2010 Micro FRQ #3

2010 Micro FRQ #3

Watch me answer it here

https://youtu.be/RS58mqKUQQA

(A) Using the labelling on the graph, identify the area representing each of the following at the market equilibrium.

(i) Consumer surplus

(ii) Producer surplus

(B) Assume that the production of each unit of candy creates a 

negative externality equal to (p5-p2),

Identify the socially optimal quantity.

(((Production of candy))???    What does a negative production externality look like.

Market Failure Cheat Sheet here.

(C) Assume that the government imposes a pr-unit tax of (p5-p2) to correct for the negative externality. Show.

(i) Consumer surplus

(ii) Dead Weight Loss

 

2008 B Micro FRQ #2

2008 B Micro FRQ #2

Market Failure Cheat Sheet Here.

(A) Draw a CLG of supply and demand, and

(i) Label the market price "Pm", and label the market output "Qm".

(ii) Label the socially efficient level of output "Qs".

(iii) Shade the area of DWL.

(B) Is marginal social cost greater than, less than, or equal to marginal social benefit at the market price?

The market price production is at Qm. Society (government) feels it would be a healthier society with more people vaccinated. Society wants more consumption of vaccines. In essence the price of vaccines is to high and the government can entice people to buy more vaccines if the price is lower. 

Society is not spending enough on vaccines or the social cost is to low. Society should spend more on vaccines raising the cost of spending to equal the benefit.

Government would entice people to buy with a subsidy that would lower the price. Remember that government cost increasing also increases the social cost as government is part of society.

Remember that the demand = benefit and the supply (MC) curve = costs

We firm wants to produce where MB = MC, and society where MSB = MSC

If MC < P we need to produce more, social costs are lower than social benefit - produce more.

to produce more we must hire more people to produce more

this extra production is spurred by giving subsidies to producers to get them to lower the price

Lower price more consumption

If MSC < MSB (demand) then costs must be lowered to get more consumption/production.

I know this section is weird, as during the beginning of the course we say that the most optimal amount of quantity to be produced is where S = D, market equilibrium. We promote the MB = MC understanding and then with market failure we say that for different reasons the people can't make the right decisions so government must step in with taxes or subsidies and fix the problem.

Economics is fun. Grind your teeth and understand what you need to to answer the questions for the exam...

(C) How will a tax on the producers of vaccines affect the DWL? Explain.

A tax on producers will raise their costs and on the margin some producers will go out of business reducing the supply of vaccines. This would move us further away from the Socially Optimal Quantity increasing the DWL.

2003 AP MICRO EXAM FRQ #1

2003 AP MICRO EXAM (Question 1)

Watch me answer it here

https://youtu.be/eGYGxPDjqHs

(a) Using a correctly labeled side-by-side graphs for the smoke alarm market and J & P is currently earning  short-run positive economic profits.

(i) Price

(ii) Output

(b) In the graph in part (a) for J & P, indicate the area of iconic profits that J&P Company is earning in the short-run.

(c) Using a new set of correctly labelled side-by-side graphs for the smoke alarm market and J&P Company, show what will happen in the long-run to each of the following.

(i) Long-run equilibrium price & quantity in the market.

(ii) Long-run equilibrium price & quantity for J&P Company

Answer - 

(d) Assume that the purchase of smoke alarms create positive externalities. Draw a CLG of the smoke alarm market.

 I like my graph better,, positive consumption externalities 

Answer -

Answer - 

(e) Identify one government policy that would be implemented to encourage the industry to produce the socially optimal quantity.

Subsidy...

Answer -

2004 AP Micro FRQ#1

This was a tough one. College Board, "You bastards"

watch me answer it here

https://youtu.be/yA4bYaeKhqA

2004 AP Micro FRQ#1 

My Understanding:

Answer from the college board 

As MSC > than MPC, the externality is a negative production externality.

At a quantity of Q2, MSB = MSC at a price of $12.

