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

Price Floors & Price Ceilings, 

Indirect Tax, Subsidy 

Cheat Sheet (Updated) 

2017 AP Microeconomics FRQ #3

2017 AP Microeconomics FRQ #3

(A) Identify the monopolists.

(i) Profit maximising quantity

(ii) Profit maximising price

Recognise, that the MPC is the MC curve and that the MR = MPB, therefore the Profit Max for this Monopoly is where MR = MC, 

Price = P4 

Quantity = Q3

Answer

(B) What information in the graph indicates that there is a negative externality?

MSC > MPC = Negative Externality

Answer

(C) Identify the socially optimal quantity.
Social Optimal Quantity is where MSB = MSC
Social Optimal Quantity = Q3

Understand: This time the monopoly is producing an output that is equal to the socially efficient amount, Here the welfare losses caused by the negative externality are less in a monopoly environment than they would be in a competitive environment. This is a point worth remembering when it comes to things like energy markets. People naturally assume that competitive markets are better than ones with market power, but if there is a negative externality of pollution that comes with consuming energy, then the economic welfare effects may be less bad for society if there is a monopoly or oligopoly provider producing a lower amount at higher price for consumers (and enjoying high profits) than if there was a competitive market, prices were forced down for consumers, and an excessive amount of energy was consumed.

Answer

(D) In the case in which the government imposes a per-unit tax equal to the marginal external cost, identify each of the following.

(i) The dollar value of the tax, using the price labels from the graph

The tax would be equal to the vertical distance between the MSC and MPC. (P4 - P1) 

(ii) The profit-maximising quantity associated with the tax.

Answer

(E) Given the monopoly facing the negative externality, would the dead-weight loss increase, decrease, or stay the same as a result of imposing the per-unit tax? Explain.

Answer

ARTIST

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 Micro FRQ #2

2008 Micro FRQ #2

(A) Define marginal utility - satisfaction from consuming an additional unit.

From the PPC & Utility Cheat Sheet Here. 

(B) The table below shows the quantities, prices, and marginal utilities of two goods, fudge and coffee, which Mandy purchases.

Mandy spends all of her money and buys only two goods. In order to maximise her utility, should Mandy purchase more fudge and less coffee, purchase more coffee and less fudge, or maintain her current consumption? Explain.

It is important that you recognise that the formula helps to set these two goods equal. If the utility of both goods were 12 but the cost of one was $2 and the other $4, then it wouldn't be a fair comparison as one good costs twice as much as the other. We use the formula (below) to take into account the differing marginal utilities and the price difference between goods. 

Understand (memorize) the Formula for these Utility problems.

(C)  Assume that consumers buy 20 units of Good R each month regardless of price.

So, step back a second and remember what you have learned from the Elasticity section of this course. What type of goods are bought no matter the price. Two examples.

Drugs and Insulin - Perfectly Inelastic

(i) What is the numerical value of the price elasticity of demand for good R?

Elasticity Cheat Sheet Here.

Remember that elasticity is not slope, but price changes do not effect the Qd.

No % change in Qd.

(ii) If the government imposes a $2 per-unit tax on Good R, how much of the tax will the seller pay?

Buyers will pay the total amount of the tax.

2014 Microeconomics FRQ #3

2014 Microeconomics FRQ #3

You can. 

Yes. Yes, you can. 

I think so.

Now, you must think so.

Watch me answer this on youtube https://youtu.be/_ZZAvxgohsE

3. Assume that gasoline is sold in a competitive market in which demand is relatively inelastic and supply is relatively elastic.

(a) Draw a CLG of the gasoline market. On your graph show the equilibrium price and quantity of gasoline, labeled Pe & Qe.

(b) Suppose the gov't imposes a $2 per unit tax on the producers of gasoline. On your graph from part (a), show each of the following after the tax is imposed.

(i) The price the buyer paid, labeled PB.

So, the government imposes a $2 dollar tax, on producers. Producers supply the good so the price of the good has to include the tax,, therefore the (S + tax) shifts up by the $2 dollar amount.

(ii) The after-tax price received by sellers, labeled PS.

Remember, that the seller has to send $2 of what he receives to the government, and the distance between S & S + tax is the $2 dollar amount.

(iii) The quantity labeled, QT.

(C) Using the labelling on your graph, explain how to calculate the total tax revenue collected by the government.

The total tax revenue can be found by taking the amount of the tax ($2) and multiplying it by the new (after tax) quantity sold.

So, $2 x QT

or, (PB - PS) x QT  

or , TAX x QT

(D) Will the tax burden fall entirely on buyers etc etc etc etc...

The tax buyers will fall more on buyers and less on sellers because the demand curve is more inelastic than the supply curve.

If the demand curve is inelastic (think drugs) then consumers will have less substitutability and will not change their buying patterns (relatively) with the increase in price.

Therefore, even when the price goes up,, demand for the good does not decline as much as the price rise.

Look at the graph, the wedge between PE and  PB (buyers wedge) is greater than the wedge between PE and PS (sellers wedge).

The wedge is the amount of tax incidence on each party,, buyer or seller.

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.