2016 AP Microeconomics FRQ # 1

2016 AP Microeconomics FRQ # 1

Watch me answer it here

https://youtu.be/cj8h0AJGbjY

(A) In the market for bananas, the equilibrium price is $1.00 per pound, and the equilibrium quantity is 1,000 pounds per week. Suppose the government imposes a price floor on bananas at $1.20 per pound, causing the quantity supplied to increase to 1,500 pounds a week.    

(I) Would the price floor result in a shortage, a surplus, or neither? Explain.

The price floor causes the price to increase, which sends a signal to producers (suppliers) to produce more but consumers will reduce their purchases due to the higher price causing the quantity demand to decrease. So, a surplus would occur.

(II) Calculate the price elasticity of supply if the price increases from $1 to $1.20 per pound. Show your work.

Use either the midpoint formula or the alternative formula as the College Board accepts both.

Midpoint Formula     Alternative Formula

(III) Between $1 & $1.20, is the supply elastic, unit elastic, or inelastic? Explain.

From the Elasticity - cheat sheet,

So, a PES of 2 or 2.5 is obviously greater than 1 and therefore is Elastic.

(B) Bananas are an input for muffins.

     

(I) Draw a correctly labeled graph (CLG) of the market for muffins indicating the equilibrium price and quantity, labeled P₀ & Q₀, respectively.

(II) On the graph drawn in part (B) (I), show the increase in the price of banana's on the muffin market, labelling P1 & Q1.

 

An increase in the price of bananas is considered an increase in input cost for muffins as bananas are an input (resource) cost for muffins. Therefore the price of muffins will increase and the quantity of muffins sold will decrease.

(III) On the same graph, completely shade the area that represents the change in the consumer surplus caused by the change in the price of bananas.

(C) In the market for coffee, the equilibrium price is $3.00 per cup and the equilibrium quantity is a 100 cups per week. The cross-price elasticity of coffee with respect to muffins is -2.

(I) Are coffee and muffins normal goods, inferior goods, complimentary goods or substitute goods?

Elasticity cheat sheet

Coffee and muffins are complementary goods.

(II) Assume the supply of coffee is perfectly elastic. Using the equilibrium price and quantity given above, draw a correctly labelled graph for the coffee market and show the impact of the increase in the price of muffins on the coffee market.

(III) Given the original quantity 100 cups of coffee per week, if the increase in the price of muffins is 10%, calculate the new equilibrium quantity in the coffee market. Show your work.

The cross-price elasticity is the responsiveness of the quantity demand to a change in price. 

As the price of muffins goes up by 10% the demand for coffee will decrease as muffins and coffee are compliments. Recognise that the price of coffee does not increase as the supply is perfectly elastic.

The question is to calculate the new quantity sold in the coffee market.

Demand & Supply Question #2 AP Micro exam 2000

Answer - (D)  "The release of three summer movies set records for movie attendance"

 (A) If the wages of farm workers and movie theater employee increase, the supply of popcorn and movies will decrease (shift to the left).

 (B) If there is a technological advance in corn production, the supply of popcorn will increase (shift to the right).

(C) If there is more competition, price will decrease because of the increased number of sellers.

(D) "The release of three summer movies set records for movie attendance" means that the quantity demand of movie attendance increases. Since popcorn and movie attendance are complements, the demand of popcorn increases. As a result, the price increases and the quantity increases of popcorn.

(E) New government regulations increase the cost of production and, therefore, cause supply to decrease.

Determinate of Demand - Compliments - Korean Fried Chicken & Beer

Determinate of Demand - Compliments - Korean Fried Chicken & Beer

Korean Chicken and Beer - Chimaek

 New York Times- Korean Fried Chicken & Beer

Korean Fried Chicken and Beer are compliments.

If the price of Korean fried chicken increases what happens to the demand curve for beer.

If the price of Korean Fried Chicken increases then the Quantity Demanded will decrease (less chicken being eaten) therefore the demand for beer will decrease (shift leftward).

Determinate of Demand - Compliments - Vada Pav and Coriander/Peanut Chutney

Compliments are two goods that are consumed usually with each other.

Compliments are usually introduced in the determinants of demand section, paired with substitutes

Today I want to introduce Vada Pav and Peanut and/or Coriander Chutney as compliments.

This is an Indian dish eaten on the streets and in the homes of Mumbai, India.

Here is a video of Nisha teaching how to create the Vado Pav with its chutney compliments.

Think,  potatoes deep-fried with spices and chutney spread on a bun.

Link at wikipedia - Vada Pav

So compliments are two goods that are usually consumed together. The AP asked this question with one good's (Vada Pav) price rising and then asks how this affects the demand curve for the second good.

Example - The price of Vada Pav has increased, how does this effect the demand curve for peanut/coriander chutney.

Obviously, when the price of a good increases this causes a change in the Qd (quantity demand) not the demand curve of the good whose price changed. A change in price affects the quantity demanded not the demand.

BUT, the second part of the question asks what happens to the demand curve for peanut/coriander chutney.

AND, since Peanut/Coriander chutney is eaten with Vada Pav the quantity demanded (consumption) of one will affect the consumption of the other.

Price increases for Vada Pav and therefore the Qd of Vada Pav decreases, it seems reasonable that with less (a decrease) of Vada Pav being consumed that the demand for peanut/coriander chutney would decrease.

So less graph that with a CLG (Correctly Labeled Graph)

Thinking, explanation - less Vada Pav consumed - less peanut/coriander chutney demanded.

AP 1995 question

Answer - (E) Complementary

AP 2005 (I believe)

Answer - (B) X & Y are complementary goods

AP Question

Answer - (B) An increase in the price of potatoes, if potatoes and beef are complimentary goods.