Econowaugh AP

Tuesday, May 23, 2017

2017 AP Microeconomics FRQ #1

2017 AP Microeconomics FRQ #1

Watch me anser it here

(A) Draw a CLG for the corn market and a representative corn farmer (Firm). On your graph show each of the following.

(i) The equilibrium price and quantity in the corn market, labelled PM & QM.

(ii) The profit maximising quantity of corn produced by the representative farmer earning zero economic profit (normal profit) labelled QF.

Answer

(B) Assume the demand for ethanol increases. On your graph in part (A) show what will happen to each of the following in the short-run

(i) The market price and quantity of corn labelled P* & Q*.

(ii) The area of profit or loss earned by the corn farmer. Shaded completely.

If the demand for Ethanol increases then the demand for corn must increases as corn is an input for Ethanol.

Answer

(C) Relative to your answer in part (B), state what will happen to the market equilibrium price and quantity of corn in the long-run. Explain.

Profits in the short run, attract firms

Firms enter in the long-run

Firms enter and produce more Supply, Supply increases

Increased Supply means quantity produced increases

Increased Supply drives prices lower

Answer

(D) Soybeans are produced in a perfectly competitive market. Assume farmers can grow either corn or soybeans on the same land. What happens to the price of soybeans in the next planting season if the price of corn increases? Explain.

Ok, if the price of corn increases farmers will want to plant more of it as the profits on each bushel will be greater than on a bushel of soy beans. So farmers switch from soybean production to corn production hunting for profits. This reduces the supply of soybeans in production. Less supply means hire prices for soybeans.

Corn and Soybeans are considered competitively (supplied) produced goods.

Answer

(E) Assume instead that the government sets a binding price ceiling in the corn market.

Draw a new CLG of the corn market and show each of the following.

(i) The binding price ceiling, labelled PC.

(ii) The quantity purchased by consumers in the corn market, labelled QC.

Understand that a binding price ceiling is one that is below the equilibrium point. Binding also means effective which implies it must effect the market and an effective price ceiling is one that is below equilibrium.

Remember that ceilings are low, and floors are high.

Answer

Tuesday, May 9, 2017

Marginal Utility Video (Jason Welker)

Marginal Utility Video (Jason Welker)

It's Marginal Utility/ P !!

Wednesday, May 3, 2017

Equation of Exchange (Quantity Theory of Money)

Quantity Theory of Money

Equation of Exchange

Lorenzo in Hong Kong @ AIS wants to know about
Equation of Exchange and how has it been tested.

Monetarists believe that inappropriate Fiscal policy will cause macroeconomic instability.

Formula

MV = PQ

M*V = P*Q

(Money Supply (times) the Velocity of Money) = (Price * Quantity or Nominal GDP)

Monetarists want the V (velocity of money) to be stable

(no sudden increases in the money supply)

1) If the PL is 4 and the velocity of money is 8,

real output is $4,000 then the money supply must be?

M*V = P*Q

so,

M(?) * 8 = 4 * $4,000

then the MS must be $2,000,

($2,000 * 8) = (4 * $4,000)

If the money supply rises faster than the rate of growth then we will have inflation

If the Money Supply doubles the Price Level doubles

1995 - 0 questions

2000 #40

Answer - A - Income velocity of money increased

Remember that the Equation above is an (Identity),

meaning that both sides must equal each other.

If the MS decreases and the NGDP doesn't change the only thing that could have changed is the Velocity of money must have decreased.

2005 #58

Answer - E the price level will increase

The Velocity of Money and the RGDP are often considered constant, so if the MS increases and Velocity and RGDP are constant the only thing that could have increased is the Price level.

2008 #21

Answer - B Nominal National Incomes

Recognise that National Incomes are the

Y = Incomes on the bottom of your AD/AS graphs.

If velocity is stable, meaning that the factors affecting it change gradually and predictably, changes in M lead directly to changes in Nominal GDP (PxQ)

2010 #16

Answer - A increase in nominal output

Nominal Output = Nominal GDP

If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.

2012 #59