2013 Microeconomics Exam FRQ #2

2013 Microeconomics Exam FRQ #2

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(a) What strategy should Piecrust choose if LaPizza chooses to advertise? Explain using the dollar values in the payoff matrix.

If LaPizza chooses to advertise PieCrust has two option,, to advertise or to not advertise.

Obviously $250 > $180 so PieCrust will choose to advertise also.

(b) What is the dominant strategy, if any for LaPizza? Explain using the dollar values in the payoff matrix.

If PieCrust advertises LaPizza has two choices, to either advertise or not advertise. LaPizza will do better to not advertise as $300 > $200.

If PieCrust does not advertise LaPizza has two choices to advertise or not to advertise. LaPizza  will do better to advertise as $500 > $400.

Answer - LaPIzza does not have a dominant strategy (a strategy it would do no matter what PieCrust would do) LaPizza's best strategy is to do the opposite of PieCrust.

(c) In the Nash Equilibrium, determine each of the following.

(i) PirCrust's daily profit.

(ii) LaPizza's daily profit.

A Nash Equilibrium exists when there is no unilateral profitable deviation from any of the players involved. In other words, no player in the game would take a different action as long as every other player remains the same. Nash Equilibria are self-enforcing; when players are at a Nash Equilibrium they have no desire to move because they will be worse off.

Answer - PieCrusts daily profit will be $450 and LaPizza's daily profit will be $300

(d) Suppose the advertising costs increase by $60 per day. Redraw the payoff Matrix to reflect the effects of the higher advertising costs.

2013 Microeconomics Exam FRQ #1

2013 Microeconomics Exam FRQ #1

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(a) Assume that the profit maximising monopolist is unregulated. Using the labelling in the graph, identify each of the following.

(i) the monopolist's quantity of output.

It is a profit maximising monopolist so profit maximising is where MR = MC.

Answer - the monopolist's quantity of output is at Q1.

(ii) The monopolists price.

Answer - The monopolists price is at P3.

(iii) The Profit earned by the monopolist.

Answer - Area of Profit, P1,P3,a,c

(iv) The deadweight loss.

Answer - Deadweight loss area (acf)

(b) Now assume that the monopolist can perfectly price discriminate. Using the labelling of the graph, identify each of the following.

(i) the quantity produced

(ii) the total revenue received by the monopolist.

Answer - P4,f,Q3,0   all in red is the total revenue.

(c) Instead, assume the monopolist charges a single price and is regulated to produce the socially efficient quantity. Using the labelling of the graph identify each of the following.

(i) The socially efficient quantity.

(ii) The consumer surplus at the socially efficient quantity.

The socially efficient quantity is allocative efficiency where P = MC or D = MC

Answer - the socially efficient quantity is at Q3 & the consumer surplus is P1,P4,f.

(d) Is the monopolist facing the regulation in part (c) earning positive economic profit, zero economic profit, or incurring a loss. Explain.

The regulated monopolist is making zero economic profit as he is covering his ATC's. 

Answer - the monopolist is making zero economic profit as the price equals the ATC.

(e) Is point f in the elastic, inelastic, or unit elastic section of the demand curve? Explain.

Answer - f is in the inelastic section of the curve as the MR (marginal revenue) is negative.

You must train daily.

2013 AP Macroeconomics FRQ #3

2013 AP Macroeconomics FRQ #3

watch me answer it here

https://youtu.be/Llx2EKVGja8

3 Inflation and expected inflation are important determinants of economic activity.

(a) Draw a CLG of the short-run Phillips curve.

You should know how to do this without thinking,,, 

Phillips Curve, a tradeoff between inflation and employment

Unemployment & Inflation Cheat Sheet - 

Short-Run Phillips curve downward sloping with axis labeled appropriately.

(b) Using your graph is part (a), show the effect of an increase in the expected rate of inflation. 

Expected Inflation not actual inflation

(c) What is the effect on the increase in the expected inflation rate on the Long-Run Phillips curve.

The long-run phillips curve is effected by situations that will decrease or increase the NRU, Natural Rate of Unemployment,,, so if the government expand unemployment benefits the LRPC will shift right,, and if the government cuts unemployment benefits the LRPC will shift left. 

There is no trade-off between unemployment and inflation in the Long-Run.

Answer - an increase in the expected rate of inflation does not effect the LRPC.

(d) Given the expectation of the increase in inflation from part (b)

(i) will the nominal interest rates on new loans increase, decrease or remain unchanged?

