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

2009 Microeconomics FRQ #1

2009 Microeconomics FRQ #1

Watch me answer it here

https://youtu.be/eGp7_Osduyg

(A) Draw a CLG for CableNow and show each of the following.

(i) The profit maximizing quantity of cable services, labeled as Q*

(ii) The profit maximizing price, labeled as P*

(iii) The area of economic profit, completely shaded

(iv) The socially optimal level of cable service, assuming no externalities, labeled as Q_S

(B) Assume that the government grants CableNow  a lump sum subsidy of $1 million. Will this policy change CableNow’s profit maximizing quantity of cable service? Explain. (Explain means Why??)

If the government grants a $1 million lump sum subsidy CableNow’s quantity produced will not change. Why? A lump-sum subsidy will not affect CableNow’s marginal costs.

Why? 

A lump-sum subsidy is given to a firm whether the firm produces the good or not. If I own a coffee shop, and the government decides to give all coffee shop owners a $10,000. Does this increase the amount of coffee I sell? No. If I don’t sell anymore coffee then I don’t need to hire more employees. If I don’t hire more employees my marginal cost curve doesn’t shift. Lump-sum subsidies are often thought of as fixed costs. If your rent (a fixed cost) decreases would this cause you to employee less people? No. The demand for your coffee doesn’t change due to a change in fixed costs, so no one will be hired or fired. But, a decrease in your fixed costs or a lump-sum subsidy will cause your profits to increase or your losses to decrease.

Lets look at a graph using the above information.

In the graph above, notice that the ATC curve decreased as the lump sum subsidy is granted but the profit maximization point MR = MC wasn’t affected and therefore quantity didn’t change.

(C) Instead of a subsidy, the government requires CableNow to produce the quantity at which CableNow earns zero economic profit. On the graph you drew in part (a), label this Q_R.

Obviously, if you don’t know where the point is where zero economic profit is earned you can’t answer this question.

Know all the points on the graph below. You should be able to draw a monopoly graph and label each of these possible points. Practice, practice, practice and then do it again.

If we use the information in the question, and the graph in the question. Zero economic profit for a monopoly is at the Fair Return or Break-Even point where

P = ATC = Zero Economic Profit

(D) At Q_R, is the firm’s accounting profit, positive, negative or zero? Explain.

If a firm is earning zero economic profit it must be covering its accounting profit. Why?

Profit = TR (total revenue) minus (TC (total costs)

Total Costs = Explicit + Implicit Costs

Explicit costs are the costs that you can see; wages, electricity, rent, materials.

Implicit Cost is the monies that the entrepreneur demands to stay in this industry.

Accounting Costs are explicit costs, so as long as the firm is covering its explicit costs it is breaking even according to the accountant. If the firm is covering (earning) its explicit costs and covering its implicit costs then firm is making an accounting profit but only earning zero economic profit.

Confusing? Ok, lets back up and take a little trip.

Charles (the entrepreneur) has $50,000 and he wants to start a business. Charles can either invest the $50,000 into a new business or he can put the 50k in the bank where he will earn interest on his money.

$50,000 x .01 = $500 a year earned with zero risk and nothing to worry about.

$50,000 x .05 = $2,500 a year (that is $208 a month guaranteed) enough to pay for Yoga and Coffee

$50,000 x .08 = $4000 a year ($333 a month) that will pay your payment for a very nice car.

So, Charles has options and the higher the interest rate he can earn the more attractive it may be to keep the money in the bank.

Lets say the Bank will pay us 8% on our savings.

But Charles wants to open a coffee shop.

Our dismal Economist (David) looks at Charles and says, “ Charles, you must consider the opportunity cost of any action you take.”

“No I don’t”, says Charles, as he is naturally cantankerous and politically a libertarian and hates to be told what to do.

David - “Well sorry old chap, but economists look at any choices made and evaluate your next best alternative.”

Charles - “Well, I have two choices, I can put the money in the bank or I can invest the money in the coffee shop”. “If I invest in the coffee shop, I will spend the $50,000 and hopefully make 10% a year on my investment.

David -  “If you only make 10% or $5,000 a year then an economist will say that you have really only earned 2% on your investment because you could have earned 8% of that 10% by keeping your cash in the bank.” “That 8% is the implicit cost that must be paid to keep you in the business of supplying coffee to people.” “If, Charles, you invested your $50,000 in the coffee shop and only made 8%, an economist would have said you broke-even as you just covered your explicit & implicit costs”. The accountant would have said that you had earned a profit as your explicit costs were paid and monies are left over.

Charles – “So let me get this straight. If I invest my $50,000 in the coffee shop, I pay all the wages to my employees, the rent, the electricity and I have $2,500 left over to pay to myself, an economist would say I have incurred an economic loss but the accountant would say I have made a profit. Who is right?

David – We both are? The accountant only looks at explicit costs, (rent, electricity, wages) the economist looks at explicit costs and implicit costs (what could have been earned by doing the next best alternative). “Really those accountants are far to optimistic and don’t look at the whole picture.”

The College Board wants you to understand that as economists we must consider the choices we didn’t take and consider them as a cost.

Accountant Loss – Can’t pay your rent, electricity or wages, or some combination.

Accountant Break-Even or Zero Accountant Profit– Can pay all the bills

Accounting Profit – Anything amount earned over the explicit costs

Economic Loss – Earnings below the sum of your explicit and implicit costs

Economic Break-Even – Earnings cover the explicit costs and implicit costs

Zero Economic Profit - Earnings cover the explicit costs and implicit costs

Positive Economic Profit – Earnings more than the explicit & implicit costs

Abnormal Economic Profit - Earnings more than the explicit & implicit costs

(E) Assume that a new study reveals that there are external benefits (externalities) associated with watching TV. Will the socially optimal quantity of cable service now be larger than, smaller than, or equal to the Q_S, you identified in part (A)(iv).

