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.

New 2012 AP Microeconomics Exam Released !!!!

WooHoo!

If your teacher doesn't know, let them know.

Circular Flow Cheat Sheet

Circular Flow Cheat Sheet

Circular Flow is tested in the Macro Exam. 

I have yet to find a Micro Exam question about circular flow.

Since it is listed in the AP Micro curriculum you should still understand.

2000 AP Macro

Answer - (D) Households are demanders in the product market and suppliers in the factors market.

Households Demand Goods & Services and supply Land, Labor, & Capital, FOP.

1995 AP Macro

Answer - (D) II & III

Households sell factor services to Firms. (Land, Labor, Capital)

Households buy outputs from Firms. (Goods & Services)

2005 AP Macro

Answer - (E) Savings (Paradox of Thrift)

Paradox of Thrift in 60 Seconds

2016 AP Macroeconomics Exam FRQ #3

2016 AP Macroeconomics Exam FRQ #3

Watch me answer it here

https://youtu.be/gyNQlVDG6xE

It is very nice of the College Board to have set the problem up in this helpful way.

THANK YOU!!

(A) Who has the absolute advantage  in producing donuts? Explain.

If we look at the chart above we see that John can produce 200 donuts and Erica can produce 150. Therefore John has an absolute advantage in the production of donuts.

From the Cheat Sheet

Draw a Graph

We can clearly see that John has an absolute advantage in production of donuts and cupcakes.

(B) Who has the comparative advantage in producing donuts? Explain.

John can either produce 200 donuts or 100 cupcakes. If he makes 200 donuts he gives up 100 cupcakes (100/200 = .5 or 1/2). Said in a different way, for every donut John makes he gives up 1/2 of a cupcake or for every cupcake he makes he gives up 2 donuts. (200/100 = 2)

Erica, on the other hand, can either make 150 donuts or 50 cupcakes. If she makes 150 donuts she gives up 50 cupcakes (50/150 = .333... or 1/3). Said in a different way, for every donut Erica makes she gives up a 1/3 of a cupcake or for every cupcake she makes she gives up 3 donuts.  (150/50 = 3)

As Erica's opportunity cost of producing 1 donut is 1/3 of a cupcake, which is less than John's opportunity cost which is 1/2 of a cupcake for every donut he makes.

Erica gives up less cupcakes by producing donuts than John does. She is more efficient.

Remember that comparative advantage is about who gives up less than the other person, as lower opportunity cost is the key.

(C) Assume that John and Erica decide to specialise according to their comparative advantages and that one cupcake is exchanged for four donuts.

If John and Erica specialise then Erica would make the donuts and John would make cupcakes. 

(i) Indicate wether or not specialisation and trade would be beneficial to John.

Before specialisation John could make a cupcake or two donuts,  said another way, if John makes two donuts he gives up a cupcake. After trade and specialisation John can trade a cupcake for 4 donuts. He would be better off.

(ii) Indicate wether or not specialisation and trade would be beneficial to Erica.

Before specialisation Erica could make a donut and give up 1/3 of a cupcake. Said another way, Erica could make a cupcake and give up 3 donuts. After trade and specialisation Erica would have to give up 4 donuts for 1 cupcake. This would not be beneficial for Erica.

(D) Assume that Erica discovers a new cupcake production technique that will increase her daily production of cupcakes only. Using donuts on the horizontal axis, draw a correctly labeled  production possibility curve for Erica, before and after the technology change in cupcake production.

Understand, that Erica's production of donuts will not increase but her ability to produce more cupcakes with the same resources will increase.

2016 AP Macroeconomics FRQ #2

2016 AP Macroeconomics FRQ #2

Nothing in this world is free, and that if you want something out of life you've got to work to get it

Watch me answer it here

https://youtu.be/c7k0R5klqU4

(A) What is the dollar value of new loans that First Superior Bank can make? Explain.

Demand deposits = amount of money deposited into the bank. 

If $2,000 dollars has been deposited into the bank the bank must keep 10% of it in reserve. So, $200 must be kept in the bank in reserve as that is required by the FED, (Federal Reserve). Then the bank loaned out $1,800 to some other customer.

