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2016 AP Microeconomics Exam FRQ#2

2016 AP Microeconomics Exam FRQ#2

(A) What is Martha’s marginal benefit of the fifth unit of good X?    

At a quantity of 0, we haven’t purchased any units so there is no marginal benefit.

As we purchase from 0 quantity to the first unit of X, we gain a marginal benefit of $16.

As we purchase from the first to the second unit of X, we gain a marginal benefit of $12.

As we purchase from the second to the third unit of X, we gain a marginal benefit of $8.

As we purchase from the third to the fourth unit of X, we gain a marginal benefit of $4.

As we purchase from the fourth to the fifth unit of X, we gain a marginal benefit of $1.

Think of marginal as meaning the next purchase. Obviously we can only purchase full units, so when we have 4 units purchased our next marginal purchase is the 5^th one and we receive a marginal benefit of $1 from the additional/marginal purchase of that 5^th unit.

(B) Calculate the total consumer surplus if Martha consumes 5 units of X. (show your work)

Remember, that consumer surplus is the additional value gained from consumption of a good subtracting what has been paid for that good.

Answer - Total Consumer Surplus = $12 + $8 + $4 + $0 + $ -3 = $21 of Total Consumer Surplus

·      Understand that the $4 Cost is also part of the benefit. Confusing at first, but understand that if I give you $4 for unit X then unit X is still worth $4, at least to me.

       

(C) Martha is currently consuming 4 units of X and 2 units of Y. Use marginal analysis to explain why this combination is not optimal.

This combination of Units X and Units Y are not optimal as the marginal benefit gained from purchasing units X and Y is not equal.

We are use to seeing these problems as Utility problems and recognizing that the Marginal Benefits and Marginal Utility formula’s are the same.

(D) What is Martha’s optimal combination of X & Y?           

1^st – using the formula set the two goods equal by using the formula above. Table is helpful. (:

2^nd – Martha chooses her purchases according to the greatest benefit gained with each purchase.

3^rd – Martha purchases until her income is all spent.

E) Indicate whether each of the following will cause the optimal quantity of good Y to increase, decrease or stay the same.

(I) The price of good Y doubles.

If the benefit per unit of Y decreases, then we would purchase less of the good.  Martha’s first purchase would have been X as the benefit is 4, which is greater than the benefit of 2.5 for a unit of Y.

Answer - The optimal quantity purchased will decrease.

(II) Martha’s income falls to $10 with no change in prices.

If Martha’s income falls to $10, then she will not be able to purchase 4 units of good Y.

She will purchase the first 3 units of good X & Y exactly the same way, but then she has spent $8 and only has $2 left, so she will then only be able to purchase a unit of Y.

So 1 unit of X and 3 units of Y will be purchased, this will use all of her income. The question above asks if the optimal quantity of good Y will decrease, increase, or stay the same.

Originally Martha, with $20 of income bought 4 units of good Y, so her purchase of good Y has decreased.

Answer – Martha’s purchase of good Y has decreased.

(III) Martha’s income doubles and the price of both goods double.

The answer to this question should be intuitive in that if Martha’s income doubles and all goods prices double then Martha is no better off with a doubling of her income as the ratio of prices to incomes are the same.

3 units of X at $8 each is $24 spent and 4 units of Y at 4 each is $16 and $24 + $16 = $40

Martha has spent $40 (all) of her income and bought the same combination of goods X & Y.

Answer - No change in optimal combination of goods X & Y.

2016 AP Microeconomics FRQ # 1

2016 AP Microeconomics FRQ # 1

Watch me answer it here

https://youtu.be/cj8h0AJGbjY

(A) In the market for bananas, the equilibrium price is $1.00 per pound, and the equilibrium quantity is 1,000 pounds per week. Suppose the government imposes a price floor on bananas at $1.20 per pound, causing the quantity supplied to increase to 1,500 pounds a week.    

(I) Would the price floor result in a shortage, a surplus, or neither? Explain.

The price floor causes the price to increase, which sends a signal to producers (suppliers) to produce more but consumers will reduce their purchases due to the higher price causing the quantity demand to decrease. So, a surplus would occur.

(II) Calculate the price elasticity of supply if the price increases from $1 to $1.20 per pound. Show your work.

Use either the midpoint formula or the alternative formula as the College Board accepts both.

Midpoint Formula     Alternative Formula

(III) Between $1 & $1.20, is the supply elastic, unit elastic, or inelastic? Explain.

From the Elasticity - cheat sheet,

So, a PES of 2 or 2.5 is obviously greater than 1 and therefore is Elastic.

(B) Bananas are an input for muffins.

     

(I) Draw a correctly labeled graph (CLG) of the market for muffins indicating the equilibrium price and quantity, labeled P₀ & Q₀, respectively.

(II) On the graph drawn in part (B) (I), show the increase in the price of banana's on the muffin market, labelling P1 & Q1.

 

An increase in the price of bananas is considered an increase in input cost for muffins as bananas are an input (resource) cost for muffins. Therefore the price of muffins will increase and the quantity of muffins sold will decrease.

(III) On the same graph, completely shade the area that represents the change in the consumer surplus caused by the change in the price of bananas.