The government can incentivise the monopolist to produce more by providing a subsidy. A subsidy should be provided to the point where the monopolists MC (MPC) curve will be reduced until it intersects with the MR (MPB) curve at Q2 (social optimal quantity)

A Perfectly competitive firm would produce an overproduction of a negative production externality. Its market price is where MPC = MPB and this is at the price of $7 and at a quantity of Q3. To get the perfectly competitive firm to produce less a per-unit tax must be levied against the (industry). As the firm has no control over price (price-takers) the industry must have the tax imposed upon it. At a tax of $5 the price would rise to $12 and the quantity would be reduced to Q2. Or what I believe to be the socially optimal quantity and price.

Students were asking why the government would subsidise a monopoly to create more negative goods,,, I believe the answer is to recognise that even a negative production externality has a benefit to society. Pollution might be the problem,, but no pollution means no production and this would be much worse than the externality. So government recognises that there is a benefit in the production of the good. 

Understand that the marginal benefit should equal the marginal cost. (MB = MC) or the MSC = MSB.

We could spend trillions of dollars to clean all of the rivers and lakes but then the MSC > MSB. Society would have pristinely clean rivers but not much of anything else.

Thank you Michelle for bringing this to my attention,,

Such fun I've had today,, trying to figure this out.

2013 AP Microeconomics Exam FRQ #3

2013 AP Microeconomics Exam FRQ #3

(a) Draw a CLG of the market for fireworks and show the market equilibrium price and quantity, labeled, Pe & Qe.

(b) Assume the noise from the fireworks disturbs all of the neighbours. On your graph in part (a), show each of the following.

(i)   The marginal social cost curve, labeled MSC

(ii)  The marginal social benefit curve, labeled, MSB

(iii) The dead weight loss, if any, shaded completely.

(c) Now assume instead, that all of your neighbours enjoy watching the fireworks.
(i)  In this case, is the market equilibrium quantity of fireworks greater than, less than, or equal to the socially optimal quantity?

As we can see, when the externality is drawn with the fireworks being enjoyed,, there still is an externality in that someone is benefitting from the fireworks,, and someone is not being compensated for providing that benefit.

Answer - the fireworks now generate a positive externality and the market equilibrium is less than the socially optimum quantity. There is still an externality and deadweight loss showing a benefit to a third party.

(ii) If the government bans fireworks will the deadweight loss, increase, decrease, or remains the same.

If people enjoy fireworks and the government bans them,, then society is moved farther from the socially optimal quantity. Remember, DWL is inefficiency meaning that some people are not getting served that should,, that is why with a positive externality the government usually wants to subsidise the cost so that more people will have the merit good.

So, this is what the deadweight looks like after a government ban.

Answer - deadweight loss has definitely increased.

Market Failure 5 - Positive Consumption Externality

Positive Consumption Externality

Positive Consumption Externality: The type/name of the externality tells you what you need to do!

Positive = Positive (duh!) (we want more of it)
Consumption = Benefits = Demand (there will be two demand curves, MSB & MPB)

• Positive = we want more
• Consumption = benefits = demand
• Triangle = DWL (dead weight loss) (points to society) & is between the two demand curves
• SOQ = Socially Optimal Quantity or the quantity desired by society (Pos.= more quantity)
• Underproduction =  If we want more we must be underproducing the good. (duh!)
• MSB = MSC, obviously where social benefits and costs equal,  equilibrium quantity- Q*
• Subsidy shifts supply right, lowering price, increasing quantity consumed.
• CLG - always a correctly labelled graph

• Triangle - always points to society - to help you know which demand/cost curve is drawn above or below, know that the triangle always points to (MSB) society for a Positive Consumption Externality... Your going to say,, but Charles I could draw the curve pointing to the left and still have it between the curves,,, but then the triangles point would be pointing to an equilibrium of less production (we need more).
• Subsidy has been granted, shifting supply right, lowering price.
• Check your graph and make sure it is showing what you want,,, to get more consumption prices must go lower. (look above and you will see this is exactly what has happened, prices have decreased and quantity produced has risen.)

