2008 B Micro FRQ #2

2008 B Micro FRQ #2

Market Failure Cheat Sheet Here.

(A) Draw a CLG of supply and demand, and

(i) Label the market price "Pm", and label the market output "Qm".

(ii) Label the socially efficient level of output "Qs".

(iii) Shade the area of DWL.

(B) Is marginal social cost greater than, less than, or equal to marginal social benefit at the market price?

The market price production is at Qm. Society (government) feels it would be a healthier society with more people vaccinated. Society wants more consumption of vaccines. In essence the price of vaccines is to high and the government can entice people to buy more vaccines if the price is lower. 

Society is not spending enough on vaccines or the social cost is to low. Society should spend more on vaccines raising the cost of spending to equal the benefit.

Government would entice people to buy with a subsidy that would lower the price. Remember that government cost increasing also increases the social cost as government is part of society.

Remember that the demand = benefit and the supply (MC) curve = costs

We firm wants to produce where MB = MC, and society where MSB = MSC

If MC < P we need to produce more, social costs are lower than social benefit - produce more.

to produce more we must hire more people to produce more

this extra production is spurred by giving subsidies to producers to get them to lower the price

Lower price more consumption

If MSC < MSB (demand) then costs must be lowered to get more consumption/production.

I know this section is weird, as during the beginning of the course we say that the most optimal amount of quantity to be produced is where S = D, market equilibrium. We promote the MB = MC understanding and then with market failure we say that for different reasons the people can't make the right decisions so government must step in with taxes or subsidies and fix the problem.

Economics is fun. Grind your teeth and understand what you need to to answer the questions for the exam...

(C) How will a tax on the producers of vaccines affect the DWL? Explain.

A tax on producers will raise their costs and on the margin some producers will go out of business reducing the supply of vaccines. This would move us further away from the Socially Optimal Quantity increasing the DWL.

Market Failure Cheat Sheet (Updated)

Market Failure Cheat Sheet (Updated)

2008 B Micro FRQ #1

2008 B Micro FRQ #1

Watch me answer it here

https://youtu.be/lvMU4b1pcdw

(A) Suppose the firm produces at the profit-max output (quantity). Using the labelling on the graph, identify each of the following.

(i) Level of output. Explain.

First, you find the profit max (MC = MR) and then draw a line straight down to the quantity. Profit is maximised at MC = MR so this is where the company should produce to maximise profit.

(ii) Price

(B) Suppose the firm maximises at the max revenue output. Using the labelling on the graph identify each of the following.

(i) Level of output. Explain.

Understand that max revenue is where the marginal revenue curve equals zero. Why? At that quantity of good produced (Q3) there is still some profit being made. Production at (Q4) would cause the company to incur a loss. 

Why would a company choose to maximise revenue instead of maximising profit? Well, perhaps you are a new business that needs to build up a clientele. So, you can sell at a cheaper price and get some market share. 

(ii) Price

Total revenue for a monopoly is maxed where MR = 0,
to produce more quantity would produce a loss on each unit produced 

(C) Suppose the government regulates the firm's price to produce the allocatively efficient level of output (quantity). 

(i) The price the government would require the firm to set. Explain.

Know this!!!!!

The government would require the firm to set the price where price (P) is equal to the (MC) or at the socially allocatively efficient level. This can be labelled (P = MC) or sometimes where (D = MC) same/same.

(ii) Alocatively efficient level of output (quantity).

(D) Suppose the firm is producing at the allocatively efficient level of output.

(i) Would it be earning a profit or incurring a loss? Explain.

A loss as at the quantity of Q4 and a price of P1, the ATC is higher than the revenues generated.

(ii) Identify the area of loss or profit at the allocatively efficient level of output.

(E) Identify the Consumer surplus at the allocatively efficient level of production.

(F) Suppose the government allows the firm to set a price that just covers its opportunity costs. Identify the price the regulators would allow.

The Regulators would allow the firm to choose the fair return/ break-even price so as to cover its expensive,, to choose a lower price would require a subsidy from the government to keep the firm in business.

Fair-Return/ Break-Even price =  where, P = ATC

Notice that the Q3 price is lower with regulation than with a profit maximising or revenue maximising monopoly and there is more quantity produced, closer to the socially optimal quantity. The regulated monopoly will produce more quantity at a lower price.

2008 B Macro FRQ #1

2008 B Macro FRQ #1

(A) How will the increase in government expenditures (spending) affect each of the following in the short-run?

(i) Aggregate Demand

Government spending will shift the AD curve rightward. 

Government spending causes (C) consumption to increase which increases AD.

The AD/AS cheat sheet is here.

(ii) Short-run Aggregate Supply

Government spending does not affect the SRAS - short run aggregate supply curve.

These shift the SRAS curve 

(B) Using a CLG of the AD/AS, show the effects of the expenditure on the real output (RGDP) and the price level (PL).

PL, increases

RGDP, increases

&

Incomes (Y) increase

(C) Assume that the government funded this increase in expenditures by borrowing from the public. Using a CLG of the loanable funds market, show the effects of the borrowing on the RIR, real interest rate.

Government spending increases, the RIR, increases

Fiscal Policy Cheat Sheet is here.

(D) Given the change in the real interest rate (C), what will be the effect of the change in the FOREX?

(i) Supply of Z currency. Explain. (WHY?)

If, the government increases spending then the RIR will increase. This increased interest rate will attract foreigners to invest into Z's interest bearing assets (people want to put their money into Bonds) because they can earn a higher interest rate compared to their own countries. Capital flows (money) will flow into the country of Z to take advantage of the higher interest rates. 

To be able to invest in country Z investors must exchange their currency in the FOREX market. They are demanding Z's currency. The demand for Z's currency will increase. This will decrease the supply of Z's currency in the FOREX. 

(ii) The value of Z currency.

Demand increases for Z's currency and supply decreases, so the value will rise.

(E) Given your answer in part (d)(ii), what will be the effect of the change in the value of Z's currency on Z's exports? Explain.

(D)(ii) says that the currency's value will increase. This means that to buy a Z, one must spend more in the FOREX. 

Explain, - I want to buy a jacket from the country of Z and it costs 100z. The company who makes the jacket do not take $ they only take z's. So, I must trade my $ for z's in the FOREX. Before the government spending (RIR increased) I could buy the jacket for $100. 

The exchange rate was 1 for 1.  - 100$ for 100z

Now the value of Z's currency has increased, it now takes 2$ to equal 1z. So, I must take $200 to buy 100z. I can still buy the jacket but since the RIR increased and the value of the z increased I must pay more for each z that I want to buy.

This means that the price of the goods in the country of Z have increased for foreigners wanting to buy their goods.

If the price of Z's goods have increased relative to other countries then they will not be able to export as much. Their exports will decline.

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.

PPC & Utility Cheat Sheet (Updated)

PPC & Utility Cheat Sheet (Updated)