for toy cars and blocks, and indicate if it is positive or negative.

You gotta be *&(6%^# kidding me.

If the Price of Toy Cars is given then we need the Qd of another good and in this situation the Qd we need is for blocks. 

Xed is the comparison between 2 different goods

Toy Cars & Blocks

 Formula - 

% change in   Qd = -.04   (4% less) (Blocks)
% change in Price = .10 (Toy Cars)

Answer - One point is earned for calculating the cross-price elasticity for toy cars and blocks:

-0.04/0.10 = -0.4 

2012 Microeconomics Exam FRQ #1

2012 Microeconomics Exam FRQ #1

Don't give up,, you can do it!!!

Watch me answer it here

https://youtu.be/9ThoLHmE_SA

1. Steverail, the only provider of train service operating between two cities, is currently incurring economic losses.

The only provider = Monopoly
incurring losses = draw a monopoly graph showing a loss

(a) Using a CLG, show each of the following.

(i) Steverail's loss-minimizing price and quantity, labeled Pm and Qm, respectively.
(ii) The area of economic losses, shaded.
(iii) The allocatively efficient quantity, labeled Qe.

(b) If Steverail raises the price above Pm, identified in part (a) (i), would total revenue increase, decrease, or not change.

Ok, I have drawn a total revenue curve on the bottom of the monopoly curve for Steverail's business.
If you know that where MR = 0 is unit elasticity then you know that the Demand curve above unit elasticity is the elastic section. In the elastic section of the demand curve,  if a monopolist raises his price his revenue will decrease.

Monopoly Cheat Sheet

Answer - One point is earned for stating that the total revenue would decrease because the demand is price elastic in that range of the demand curve where MR > 0.

(c) Assume a per-unit subsidy is provided to Steverail.

(i) Will Steverail's quantity increase, decrease, or not change? Explain.

Per-unit subsidies are viewed as Variable Costs (VC) and therefore shift the MC curve right and the ATC curve down. Quantity is increased and prices fall. A shifting of the MC curve also means that there is a new profit-max (MR = MC), hence the new lower price and greater quantity.

Why is the Per-Unit Subsidy considered a variable costs,,, because you only get the subsidy based on the amount you produce. If you don't produce you get nothing,,, so the amount of the subsidy you receive is variable.

Answer - One point is earned for stating that the quantity will increase because the subsidy will cause the MC curve to shift downward and intersect the MR curve at a larger quantity.

(ii) Will consumer surplus, increase, decrease, or not change?

A lower price will increase consumer surplus.

Answer - One point is earned for stating that the consumer surplus will increase.

(d) Assume instead that a lump-sum subsidy is provided to Steverail. For the short-run answer the following.

(i) Will the dead weight loss increase, decrease, or remain unchanged? Explain.

Ok,, so let me paint a picture. You are operating a coffee shop outside of your high school. On day a man stops by and gives you a $1,000 dollars (subsidy)... Does this effect what you pay your employees? Does this cause you to sell more coffee/ less coffee? No it doesn't,, your employees keep selling the same amounts of coffee as before. You now just have an extra $1,000 dollars in your pocket.

Deadweight loss is an inefficiency in that profit maximizing monopolies produce where MR = MC, and we know that at P = MC is allocative efficiency (no DWL)... So a lump-sum subsidy causes no change in quantity produced and does not effect DWL, society is no better off, but it does make you $1,000 richer.

Answer - One point is earned for stating that the deadweight loss will not change because the lumpsum subsidy does not change the profit-maximizing quantity.

(ii) Will Steverail's economic losses, increase, decrease or not change?

A lump-sum subsidy will decrease the loss,,, money in your pocket will decrease your overall losses.

Answer - One point is earned for stating that economic losses will decrease. 

2012 AP Macroeconomics Exam FRQ # 3

2012 AP Macroeconomics Exam FRQ # 3

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https://youtu.be/wkJxo4ureQM

(a) Draw a CLG of short-run AS, LRAS and AD. Show each of the following.

(b) Assume that there is an increase in exports from Andersonland. On your graph in part (a), show the effect of higher exports on the equilibrium in the short-run, labeling the new equilibrium output and price level Y2 and PL2, respectively.

(c) Based on your answer in part (b), what is the impact of higher exports on real wages in the short-run? Explain.

In the short-run is what you have to have noticed,,,, as wages can't adjust in the short-run,,, therefore if the price level is increasing and wages are not,,  real wages are falling.

Answer - One point is earned for stating that real wages will fall because the price level has increased and the nominal wages are fixed in the short run.

(d) As a result of an increase in exports, export oriented industries increase expenditures on new container ships and equipment.

(i) What component of aggregate demand will change?

New container ships and equipment are increases in capital and therefore Investment will increase.

Answer - One point is earned for stating that the investment component of AD will change.

(ii) What is the impact on the Long-run aggregate supply? Explain.

Think of increases in the capital stock as increasing efficiency and productivity and increasing the potential output of the economy.

Answer - One point is earned for stating that the long-run aggregate supply curve will shift to the right because the capital stock has increased.

2012 Macroeconomics Exam FRQ #2

2012 Macroeconomics Exam FRQ #2

Watch me answer it on youtube https://youtu.be/WPH4Pmot8aM

(a) What is the reserve requirement?

If demand deposits are $100,000 and required reserves are $10,000 we can assume that the reserve requirements are 10%.

Answer - One point is earned for calculating the correct reserve requirement of 10 percent

($10,000/$100,000). 

(b) Assume that Luis withdraws $5,000in cash from his checking account at Mi Tierra Bank.

(i) By how much will Mi Tierra Bank's reserves change based on Luis's withdrawal.