College Board bastard,, tricky.

If a positive externality is occurring you can know, that the market is producing to little of the good/the price is to high. Understand that producing to little/price is to high is the same thing. The market will produce the quantity where P = MC/ quantity of QS.

If the market is producing at QS but is producing to little then the Socially Optimal Quantity must be a larger quantity than QS.

Thanks Nadia, good times in Vancouver.

2008 Micro FRQ #1

2008 Micro FRQ #1

Watch me answer it on youtube 

https://youtu.be/F-YvJktcaA8

(A) Draw a clearly labeled side-by-side graph for the apple market and Callahan's Orchard, and show,

(i) Market output & price

(ii) Callahan's output & price

(B) Now assume that the Government provides farm support to apple growers by granting an annual lump-sum subsidy all apple growers. Indicate the effect the subsidy would have on each of the following. ((In the Short-Run))

(i) Callahan's (firms) output and quantity

Lump sums do not affect the marginal costs (no change in quantity or price) 

Perfect Competition Cheat Sheet, Here.

(ii) Callahan's Profit

Profit will increase.

(iii) The number of firms in the industry.

 The number of firms will only increase in the long-run, never in the short run.

(C) Indicate how each of the following will change in the ((long-run)) due to the subsidy.

(i) Number of firms in the industry.

In the short-run due to the lump-sum subsidy Callahan has a profit, firms in the industry are attracted to the profits and enter the industry. 

(ii) Price

As firms enter the industry they will push the price down.

(iii) Industry Output

Industry Output will increase as there are more firms producing more goods

Earlier post with some more coverage, here.

2015 AP Microeconomics FRQ #1

2015 AP Microeconomics FRQ #1

Watch me answer it here

https://youtu.be/fEypFthw01Y

(a) Is the market price greater than, less than, or equal to the firms price? Explain.
       So, if it is a perfectly competitive industry,, (Price taker) the firm can't raise its price as all other firms would then be selling the exact same product at a cheaper price and sales would plummet. The perfectly competitive firm also has no incentive to lower its price as it can sell all it wants at that price. The perfectly competitive firm therefore will have a price that is equal to the market price.

Answer - The firms price will be equal to the market price.

(b) Draw a CLG for both the market and a typical firm and show the following:

(i) Market price and quantity, labeled Pm and Qm.

(ii) The firms quantity, labeled Qf.

(iii) The firms average revenue curve, labeled AR.

(iv) The firms average total cost curve, labeled ATC.

(v) The area representing total cost, shaded completely.

(c) If one firm in the market were to raise its price, what will happen to its total revenue? Explain.

If one firm decides to raise its price sales of its product will plummet as all of its competitors will have the same product at a lower price, therefore its total revenues will theoretically fall to zero. 

Answer - total revenue will fall
Answer - One point is earned for stating that the firm’s total revenue will fall to zero, because quantity decreases to zero, or because the firm is a price taker, or because the firm is facing a perfectly elastic demand, or the firm loses all of its customers, or the firm has no market power. 

(d) Now suppose the market is in long-run equilibrium. The government gives a lump-sum subsidy to each firm producing in the industry. Indicate wether each of the following will increase, decrease, or remain the same.

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

As a lump-sum subsidy does not effect the MC curve of the firm so we can conclude that quantity of the firm will not decrease or increase.

Imagine that you own a coffee cart out in front of the school. Every day students file buy and buy approximately 100 cups of coffee from your cart. You pay Alice to handle the orders and take the money while you make the coffee. The school principal likes your ingenuity and determination so much that he gets the school board to give a $1,000 donation to your small business. (Of course he takes a photo shoot of him handing you the check with his arms around you. The school paper has this photo with the caption, "Supporting Student Innovators"). Now, you have an extra $1,000 dollars of cash in your pocket. Question? Does that money in your pocket increase the amount of coffee the students will drink? NO,, Will you pay Alice more money because the principal handed you $1,000? NO,,, So, if there is no increase in demand for your coffee and the wages you pay Alice don't increase (variable costs, marginal costs) then why would you increase your production of coffee.

Answer - A lump-sum subsidy will not effect your marginal costs and therefore will not effect your quantity produced.

(ii) The market price and quantity in the long-run. Explain.

Ok, so the school principal is handing out $1,000 to student innovators. You have received your $1,000 for your initiative, while the $1,000 has not increased your production it has increased your profit. You are $1,000 dollars richer. Now the principal feels so strongly about supporting young innovators that he offers a $1,000 to anyone who opens a coffee cart. Hang Yuk decides he would like to get in on this action (profits attract competitors) so he builds his own coffee cart and starts competing with you in supplying coffee to students in the morning. Now,, there are two coffee carts supplying coffee to students in the morning and an increase in the supply of a good tends to drive prices lower while lower prices are an incentive for consumers to consume more coffee.

Answer - The market price will fall with more suppliers and with more suppliers comes a higher quantity produced.

Answer - 

• One point is earned for stating that the firm’s quantity will remain the same in the short run and for
  explaining that MR or MC will not change in the short run. (Or, because the lump sum subsidy has
  no effect on marginal revenue and/or marginal cost, or that only fixed costs will be affected.)
  
• One point is earned for stating that the market price will decrease and the quantity will increase.
  
• One point is earned for the explanation that positive profits lead to entry of new firms that will
  increase the industry supply.