(C) In the market for coffee, the equilibrium price is $3.00 per cup and the equilibrium quantity is a 100 cups per week. The cross-price elasticity of coffee with respect to muffins is -2.

(I) Are coffee and muffins normal goods, inferior goods, complimentary goods or substitute goods?

Elasticity cheat sheet

Coffee and muffins are complementary goods.

(II) Assume the supply of coffee is perfectly elastic. Using the equilibrium price and quantity given above, draw a correctly labelled graph for the coffee market and show the impact of the increase in the price of muffins on the coffee market.

(III) Given the original quantity 100 cups of coffee per week, if the increase in the price of muffins is 10%, calculate the new equilibrium quantity in the coffee market. Show your work.

The cross-price elasticity is the responsiveness of the quantity demand to a change in price. 

As the price of muffins goes up by 10% the demand for coffee will decrease as muffins and coffee are compliments. Recognise that the price of coffee does not increase as the supply is perfectly elastic.

The question is to calculate the new quantity sold in the coffee market.

Good Year, Good Students, Good Times

Good Year, Good Students, Good Times

Thanks for working so hard this year and good luck.

Good Luck

Good Luck

Things to remember.

1. You have 1 hour and 10 minutes for the multiple choice section,,, pencil only,, no calculators,, plenty of time.,, draw graphs in the margins to help you answer the questions,, do not get hung up on one question,,, do the easy ones first and come back and ponder (SAT people) the hard ones. You know all of this so breathe and be brilliant.

2. You have 1 hour for the FRQs, this includes a ten minute reading section. Plan well,read the questions and underline the important parts,, but you can start writing during the 10 minute reading period,,, you do not have to wait to start writing.   ((((use a pen only))) no coloured markers,, highlighters or white out.... If you start and then figure out that you have  done something wrong,,,, quickly put a big X through it and start again.... Remember,, you know much more than they will be asking,,, show them what you know. Underline the important parts of the question,,, reread the questions to make sure you know what they are asking. 

EXPLAIN Underline anytime you see the word  EXPLAIN and EXPLAIN = WHY,,, Do not state,,, EXPLAIN, Complete sentences,, arrows on graphs,, but arrows in explanations need to be written out. Don't make them look and hunt for the answers,,, clearly labeled and underlined and/or circled the answer.

3. Eyes on your own paper 

4. During the break,, do not touch anything related to economics,, or electronics.

5. The night before,,, (((( do not study until late))) Go to bed after a good bit of studying ,, but sleep and a clear head is better than cramming the night before.

6. The morning of the exam,,, eat breakfast and, then some kind of light snack before... Snacks and water are technically not allowed but almost all proctors allow it.

7. Study a bit more the morning of the exam,, you should be doing things you know well (Graphs),,, do not try and learn anything new the might before or the morning of the exam,,, do what you know and show yourself all you know.

8. Be confident,,, enjoy being tested and knowing that you will do well.

Mr w

Helpful and Nice review from Mr. Clifford,, Good Work. Mr. Clifford

2006 AP Micro FRQ #2

2006 AP Micro FRQ #2

Watch me answer it on youtube 

https://youtu.be/HMjZFLz1IiY

(a) What is the dollar value of the firm's total fixed cost?

Understand that Total Cost = Variable Cost + Fixed Costs,,, Variable costs (think labor) only exist when there is actual production. If costs are ($20) and there is no production then the cost of $20 must be a fixed cost.

Answer - 

(b) Calculate the marginal cost of producing the first unit of output.

If Fixed Costs are ($20) and the Total Costs are ($27) then the Variable Costs/ Marginal Cost must be ($7).

Answer - 

(c) If the price the firm receives for its product is $20, indicate the firms profit-maximising quantity of output and explain how you determined the answer.

If $20 is the products price, and it is a perfectly competitive firm, then the 

Marginal Revenue = Price,, as the perfectly competitive firm's (MR. DARP) is perfectly elastic.

For every unit sold the revenue increases by $20 = the MR = P.

Profit Maximising quantity is where MR = MC, which is closest with the fourth unit.

Understand that just saying the 4th unit does not explain,,, to explain you must clearly explain WHY?

EXPLAIN - Using marginal analysis we compare where a firm's MR = MC, this is where profit is maximised. The 4th unit of production the MR $20 > MC $19. We are as close to Profit Max as possible, if we produce the 5th unit MR $20 < MC $23 (a loss). The firm profit max is to produce a quantity of 4.

Answer - 

(d) Given your results in part (c), Explain what will happen to the number of firms in the industry in the long-run.

Understand that the firm is making a profit of $8 with a production of 4 units. This is positive/abnormal/super economic profit in the short-run. Profits attract firms and therefore firms will enter the market hunting for profits. 

Number of firms will increase

Answer - 

(e) Assume that this firms operates in a constant cost industry (clue), and has reached long-run equilibrium. If the government imposes a per-unit tax of $2, indicate what will happen to the firm's profit maximising output in the long-run.

If in the Long-run firms are making zero economic profit, and the government imposes a $2 tax, it is fair to assume that the marginal costs will shift to the left as input costs increase. 

Answer - 

Thanks, Linh Nguyen