Price Floors & Price Ceilings, Indirect Tax, Subsidy Cheat Sheet (Updated)

Price Floors & Price Ceilings, 

Indirect Tax, Subsidy 

Cheat Sheet (Updated) 

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.

2012 Microeconomics Exam FRQ #1

2012 Microeconomics Exam FRQ #1

Don't give up,, you can do it!!!

Watch me answer it here

https://youtu.be/9ThoLHmE_SA

1. Steverail, the only provider of train service operating between two cities, is currently incurring economic losses.

The only provider = Monopoly
incurring losses = draw a monopoly graph showing a loss

(a) Using a CLG, show each of the following.

(i) Steverail's loss-minimizing price and quantity, labeled Pm and Qm, respectively.
(ii) The area of economic losses, shaded.
(iii) The allocatively efficient quantity, labeled Qe.

(b) If Steverail raises the price above Pm, identified in part (a) (i), would total revenue increase, decrease, or not change.

Ok, I have drawn a total revenue curve on the bottom of the monopoly curve for Steverail's business.
If you know that where MR = 0 is unit elasticity then you know that the Demand curve above unit elasticity is the elastic section. In the elastic section of the demand curve,  if a monopolist raises his price his revenue will decrease.

Monopoly Cheat Sheet

Answer - One point is earned for stating that the total revenue would decrease because the demand is price elastic in that range of the demand curve where MR > 0.

(c) Assume a per-unit subsidy is provided to Steverail.

(i) Will Steverail's quantity increase, decrease, or not change? Explain.

Per-unit subsidies are viewed as Variable Costs (VC) and therefore shift the MC curve right and the ATC curve down. Quantity is increased and prices fall. A shifting of the MC curve also means that there is a new profit-max (MR = MC), hence the new lower price and greater quantity.

Why is the Per-Unit Subsidy considered a variable costs,,, because you only get the subsidy based on the amount you produce. If you don't produce you get nothing,,, so the amount of the subsidy you receive is variable.

Answer - One point is earned for stating that the quantity will increase because the subsidy will cause the MC curve to shift downward and intersect the MR curve at a larger quantity.

(ii) Will consumer surplus, increase, decrease, or not change?

A lower price will increase consumer surplus.

Answer - One point is earned for stating that the consumer surplus will increase.

(d) Assume instead that a lump-sum subsidy is provided to Steverail. For the short-run answer the following.

(i) Will the dead weight loss increase, decrease, or remain unchanged? Explain.

Ok,, so let me paint a picture. You are operating a coffee shop outside of your high school. On day a man stops by and gives you a $1,000 dollars (subsidy)... Does this effect what you pay your employees? Does this cause you to sell more coffee/ less coffee? No it doesn't,, your employees keep selling the same amounts of coffee as before. You now just have an extra $1,000 dollars in your pocket.

Deadweight loss is an inefficiency in that profit maximizing monopolies produce where MR = MC, and we know that at P = MC is allocative efficiency (no DWL)... So a lump-sum subsidy causes no change in quantity produced and does not effect DWL, society is no better off, but it does make you $1,000 richer.

Answer - One point is earned for stating that the deadweight loss will not change because the lumpsum subsidy does not change the profit-maximizing quantity.

(ii) Will Steverail's economic losses, increase, decrease or not change?

A lump-sum subsidy will decrease the loss,,, money in your pocket will decrease your overall losses.

Answer - One point is earned for stating that economic losses will decrease. 

Perfect Competition 3, Per Unit Tax & Subsidy

Perfect Competition 3, Per-Unit Tax & Subsidy

Subsidy - Humor

Per-Unit Subsidy - a sum given to the producer for each unit of good that is produced.

Per-Unit Tax - a tax imposed on the producer for each unit of good that is produced.

Lets do per unit tax first.

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 per-unit taxes as if they are extra costs added to the firms variable costs. Increases in variable costs will shift the marginal cost curve left. Variable cost increases will effect the ATC or Average total costs curve, the AVC and the MC curves.

• A per-unit 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. The firms marginal cost curve is effected and shifts left with an increase in variable costs. (wages increase, production falls, tax increase, all cause the MC curve to shift left). Quantity will decrease.
• 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.

Per - Unit Subsidy

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 per-unit subsidies as if they are monies decreasing the firms variable costs. Decreases in variable costs will shift the marginal costs curve right. (decreasing wages, increasing worker productivity, and subsidies) Variable costs decreasing will effect the ATC or Average total costs curve, the AVC and the MC curves.

• A per-unit 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. The MC curve will shift right. Quantity will increase.
• 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.