If inflation is expected to increase then the Price Level is expected to increase then the demand for money is expected to increase.. If demand for money is expected to increase then interest rates for new loans will increase.

Answer - Nominal interest rates will increase.

(ii) Will the real interest rate on new loans, increase, decrease, or remain unchanged?

Ok, so if the nominal interest rate is rising with the expected level of inflation the bankers crafting new loans will be building into the loans the expected rise in inflation.

In essence,, I'm a banker and I'm selling loans at the nominal rate of interest of 5% and this is also the real rate with no inflation,,, but I expect the rate of inflation to increase by 2%,,, I'm going to sell all new loans at 7% rates of interest. I'm going to build into the loans the expected rate (2%) of inflation. Thus the real rate will not change it will still be 5%.

Nominal Rate = Real Rate (no inflation)

Real Rate = Nominal Rate - Inflation

Nominal Rate = Real Rate + inflation

Answer - The real interest rate will not change

(e) Assume that the nominal interest rate is 8%. Borrowers and lenders expect the rate of inflation to be 3% and the growth rate of the real GDP is 4%. Calculate the real interest rate.

Real Rate = Nominal Rate - Inflation

5% = 8% - 3%

Answer - the real interest rate is 5%

2013 AP Macroeconomics FRQ #2

2013 AP Macroeconomics FRQ #2

Watch me answer it here

https://youtu.be/Lz-sQVspjB0

(2) Assume that the Country of Fischerland produces only consumer goods and capital goods.


(a) The graph above shows the PPC for Fischerland. The production of which of the following exhibits increasing opportunity cost: consumer goods only, capital goods only, both goods, or neither good?

The PPC is a perfect example of showing the concept of scarcity,, and that because of scarcity we must make choices, (to choose is to act) and in the process of choosing one, we simultaneously not choose something else. The opportunity cost is the cost of what we didn't choose or the opportunity foregone.

The bowed out shape of the PPC shows that there is increasing opportunity cost. Consider the difference between a society making Bridges (capital goods) or butter (consumer goods),, if we take the machinery that is used to make bridges and use them to try and make butter it will not be as efficient and therefore costs will increase,, the more butter we choose to make the less efficient the bridge making resources.

The shape of the curve ,, bowed out,, shows increasing opportunity costs,, whereas a straight line PPC would demonstrate that there is opportunity cost but not increasing opportunity cost.

Answer - both goods exhibit increasing opportunity cost.

(b) Redraw the graph above. Show a point that shows fully employed & efficiently used resources on the redrawn graph and label it A.

Any point on the PPC curve is efficient and attainable.

(c) Assume there is a recession in Fischerland. On your graph show a recession, label it C.

Answer - Look Above

C is attainable but inefficient,,, usually C represents unemployment,,, and in a recession we have much unemployment.

(d) Identify a fiscal policy action the government can take to address the recession.

Fiscal policy - Government spending or Taxes

Answer - the government can increase spending or decrease taxes.

(e) Assume that no discretionary policy actions are taken, will short-run aggregate supply curve, increase, decrease, or remain the same in the long run. Explain.

From equilibrium to recession to equilibrium again with a lower PL... SRAS curve will shift right as wages and prices adjust.

Answer - wages and production costs decrease and the SRAS curve shifts right. 

This junks easy!!!

2013 AP Macroeconomics Exam #1

2013 AP Macroeconomics Exam #1

watch me answer it here

https://youtu.be/WQBx1XmJ378

1. Assume the US is operating at full employment.
(a) Using a CLG of the long-run aggregate supply, short-run aggregate supply, and aggregate demand, show each of the following.

(i) Current price level, labeled PL1
(ii) Current output level, labeled Y1

This first part should be automatic,,  no real thinking,,,, they just want to see if you have memorized the graphs. You should be able to draw (at the drop of a hat) AD/AS curves for Equilibrium, recession, LR-recession, Inflation, LR-inflation, Stagflation, Growth and LR-Growth...

Check out the cheat sheets and practice. AD/AS Cheat Sheet

(b) Assume that personal savings in the US increases. Using a CLG of the loanable funds market, show the impact of the increase in personal savings on the real interest rate.

Straight forward question,, people save more and they deposit their cash in the commercial banks,, therefore the supply of loanable funds increase. If the Supply of loanable funds increase then the Supply of loanable funds curve shifts down (to the right) and the real interest rate decreases.

