Econowaugh AP: Multiple Choice

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Wednesday, March 4, 2020

Understanding Classical View Multiple Choice Questions

Understanding AP Classical View

Multiple Choice Questions

1) The clearest example of the Classical View is the Vertical Aggregate Supply Curve

Any change in AD only increases or decreases the PL

No Change in RGDP

We think of the Classical View having a vertical Aggregate Supply curve,
so when AD increase we have an increase in the PL but no change in the RGDP/output.

1995 Exam

(A.) the price level is rising (No change in RGDP)

If Government Spending is increasing and the RGDP (No Change)

then the AS curve must be vertical

therefore

the PL increases but RGDP (no change)

2) You read a Multiple Choice question that starts with the phrase "In the Long-Run".

In the Long-Run implies that we are starting at Long-Run Equilibrium, then something changes such as the FED increasing the Money Supply which increases aggregate demand which increases the Price Level. We are now in an Inflationary Scenario and we must figure out what happens in the Long-Run.

(C.) Real GDP (No change) PL decreases

or
we can think of it like this

In the graph above
recognize that we are moving from LR-Equilibrium into an inflationary scenario

and

with no Monetary or Fiscal Policy actions (In the Long-Run) wages and prices will increase

and

we will return to Long-Run Equilibrium (Full Employment) at a higher price level

therefore

PL increased and RGDP/Output did not change (back to full employment)

Notice the graph above is Inflation
(E.) As wages increase, it shifts the SRAS to the left,

Business prices increase and output returns to full employment (LR-Equilibrium)

at a higher price level (No change in the RGDP)

1990 Exam

Notice the graph above is Recession

(C.) lower resource prices, which will reduce costs and shift

SRAS to the right

Until full-employment is achieved

at a lower price level

Perhaps we should have started with the types of questions tested by the College Board
on the Classical View that involve no graphs
but understandings about the characteristics of the Classical View

From the Classical View Cheat Sheet
found here.

Understand that all of these phrases above clue us into the fact that we are taking the
Classical View

1990 Exam

(D.) Prices and Wages are flexible

1995 Exam

(B.) The economy is self-correcting to full-employment

2000 Exam

(A.) A market economy is self-correcting and thus

will not remain in recession indefinitely

2005 Exam

(C.) Self-correcting market forces stemming from

flexible prices and wages

We could talk about if the College Board starts a question in a Recession

2008 Exam

Less than Full Employment = Recession

(A.) Output increases & the PL falls

Wednesday, January 11, 2017

2012 Multiple Choice (LRS/EOS)

2012 Multiple Choice (LRS/EOS)

Answer - (A) an increase in demand will cause no change in the long-run equilibrium price.

Understand that constant cost industries in long-run equilibrium are producing at the bottom of their SRATC and LRATC curves. They are productively and allocatively efficient. Firms can enter and exit and the price of the good will not be affected. The LRS (long-run supply) curve is horizontal or perfectly elastic. When demand increases then the industry supply will adjust in exact proportion to the increase in demand. Long-Run price returns to the original price.

LRS/EOS Cheat Sheet here.

Answer - (B) downward sloping

Long-Run Average Total Costs must be falling as when inputs are added output is larger proportionally than the inputs. Costs are falling as we add inputs. The LRS curve is downward sloping as the firm has economies of scale. (It needs to expand) - Demand increases and industry supply increases proportionally more than the change in demand as resource prices fall due to Economies of Scale. We are on the downward sloping section of our LRATC curve.

Answer - (D) a higher short-run price for gadgets, followed by an increase in the quantity produced.

Understand that this question is asking the same thing as #10 above,

but it is referring to short-run affects.

IN the short-run as population increases (demand determinate) demand increases causing prices to rise,,, and in the short term firms respond by increasing the amount of labor they have to take advantage of the higher price to make profits.

More labor is hired, MC's increase as more labor is hired until the firm reaches profit max (MR=MC)

In the long run firms will enter (chasing profits) and the competition will force prices back to the original long-run equilibrium price. Why? the original price? It's a constant cost industry.

Answer - (C) It's long-run average total costs will fall.

Understand that this question is the same as #22. If the firm is experiencing EOS its Long-Run ATC curve is downward sloping,,

(meaning that they are producing on the LRATC where it is downward sloping)

Of course it can only do this in the long-run as capital can only be added and firms can only enter in the long-run. As it adds more capital or expands its total costs will fall (its LRATC's will fall) as we can se form the above graph.

Do you get it??????

Saturday, September 5, 2015

Determinants of Demand

Determinants of Demand Questions

1995 AP Micro Question

There was some confusion about this question the other day and I wanted to explain my thinking. The question wants the answer that is the most likely (best answer) to shift the demand curve.

(B) A decrease in the price of a license necessary for aircraft mechanics.

If the price of the license is paid for by the mechanic, then the license must be looked at as a tax on the mechanic to supply his labor. Taxes are a determinate of supply and an increase of taxes (license prices) will reduce the supply of airplane mechanics.

If the price of the license is a cost to the airplane companies, they pay the fee for the license, then a reduction of the license price would be a movement on the curve. A decrease in the license price would lower the price for a mechanic, with the effect being an increase of the quantity demanded for mechanics.

Answer - (A) An increase in the demand for air travel.

An increase in the demand for air travel is a demand shifter for the need for airplane mechanics. The demand (at every price) would shift right.

The rest of the questions are easily seen as not the best answer.

1995 AP Micro Exam

Normal Goods are by definition those goods that when an increase in income occurs more of the good is purchased. This is simply a definitional question.

An inferior good is one that would have been bought less when income rises.

A Public good is a good provided for by society.

A Giffen good is a good that is consumed more as the price rises.

2000 AP Micro Exam

Answer - (D) The release of three summer movies sets records for movie attendance.

Popcorn and movies are complements, meaning that when movie attendance increases, so does the demand for popcorn. The Demand curve for popcorn would shift rightward.

More popcorn would be Demanded at all prices.

(A) The wages of farm workers and movie theatre employees increase.

Increasing wages are a cost to the suppliers of a good and would cause prices to rise, and rising movie and popcorn prices would reduce the quantity demanded of both goods. Mr Concession would not sell more popcorn (most likely) with rising prices.

(B) A technological improvement results in less expensive and more efficient harvesting of corn.

This would lower the costs of supplying the corn and result in Mr Concessions profits to increase but as for prices being able to rise and a greater quantity being sold, not so much.

Competition tends to make suppliers lower their prices to compete, not raise them and get more sales.

(E) New government regulations force movie theatres to hire more security guards at each new theatre. More security guards mean that the theatre will have to raise its prices for movies to pay for the new guards and that means less attendance at the theatre and less sales of popcorn.