So, Luis deposited $100,000 into the bank, of which 10% is required by the Fed to be held as required reserves. The banks has loaned out $85,000 dollars of the amount Luis deposited into the bank, leaving $5,000 in cash on hand,, called excess reserves.

If Luis takes out $5,000 then reserves will decrease by $5,000.

Answer - One point is earned for stating that total bank reserves will decrease by $5,000 

(ii) What is the initial effect of the withdrawal on the M1 measure of money supply? Explain.

First, you must know what the M1 money supply actually is.. 

Monetary Policy Cheat Sheet

M1 is paper money, coins and checkable deposits,,, no matter if the money is in the bank as checkable deposits or in Luis's pocket as cash it doesn't effect the M1 money supply. I guess if Luis took the money and burned it,, then the M1 level of the money supply would have been changed.

Short of burning the money,, the M1 doesn't change from bank  (checkable deposits) to customer (cash).

Answer - One point is earned for stating that the $5,000 withdrawal has no effect on the M1 measure of the money supply because it only changes the composition of M1 between cash and demand deposits. 

(iii) As a result of the withdrawal, what is the new value of the excess reserves on the balance sheet of the Mi Tierra Bank, based on the reserve requirements from part (a).

This is tricky,, you must decrease the Demand deposits by the $5,000 and decrease excess reserves by $5,000 and then add back to excess reserves the amount $500 that doesn't need to be held in reserved requirements due to the $5,000 withdrawal.

Answer - One point is earned for stating that the new value of the excess reserves is $500. 

2012 Macroeconomics Exam FRQ #1

2012 Macroeconomics Exam FRQ #1

watch me answer it here

https://youtu.be/8x_NNvV81qs

Watch me anser it here

https://youtu.be/Jdnmwrvz8U8

(a) Assume that Rankinland produces only food and clothing. Draw a correctly labeled PPC for Rankinland. Show a point that could represent the current output combination and label it A.

Remember, Rankinland is in Recession,, so all resources are not being utilized. Again,, recession usually means higher unemployment,, so the point A on the PPC represents, (or can represent) unemployment.

(b) Assume that the Central Bank of Rankinland pursues an expansionary policy.

(i) Identify the OMO, Open Market Operation that the central bank would use.

Expansionary fiscal policy,,, the OMO the central bank would use is the buying of bonds. When bonds are bought,, cash flows into the economy. The money supply is increased and nominal interest rates fall,, as interest rates fall, consumption (C) and investment (I) increase and therefore aggregate demand (AD) increases.

Answer - the central bank will buy bonds

(ii) Draw a CLG of the money market graph and show the short-run effects of the expansionary monetary policy on the nominal interest rate.

CLG - Correctly Labeled Graph,, nominal interest rate on the vertical axis,, and quantity of money on the horizontal.. MS for money supply shifting right (with arrows) and a decreasing of the nominal interest rate (with arrows) and a downward sloping demand for money curve.

(iii) Assume no change in the price level, what happens to the real interest rate, as a result of the expansionary policy,, Explain...

NO Change in the Price Level

Ok,, so first,, if you have learned the graphs like I have,, then when AD increases then the PL Price Level increases also. But that is because I was taught the classical/monetarist graph that has an upward sloping aggregate supply curve.

As AD increases the PL rises.

This no price level change can (theoretically) happen if the recession is bad and we use the Keynesian aggregate supply curve.

The Keynesian AS curve is viewed as horizontal during a recession and therefore that AD can increase with no Price Level changes

So,, we have expansionary monetary policy with no PL change and we need to know what happens to the real interest rate.

Let us look at the cheat sheet.Monetary Policy Cheat Sheet

If we understand that when the Fed buys bonds the Nominal Interest rate will fall and that with no price level change the nominal interest rate is the real interest rate then the Real interest rate must fall also.

Answer - One point is earned for explaining that with the price level remaining constant, when the nominal interest rate falls, the real interest rate also falls

(iv) Given your answer to part (b)(iii) regarding the real interest rate, what happens to the real gross domestic product (GDP) in the short-run? Explain.

As we can see,, the AD curve in the short run will increase and the R-GDP will also increase because an increase in the money supply will cause nominal interest rates to fall,, the lower rates will entice people to consume (C) and invest (I) which increases the AD therefore increasing (in the short-run) the R-GDP.

Why in the short-run???,,, because in the long-run we can be sure that prices will rise and rising prices will cause the demand for money to rise,, this will cause the Nominal interest rates to rise and that will decrease consumption (C) and Investment (I) and a decreasing of AD..

Answer - One point is earned for stating that the real GDP will increase in the short run and explaining that investment or consumption increases, causing aggregate demand to increase. 

(c) Suppose Rankinland has a current account deficit. Rankinland's currency is called the Bera.

(i) What will initially happen to the current account deficit in Rankinland solely due to the change in real GDP from part (b) (iv). Explain.

First, you must know that a current account deficit is a situation where imports > exports. If there is more money being pumped into the economy by the central bank,, we can assume that more imports will be consumed. So the deficit will increase.

Answer - One point is earned for explaining that the increase in real GDP increases income, which causes imports to increase and net exports to decrease.

(ii) What will happen to the international value of the Bera solely due to the change in the R-GDP from part (b) (iv). Explain.

If there is an increase in the money supply and more citizens spend money on imports,, then goods will come into the country and Bera's will go out. An increasing supply of Bera's in the international market will decrease their value.

FOREX Cheat Sheet

an increasing level of imports will increase the supply of Bera in the FOREX market which will lower the value of the Bera.

Answer - One point is earned for explaining that the decline in the international value of the bera is due to an increase in the supply of the bera