So if the bank has to hold in reserve $200 and loans out $1,800 then that $2000 is not able to be loaned out to anyone else. The bank has no excess reserves to loan.

If Mr. Smith deposits $100 of cash 10% of it must be held in reserve.(As the FED requires) So 10% of $100 is $10 and $100 - $10 = $90. Therefore $90 is the maximum amount of new loans that can be made, (Loaned Out).

(C) As a result of Mr. Smith's $100 cash deposit, calculate the maximum change over time in each of the following banking system.

(i) Loans.

If Mr. Smith deposits $100 in the bank and $10 is kept in reserves then $90 can be loaned out. If that $90 is deposited in another bank then 10% of the $90 or $9 must be kept in reserve and therefore $81 can then be loaned out in the next round and 10% of that must be kept in reserve and so on and so on and so on. Until all is loaned out.

The quick way to figure this out is to understand that the formula for this is the Required Reserve Ratio or 1/RR, so, 1/10% or 1/.1 which will equal 10.

Monetary Policy Cheat Sheet

Answer - $90 x 10 = $900

(ii) Demand Deposits.

The maximum amount of demand deposits in the banking system due to Mr. Smith's $100 deposit is $100 x 10 = $1,000.

(D) As a result of Mr. Smith's $100 deposit, calculate the maximum change over time in the money supply.

 The original $100 was already part of the money supply so you can't include that in the calculation.

(E) Provide one reason why the actual change in the money supply can be smaller than the maximum change you identified in part (D).

If credit card rates increase (past AP question) then people will be inclined to hold more cash and this will decrease the effects of the money multiplier. 

If banks voluntarily hold excess reserves then the money multiplier will have less of an effect on the money supply.

(Not entirely happy with my explanations for this section, stay tuned for a more thorough explanation.)

2016 AP Macroeconomics FRQ #1

2016 AP Macroeconomics FRQ #1

(A) Draw a single CLG with both the long-run Phillips curve and the short-run Phillips curve. Label the current short-run equilibrium point P.

Understand that when the actual unemployment rate is above the natural rate of unemployment (NRU) the economy is in a recession.

(B) Assume no policy action is taken, will the short-run phillips curve shift to the left (downwards), shift to the right (upwards), or remain the same?

NO POLICY ACTION TAKEN - translated =  (In the Long-Run)

So in the long run with a recession the SRAS curve for AD/AS will shift to the right (downward) as prices and wages fall and output will therefore increase. 

When the SRAS curve shifts, the SRPC will  shift left (down). This makes sense as in the long run, employees will accept lower wages and choose to go back to work, decreasing unemployment. As prices (inflation) falls also.

I like the way I say it better :).

(C) If the FED wants to lower unemployment, what expansionary what expansionary open-market operation should it use.

From the cheat sheet - Monetary Policy

Notice, that when the FED buys bonds, money is injected into the economy and AD will increase, output will increase and unemployment will be lowered as people go to work.

Output increase - unemployment must decrease.

(D) How will the open-market operation from part (C) affect?

(i) Federal Funds Rate? 

(ii) Real Interest Rate in the short-run ? Explain.

Monetary and Fiscal - Nominal and Real Rates

(E) Given your answer in part (d)(ii), what is the effect on the Real GDP in the short-run? Explain?

Looking at the same cheat sheet above we can see that as the MS increases that Consumption and Investment will increase as Interest Rates fall, and therefore AD will increase and RGDP will 

increase.

(F) Japan and The US are major trading partners. Indicate how the change in Real GDP will effect the demand for Japanese Yen (¥) in the foreign exchange market?

If the US has increasing AD/Output, Real GDP, then we also expect US incomes to be increasing and therefore Imports (from Japan) will increase.

Increasing imports into the US from Japan means that US citizens are demanding Japanese goods and therefore the demand for ¥ is increasing in the FOREX.

(G) Draw a CLG of the FOREX market for the Japanese Yen (¥), showing the effect of the change in demand  for the Yen identified in part (F) on the value of the Japanese Yen relative to the US dollar.