2010 B Micro FRQ #3

2010 B Micro FRQ #3

Watch me answer it here on youtube

https://youtu.be/4MmPMLCwKSQ

(A) The table below gives the quantity of good X demanded and supplied at various prices.

(i) Is the demand for good X relatively elastic, relatively inelastic, unit elastic, perfectly elastic or inelastic when the price decreases fro $30 to $20? Explain.

Elastic Cheat sheet is here.

First way to get this answer - - -

Second way to get this answer - - -     

 Total Revenue = P x Q

Total Revenue Test

Total Revenue at $30 price = Qd (1) x $30 = $30TR

Total Revenue at $20 price = Qd (3) x $20 = $60TR

Price decreased and Total Revenue increased = Relatively Elastic Demand

From the Elasticity Cheat Sheet

(ii) Is the supply of Good X relatively elastic, relatively inelastic, unit elastic, perfectly elastic or inelastic when the price decreases fro $30 to $20? Explain.

From the Cheat Sheet:

(iii) If a per-unit tax is imposed on good X, how will the tax be distributed between the buyers and sellers?

If the quantity supplied  does not change  when the price changes we assume that the good is perfectly inelastic. A perfectly inelastic supply implies that the supplier can't change the quantity of the good he produces. If a tax is imposed an a seller with a perfectly inelastic supply curve the seller will pay the total amount of the tax. 

(The one with the most inelasticity pays the burden of the tax) Know this...

(B) Assume that the income elasticity of demand for good Y is a -2. Using a CLG of the market for Good Y, show the effect of a significant increase in income on the equilibrium price of Good Y in the short-run.

You must understand that the YED, income elasticity of demand, when negative means that Good Y is an inferior good. 

From the Elasticity Cheat Sheet here.

From the Demand and Supply Cheat Sheet here

The "Y" in the cheat sheet above stands for Income. 

If Income (Y) increases then the quantity demanded of the good will decrease.

This is a bit confusing and perhaps I should rework the cheat sheet as actual Demand shifts to the left.

Demand decreases due to the rising incomes and Good Y being an Inferior good.

Remember from the Demand and Supply Cheat Sheet.

Inferior Good - (Y) Income increases then Demand (D) decreases

When Income increases the demand for Good Y decreases

Monopoly 7 - Lump-Sum & Per-Unit

Monopoly 7 - Lump-Sum & Per-Unit

The AP exam will often ask you to correctly graph a monopoly firm's profits or loss and then evaluate what happens if a per-unit/lump-sum tax or subsidy is imposed/provided. 

You must know how to answer what happens to the firms, quantity, price, profits, consumer surplus, DWL, losses due to a per-unit or lump-sum.

Remember, a lump-sum is treated/viewed as a Fixed Cost (FC) and therefore will shift the ATC curve up(tax) or down (subsidy) but it will not effect the MC marginal cost curve.

*It appears that Subsidy and Tax are only asked/answered for short-run.  

Lump-Sum Subsidy - Monopoly 

Q- No change - (as MC not effected)

P - No change - (as MC not effected)

CS - No change - (as MC not effected)

DWL - No change - (as MC not effected)

Profits (increase) Losses (decrease)

Lump-Sum Tax - Monopoly

Q- No change - (as MC not effected)

P - No change - (as MC not effected)

CS - No change - (as MC not effected)

DWL - No change - (as MC not effected)

Profits (decrease) Losses (increase)

A per-unit tax is treated as a VC, variable cost and will shift the ATC up(tax) or down(subsidy) but it will also shift the MC curve left(tax) or right(subsidy).

Per-Unit Tax - Monopoly (graph to come)

Q - Decrease (MC will shift left and up)

P - Increase (MC will shift left and up)

CS - Decrease

Profits (decrease) Losses (increase)

DWL - Increase (less supplied DWL increases) “Quantity levels less than or greater than the efficient quantity create efficiency losses (or deadweight losses).”

Q is decreasing, price is increasing, profits (decrease) Losses (increase), DWL has increased as less is produced.

Per-Unit Subsidy - Monopoly (graph to come)

Q - Increase (MC will shift right and down)

P - Decrease (MC will shift right and down)

CS - Increase

Profits (increase) Losses (decrease)

DWL - Decrease (more supplied DWL decreases)  “Quantity levels less than or greater than the efficient quantity create efficiency losses (or deadweight losses).”

Q is increasing,  price is decreasing, profits (increase) Losses (decrease), DWL has decreased as less is produced.

Notice, the farther from Socially Efficient Quantity,, DWL increases. (anyone know something different, leave a comment)

 2012 AP Economics Exam FRQ, Q1

2007 AP Microeconomics Exam