ALL Lump Sum/ Per Unit FRQ

Lump Sum/ Per Unit FRQ

2015 AP Microeconomics Exam

1. 

(D.) If the market is in LR Equilibrium, and the government gives a lump sum subsidy, what will happen to the following.

(i) The firms quantity in the short-run. Explain.

If the Market/Industry is given a Lump-Sum (Subsidy or Tax)

then the Lump Sum does not effect the Marginal Cost Curve of the Firm

therefore

the quantity of the firm doesn't change.

(ii) The market price and quantity in the Long-Run. Explain.

If firms are in LR Equilibrium and a Lump Sum subsidy is given 

then firms will be making Positive Economic Profits

Positive Economic Profits attracts firms (Firms Enter)

Supply Increases Price Decreases and Quantity Increases

2012 AP Microeconomics Exam

1. Steverail (Monopoly) is incurring economic losses

(A.) 

(C.) Assume a per unit subsidy to Steverail.

(i) Will Steve quantity increase, decrease, or not change? Explain.

Per Unit subsidies effect the MC curve (shifts right)

Understand that the MC curve is the firms supply curve

If the firm is given a subsidy for every unit of production then the Supply shifts right

the MC shifts right then the Price Decreases and Quantity increases

(ii) What about Consumer Surplus?

The Price decreases and therefore

CS will Increase

(D.) Assume that a Lump-Sum Subsidy is provided.

(i) Will the DWL, increase, decrease or stay the same? Explain.

Lump Sums do not effect the MC curve

therefore quantity can't change

therefore DWL can't decrease

as the only way to decrease DWL is to increase quantity

(ii) Will Steverail losses increase, decrease or remain the same.

Subsidies would decrease Steve's losses

2011 AP Microeconomics Exam

(A.) 

(B.) Assume a Lump-Sum. What happens to the DWL? Explain.

If a lump-sum tax is imposed it doesn't effect the MC curve

therefore quantity can't change therefore DWL can't change.

2009 AP Microeconomics Exam

(A.)

(B.) Assume lump-sum subsidy will quantity change? Explain.

NO, as Lump-Sum subsidies do not effect the MC curve 

therefore quantity cannot change.

2008 AP Microeconomics Exam

(A.) 

(B.) Now assume a lump-sum subsidy is given, effect of the following in the short-run.

(i) Callahan's quantity of output. Explain.

As the Lump-Sum subsidies do not effect the MC curve

therefore Quantity doesn't change.

(ii) Callahan's profit - Increases as monies are being given.

(iii) The number of firms in the industry.

No firms can enter in the short-run.

Tricky Bastards

2007 AP Microeconomics Exam

1. Patent = Monopoly

(A.) GCR is making a profit

(B.) Assume the government gives a lump sum tax. 

(i) Output and Price? Explain.

Lump-Sum taxes do not effect the MC curve

therefore quantity and price do not change.

(ii) What happens to GCR's profits?

GCR's profits decrease as they are taxed.

(C.) Assume instead the government gives a per-unit subsidy.

(i) Output & Price? Explain.

Per-Unit Subsidies shift the MC curve, 

a per-unit subsidy would shift the MC curve to the right

price would decrease and quantity would increase

(ii) What will happen to GCR profits.

Profits increase as the more produced the more subsidy given.

2000 AP Microeconomics Exam

(G.) To achieve allocative efficiency what would be best a per-unit tax or per-unit subsidy.

A per-unit tax would shift the MC curve to the left, quantity would be reduced

and therefore DWL is larger as we are further away from allocative efficiency.

A per-unit subsidy would shift the MC curve to the right, quantity would increase

and therefore DWL would decrease as more quantity will be produced, 

as we are moving closer to the SOQ the we are becoming more

allocatively efficient

2007 Microeconomics FRQ #1

2007 Microeconomics FRQ #1

Sometimes music makes it go down smooth.
https://www.youtube.com/watch?v=_NNOaYNqLo8

So, you must understand that a patent is a government sanctioned monopoly. Yes, I know that seems dramatic but a patent is a governmental guaranteed or privilege that allows you to sue anyone that copies your idea and the courts will find in your favour if you have a patent. 

(A) Assume that GCR is making economic profit. Draw a correctly labeled graph and show the profit-maximising price and quantity.

(B) Assume that the government imposes a lump-sum tax on GCR.

(i) What will happen to the price and quantity? (Explain.)

(ii) What will happen to GCR profits?

Ok, so the important thing to know about lump-sum taxes is that they don't effect the MC curve. 

What in the F&#$K does that mean Mr. Waugh, you say. It means, my dear friend that a lump sum tax is to be paid by any company in the industry no matter if they produce or not.

Let us make it personal. Mr Waugh owns a waffle cart outside of the school gate and every morning students stop by and buy coffee from the cart. The principle stops by at the end of the day and explains that I will have to give him a hundred dollars to keep selling coffee at the front gate. 

Consider the $100 to be a lump sum tax. We think of lump-sum tax as a Fixed Cost.

A fixed cost affects your ATC (Average Total Cost) as ATC is a combination of fixed and variable costs. Remember - ATC = FC + VC

Since it is a lump-sum tax the ATC will shift up. Your fixed costs will increase and therefore mathematically your ATC must increase.

Answer (i) -You would not be producing anymore quantity of coffee because the principles $100 tax does not affect the demand for coffee. So quantity will not change and if quantity produced does not change you will not need to hire more people so VC (Variable Costs) will not change.