Market Failure 4 - Positive Production Externality

Positive Production Externality

pajholden - Positive Externalities - Video

Positive Production Externality: The type/name of the externality tells you what you need to do!

Positive = Positive (duh!) (we want more of it)
Production = Production = Costs = Supply (there will be two supply curves, MSC & MPC)

• Positive = we want more
• Production = costs = supply
• Triangle = DWL (dead weight loss) (points to society) & is between the two supply curves
• SOQ = Socially Optimal Quantity or the quantity desired by society (Pos.= more quantity)
• Underproduction =  If we want more we must be underproducing the good. (duh!)
• MSB = MSC, obviously where social benefits and costs equal,  equilibrium quantity- Q*
• CLG - always a correctly labelled graph

• Triangle - always points to society - to help you know which supply/cost curve is drawn above or below, know that the triangle always points to (MSC) society for a Positive Production Externality... Your going to say,, but Charles I could draw the curve pointing to the left and still have it between the curves,,, but then the triangles point would be pointing to an equilibrium of less production (we need more).

• Check your graph and make sure it is showing what you want,,, to get more production prices must go lower. (look above and you will see this is exactly what has happened, prices have increased and quantity produced has fallen.)

An example of a positive production externality would be a case of bee keepers producing honey next to an orchard. Bees help in the pollination of the orchard, causing a benefit (unpaid) to the orchard owner.

Demand in this instance, which always reflects the MPB of buyers of honey, and is identical to the MSB as no external effects of honey consumption are assumed. (D,MSB,MPB)

Supply of honey reflects the MPC of honey producers (costs paid, labour and bees). Since the honey producer's production process entails external benefits to apple growers in the form of pollination, it follows that the social costs of honey production are lower than the private costs that the beekeepers consider. The MSC of honey production are therefore lower than the MPC by the amount of the external benefit created. (Triangle points to Society = MSC)

There is an underproduction of this good, so prices need to be lowered. This is normally done through the use of a subsidy granted to the producer. This decreases the costs of production increasing output levels.

2008 AP Microeconomics Exam

Answer (B) Subsidizing flu shots will lead to the socially efficient level of output. 
                    (socially efficient level = socially optimal quantity)

Reffonomics, excellent website

Market Failure 3 - Negative Consumption Externalities

Negative Consumption Externalities

Negative Consumption Externality: The name of the externality tells you what you need to do!

Negative = Negative (duh!) (we want less of it)
Consumption  = Benefits = Demand (there will be two Demand curves, MSB & MPB)

• Negative = we want less
• Consumption = benefits = demand
• Triangle = DWL (dead weight loss) (points to society) & is between the two demand curves
• SOQ = Socially Optimal Quantity or the quantity desired by society (Neg.=less quantity)
• Overproduction =  If we want less we must be over producing the good (duh!)
• MSB = MSC, obviously where social benefits and costs equal,  equilibrium quantity- Q*
• Indirect tax pushes costs higher, shifting supply left, causing higher prices
• CLG - always a correctly labelled graph

• Triangle - always points to society - to help you know which demand/cost curve is drawn above or below, know that the triangle always points to (MSB) society for a Negative Consumption Externality... Your going to say,, but Charles, I could draw the curve pointing to the right and still have it between the curves,,, but then the triangles point will be pointing to an equilibrium of more production (we want less). 
• Indirect tax equal to the external costs of consumption is needed to decrease supply and to increase the price of the good. 
• Check your graph and make sure it is showing what you want,,, to get less production prices must go higher. (look above and you will see this is exactly what has happened, prices have increased (with the tax) and quantity produced has fallen.)

Examples: (drugs, alcohol, cigarettes) also known as demerit goods.