2019 AP Macro (Set 1) FRQ#3

Watch me answer it here

https://youtu.be/aG6B62m3eX0

(a.) Draw a CLG of the short run and long run Phillips curve. Label the current short-run equilibrium as Point X and plot the values on the graph.

(b) Is the actual inflation rate greater, less than or equal to the Expected Inflation Rate of 3%.

Less than.

The economy is currencty in a recession and has a lower PL and greater unemployment rate than the Expected inflation rate and NRU.

(c) Assume loans were made taking into account the expected rate of inflation at 3%, will lenders (creditors, bankers) be better off, worse off after they realize the actual inflation rate identified in part B? Explain.

Better off as the actual inflation rate is less than the expected rate.

Bankers must take into account the inflation rate. Why?

Suppose you make a loan to someone with an interest rate of 3%. This is the nominal rate you have charged them and actual inflation turns out to be 3%. 

Stupid, Stupid, Stupid

{{Nominal - INflation = Real}}

If you charge then 3% and the Inflation rate is 3% then you have made 0 real dollars

Remember inflation implies that the price of everything increased by 3%, 

you made 3% on your loan but the price of everything increased by 3%.

If you had charges 5% and the inflation rate was 3% then you would have made 2% on your money.

If you charged 3% and the inflation rate was 1%, then you earned 2% on your loan and this is what we have in the problem above. The actual rate is less than the expected rate of 3% and therefore the banker wins.

(d) Based on the relationshipbetween the actual and the expected, what will happen to the natural rate of unemployment in the long-run?

What we know is that in the long-run we always return to the LR rate of unemployment at 4%.

The only time the college board has tested the NRU actually changing was 1 year when they had unemployment benefits increasing. This caused more people to choose to stay unemployed and therefore the NRU increased as the LRPC shifted right.

In the situation above (in the long-run) wages would fall, input prices would fall and the SRPC would shift leftward taking us back to fullemployment at a lower price level.

but the NRU would remain unaffected.

(Think Classical view)

2019 Micro Set 1, FRQ # 3, Oligopoly

2019 Micro Set 1, FRQ # 3, Oligopoly

Watch me anser it here

https://youtu.be/l4uEvDLl9Oo

                                             1st - Underline Patricks Pie's numbers 

                                             and square-in Dee's Pizza

                2nd - Do a word chart

a) What actions maximize the combined total profits for Patricks pie and Dee's pizza?

b) Conditional on your answer in part (a), does either Patrick or Dee have an incentive to cheat on this combination of actions that maximize the combined total profits? Explain using numbers from the payoff matrix.

c) Does Patrick have a dominant strategy?

d) Identify the Nash Equilibrium or equilibria actions for this game.

Nash Equilibrium = When neither player has an incentive to change its position

*** If neither player has a dominant strategy 

there can be two Nash Equilibria 

or 

No Nash Equilibria

e) Ignoring anti-trust considerations, suppose that Patrick pays Dees $20 to Stay-Out

i) Redraw the payoff matrix showing how the $20 payment to Dee affects the payoffs.

ii) Identify the Nash Equilibrium

2019 Micro Set 2, FRQ #3, Oligopoly

2019 Micro Set 2, FRQ #3, Oligopoly

Watch Me answer it here

https://youtu.be/4K3qmsTA078

a) Is Jackpot's dominant strategy to close at 6pm or to close at 9pm, or does it have no dominant strategy.

b) Suppose jackpot chooses to close at 6pm and Boulevard chooses no delivery. Is this the profit-maximizing action by Boulevard? Explain using values from pay-off matrix.

c) How much profit will Boulevard earn in the Nash Equilibrium?

Understand that The Nash Equilibrium,, implies that both participants are in their best locations given the other participants choice.

1st - Understand that Jackpot will always close at 6pm = dominate strategy

2nd - Understand that Boulevard will choose to Deliver as that maximizes profit.

Boulevard will Deliver as $30 > $20 - Boulevard's profit is $30 in the Nash Equilibrium

d) Suppose the two companies merge with two locations and the same pay-offs. What strategy would the new company use to maximize its combined profits?

Why?

The payoff with the largest combined profit for two locations.

e) 

2019 Micro Set 2, FRQ #2, Indirect Tax

2019 Micro Set 2, FRQ #2

Watch me answer it here

https://youtu.be/nOZkfrvmxRE

a) Using the graph, identify the following

i) The after-tax price and quantity.

ii) The area representing the total tax revenue received by the government.

Understand that the vertical distance between the two supply curves is the amount of the tax.

b) Now assume that the demand for hats is perfectly inelastic at Q3, while supply and per-unit tax remains unchanged.

i) Will the after tax price paid by consumers be higher, lower, or the same compared to the price in your answer in part (a) (i)?

ii) Will the total tax revenue received by the government be higher, lower or the same compared to the price in your answer in part (a) (i)? Explain.

c) If the demand for hats remain perfectly inelastic at Q3, and the per-unit sales tax is reduced, will producer surplus increase, decrease, or remain the same? EXPLAIN.

*Producer Surplus is the area below the price 

and above the supply curve