2010 B Micro FRQ #2

2010 B Micro FRQ #2

Watch me answer it here

https://youtu.be/sFLBg3nifok

Make a Chart

(A) Calculate the Marginal (physical) product of the third worker.

For the AP marginal physical product is often just marginal product. 

Understand that the MRP is MP x P (price of the good) so, with an MRP of $450 and a price of $5

then the marginal product must be 90. 

The marginal product of the 3rd worker is 90.

(B) Define the law of diminishing marginal returns and explain why it occurs.

From the Resource Costs (Labor) Cheat Sheet here.

((The overuse of a fixed input,, I don't know exactly what that means.)) 

(It means to many input for a fixed capital)

(Too many cooks in the kitchen/ Coffee cart)

Example, you have a coffee cart and it can reasonably fit three people inside to make drinks, take the money etc. If you try and add 5 people into the cart, they will bump into each other, actually the large number of people in a small space may limit or even decrease production. Labor is the variable inputs and the coffee cart is the fixed capital.

(C) Diminishing marginal returns first occur with the hiring of which worker for the firm.

Hiring of the 3rd worker as MRP/MP decreases with the hiring of #3.

(D) What is the highest daily wage the firm is willing to pay the fifth worker?

The 5th worker will be paid no more than she will bring in. So the 5th worker makes/brings in $300,, so the firm will not pay her more than that or they would be incurring a loss on the hiring of #5 worker.

(E) What will happen to the demand for labor if the market price of the product increases?

If the price of the product increases then the MRP will increase/shift right, and more labor will be demanded as we will want to produce more of this good.

Resource Costs (Labor) Updated Cheat Sheet

Resource Costs (Labor) Updated Cheat Sheet

If you need a copy of a cheat sheet - email wcwaugh@aol.com

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

 

2010 Macro FRQ #1

2010 Macro FRQ #1

Watch me answer it on youtube 

https://www.youtube.com/watch?v=aX2zAKId5RQ&feature=youtu.be

(A) Draw a CLG of AD/AS and show each of the following.

(i) The Long Run Supply Curve.

(ii) The current equilibrium output/price levels, labeled a sYE & PLE.

(B) Assume the government increases spending on national defence without raising taxes.

(i) On your graph in part (a), show the effect on AD.

Government spending on national defence is government spending that increases the G in the GDP formula. So, C + I + G + XN = GDP,,, If, G increases (defence spending) then AD increases, increasing GDP.

(ii) How will this action affect the unemployment rate in the short-run? Explain.

If the government is spending then the G is increasing, people are supplying goods to the government, so GDP is increasing and output is increasing which means businesses are hiring to keep up with the increased demand from government spending and increased output. 

(C) Assume that the economy adjusts to a new long-run equilibrium after the increase in government spending.

(i) How will the new short-run aggregate supply curve compare to the initial SRAS curve in part (a)? Explain.

The college board is simply asking you what happens in the long-run, after inflation happens in the economy. Notice that when an economy is in equilibrium and then the government spends, that we are in an inflationary gap. If the government does nothing in the long run the SRAS curve will shift leftward as prices and wages adjust. In essence during an inflationary gap, there isn't enough labor to handle the increased demand for goods and services, so wages rise to entice more people into the workforce and prices also rise.

(D) In order to finance the increase in government spending national defence in part (B), the government borrows from the public. Using a CLG of the loanable funds market, show the effect of the government's borrowing on the real interest rate.

If the government is borrowing from the public then the demand for loanable funds is increasing driving up the interest rate.

(E) Given the change in the Real Interest Rate in part (d), what is the impact of the following.

(i) Investment.

Crowding out will occur as the real interest rate rises it deters people from taking out loans to invest. As the government drives up the interest rates by borrowing there is less and less private investment.

(ii) Economic growth rate. Explain.

If there is less private investment there will be less long-term growth as there will be less capital formation, less capital goods produced so in the long-run society will suffer.

2010 Macro FRQ #2

2010 Macro FRQ #2

watch me answer it here

https://youtu.be/36FeNAAp3_I

(A) Using a CLG of the money market, show how the nominal interest rate will be affected.

There is the idea that people need a certain amount of cash monthly, daily to pay for incidentals. Lunch, snacks, school play, whatever. If credit card fees fall, then it is cheaper to use credit cards and they don't need to keep as much money on hand as now it is more affordable to just use a credit card.

The problem even tells you that the demand for money falls. So the demand for money will fall.

(B) Given the interest rate change in part (A), what will happen to bond prices in the short-run?

This is more of a finance question than an AP economic one. You must understand that a Bond is a financial asset that is bought (usually for a $1,000) and then the company that sells you the bond promises to pay you a yearly rate of interest (like 5%) to borrow your $1,000. At the end of the time the $1,000 is paid back to you in full.

If interest rates fall to lets say 2%, and you have a bond that is paying 5%, your 5% bond is worth more than the Bonds that now only pay 2%.

If interest rates fall, the bonds with higher paying amounts (Yields) will have higher prices as your bond, having a higher yield will be worth more than the lower yield bond.

(C) Given the interest rate change in part (A), what will happen the price level in the Short-run? Explain?

If interest rates fall, then more consumption and investment will occur, as it is now cheaper to borrow money. Therefore the AD curve will shift rightward and the price level will increase. (I wouldn't have thought of exports)

(D) Identify an open market operation that the FED could use to keep the nominal interest rate constant at the level that existed before the drop in credit card fees. Explain.

If the demand for money is falling which reduces the interest rate then the FED can reduce the money supply which will increase the interest rate. So the FED should sell bonds.

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