 Loanable Funds Cheat Sheet

(c) Based on the real interest rate change in (b),

(i) Will interest sensitive expenditures, increase, decrease, or remain unchanged?

 The use of the phrase interest sensitive expenditures is code for loans,,, so if we use different language could this question make more sense??

When the RIR (Real Interest Rate) falls will the number of people taking out loans, increase, decrease, or remain unchanged?

Answer - Interest sensitive expenditures will increase

(ii) What will happen to the rate of growth? Explain.

An increase of savings leads to a lowering of interstate rates that will encourage investment,, more investment leads to higher levels of capital formation (business plants, roads, construction, equipment, etc, etc) which leads to an expanding rate of growth in the economy.

Answer - growth rate will increase with an increase in capital formation.


(d) Assuming the real interest rate of the Euro Zone increases relative to the real interest rate of the US. Draw a CLG of the foreign exchange market for the Euro and show the impact of the change in the real interest rate in the Euro Zone in each of the following.

(i) Demand for the Euro. Explain.

If real interest rates are higher in the Euro Zone,, then US citizens wish to take advantage of the higher rates so they wish buy Euro Zone bonds (as these Euro Zone bonds are paying more than the US bonds) ,, to buy Euro Zone bonds they must exchange their US dollars for Euros. All of the US investors wishing to invest in Euro Zone bonds lead to a higher demand for the Euro.

Answer - Demand for the Euro increases because the higher real interest rate leads to higher returns for investors, thus US investors funds flow to the Euro Zone.


(ii) Value of the Euro to the US dollar.

Look at the graph, the value of the Euro is increasing,,, which also means the value of the dollar is decreasing,,, it will take more US dollars to buy a Euro as the values diverge.

(e) Assume that the US account balance is zero. Based on the change in value of the Euro identified in part (d) (ii), will the US current account be in surplus, deficit, or remain at zero?

As the Euro is increasing in value,, then the US goods and services will be cheaper ,, relatively to Euro goods and services,, and since the current account is about goods and services,, we would assume the US will be exporting more goods and services to the Euro Zone.

Answer - the US current account balance will be in surplus.

Surprisingly Easy!

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.

2014 AP Microeconomics FRQ #2

2014 AP Microeconomics FRQ #2

Oh! I just love me 

some unskilled labor.

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(a) Using correctly labeled side-by-side graphs for the labor market and Ray's Stable, show each of the following.

(i) The equilibrium wage and quantity for unskilled labor.

(ii) The wage paid by Ray's Stable and the quantity of unskilled labor hired.

(b) Is the MFC of unskilled labor for Ray's Stable greater than, less than, or equal to WE?

If you were able to draw the graph above then it seems fairly straight forward that the equilibrium rate of pay for unskilled employees is equal. The explain,, part of this question is the fact that Ray's Stable is in the perfectly competitive factor market (factor as in employee) and perfectly competitive as in Ray's is a wage taker and can't pay more or less than the market wage rate as the market sets the price of wages.

Answer - wage rates are equal in the market and at Ray's, and the wage rate is set by the market as Ray is a wage taker.

(c) Now assume the government imposes a minimum wage for unskilled labor.

(i) Show the minimum wage & quantity for unskilled labor.

You must understand that a minimum wage is a price floor (floors are high) and that to be binding (effective) it must be drawn above equilibrium... (as minimum wage below the market equilibrium will not effect the employees wages)

What we know about price floors is that they cause a surplus,, at the higher price less employees are demanded but more will be supplied.

(ii) On the labor market graph in part (a) show the quantity of unskilled labor supplied in the labor market as a result of the new minimum wage, labeled Qs.

(iii) As a result of the new minimum wage, will the marginal revenue product (MRP) of the last worker hired by Ray's Stable increase, decrease, or stay the same?

So 1st off,, I don't like this question. It's a literal question,, as in look at the graph. Are we travelling up the MRP curve as we fire people... Yes... If we fire the fifth worker,, the 4th worker hired would have a higher MRP.

Does that workers MRP (the 4th) change??? Does it really increase??? or is it just higher?

What we do know is that the 4th worker has a higher MRP...

What we also know,, is that 75% of students missed this question.

I think if they had used the word (higher) instead of increase there would have been less confusion.

As in the 4th workers MRP is clearly higher but it didn't increase..

Answer - the MRP of the next worker hired increases

Perhaps,, that should be a fallback response,, if in doubt look at the graph.