* When you see (VC) think (Labor) and you only need more labor to produce a higher quantity.

Answer (ii) - If you are taxed and your making profits, well now you are making less profits. Shifting the  ATC straight up reduces your profits but doesn't affect quantity or price.

Check out the cheat sheet on Lump-sum taxes and subsidies. Here

(C) Assume instead that a per-unit subsidy is granted.

(i) What will happen to market price and quantity? Explain. (Explain means why!!!)

(ii) What will happen to profits?

OK, so per-unit subsidies or taxes are looked at as VC (variable costs) Remember (Think Labor)

So, VC will decrease meaning that the MC (marginal cost curve) will shift rightward.

Why, Mr. Waugh does a per-unit subsidy affect the MC curve. If I'm given cash for every cup of coffee that I sell at my coffee cart it lowers my costs and thus raises my profit per cup. More profit per cup means that I will want to produce more quantity. Lets look at a graph.

Answer - As we are given money (per-unit) our ATC curve decreases because the ATC curve is composed of FC and VC and Per-unit subsidies reduce our VC and therefore our ATC. A decrease in the VC shifts the MC curve rightward. Then we find a new Profit Max (MR=MC) and notice that price falls and quantity increases. Profit also increases.

(D) Now assume the Patent expires. What will happen to GCR's profit in the long run. Explain.

If GCR's patent goes away then other firms will be able to use GCR's anti-spyware. Profit attracts firms into the industry and therefore GCR's profits will decrease.

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.

Perfect Competition 2 - Lump Sum, Tax & Subsidy

Perfect Competition 2 - Lump-Sum, Tax & Subsidy

I have been tutoring some lately and have noticed that many students seem to have a bit of trouble with Lump-Sum & PerUnit taxes and subsidies within a perfect competitive market structure. While I have only seen this in one FRQ,, I believe 2008, Question, 1, I want to try and explain it and then we will do the 2008 FRQ and see if our graphs help us understand and answer the question...

Lump Sum Tax --A lump sum tax is a tax of a fixed amount that has to be paid by everyone (every firm in the industry) regardless of the level of his or her (its) income (production). (So no matter how much you produce or don't produce, you still have to pay this tax).

Lump Sum Subsidy - A lump sum subsidy of a fixed amount that is given to everyone (every firm in the industry).  Think of a subsidy like a gift or grant from the government for producing in the specified industry.

Subsidy humor

Lump-Sum Subsidy 

So, Short-run is on the left and Long-run is on the right.

Marginal Cost curves intentionally left off (as not effected) to show effects clearly,, feel free to add as Profit Max is where MR=MC.

Lets start with the short-run. The market graph is drawn showing supply and demand in equilibrium. Firms look at lump-sum subsidies as if they are monies added, decreasing the firms fixed costs. Additional decreases in fixed costs will not effect the variable costs and therefore won't effect marginal costs. Fixed cost increases will effect the ATC or (Average total costs curve) not the AVC or MC curves.

• A lump sum subsidy will shift the ATC downward, in the short-run the firm will earn positive (super/abnormal) economic profits due to the subsidy. Remember - that in the short run other firms cannot enter the market. 
• In the long-run firms are attracted to this industry's abnormal profits and will enter the market. As more producing firms enter the market, supply increases,  pushing down the market price and increasing the quantity produced. In the long run the the price will decrease to the point that the firm is only making normal profit/zero economic profit.

Lump-Sum Tax

So, Short-run is on the left and Long-run is on the right.

Lets start with the short-run. The market graph is drawn showing supply and demand in equilibrium. Firms look at lump-sum taxes as if they are extra costs added to the firms fixed costs. Increases in fixed costs will not effect the variable costs and therefore will not shift the marginal cost curve. 

• A lump sum tax will shift the ATC upward, in the short-run the firm will have a loss due to the tax. Remember - that in the short run other firms cannot enter the market. 
• In the long-run firms exit this industry. As more producing firms exit the market, supply decreases,  pushing up the market price and decreasing the quantity produced. In the long run the the price will increase to the point that the firm is only making normal profit/zero economic profit.

AP Microeconomics 2008, FRQ, question 1

So, (a) is asking for the short run market graph in equilibrium,, and the long run firm graph,, labelled appropriately, of course. This question is starting with everything in equilibrium.

(b) Notice, the underlined in the short-run. 

(i) Callahan's quantity of output? (Callahan's output/quantity doesn't change in the short-run as lump-sum subsidies are considered as an increase in fixed costs and therefore don't effect output/quantity produced.) (Variable costs are not effected therefore marginal cost is not effected.)

(ii) Callahan's Profit? (Callahan's profit definitely increases in the short-run)

(iii) The number of firms in the industry? (Tricky bastards) (The number of firms in the short-run never changes, look at the market graph in the short-run,,, firms only enter and exit in the long run.)

(c) Notice, the underlined in the long run.

(i) The number of firms in the industry. Explain (In the long-run the number of firms enter the market attracted to Callahan's abnormal profits) (Look at the long-run market graph.)

(ii) Price? (The price decreases as new firms increase supply, pushing down the price.)

(iii) Industry Output? (Industry output will increase.) (Look at the long-run firm graph and notice that the quantity is now at Q2, this makes since in that at the new lower price more quantity will be demanded and supplied by the firms in the industry.)

AP 2008 FRQ, Question 1 - Scoring Guideline

Both graphs in one,, for your learning pleasure.