Resource Costs/ Labor Cheat Sheet
Need a copy e-mail wcwaugh@aol.com
Sunday, October 23, 2016
2007 Microeconomics FRQ #2
2007 Microeconomics FRQ #2
watch me answer it here
(A) Using the specific information above, draw a correctly labeled graph of HZRad's current supply curve for unskilled labor.
Most of these questions are almost all identical. Recognise that the phrase, "can hire all the unskilled labor it needs at a wage of $90 per day per worker." is telling you that the there is a perfectly competitive market for labor. Lets graph it.
(B) What is HZRad's profit maximising output level? Explain.
Profit Max is where MRP=MRC, sounds familiar, yes!
A Table is helpful, learn (memorise) how to set this table up.
You are given the first two columns, Labor, Total Product, Price of the Good and the Wage Rate.
The MRP is the amount brought in by adding that worker into the production. The 1st worker brings in $400 and we pay her $90. Yes, we want to hire this person. The 2nd worker brings in $500 and we pay him $90. Yes, we want to hire him. We go down until the MRP=MRC and this is where profit is maximised. Notice, that at the 5th person we hire they are bringing in $100 and costing us $90.
MRP does not equal MRC but it is as close as we can come without loosing money. The 6th person hired would only bring in $80 and would cost us $90, a loss of $10. So don't hire the 6th person.
You can't hire a piece of someone so marginally we can either hire 5 or 6 and the 5th makes us some profit while the 6th costs us money.
Answer - Output level = 75 units of the good. The 5th worker
(C) Suppose the company uses a new technology to increase the productivity of the workers.
(i) How will the new technology affect the quantity of the workers hired? Explain.
(ii) How will the new technology affect the wages paid to the workers hired?
So, if HZRad's technology improves each and every worker will be able to be more productive. Lets pretend that every worker will be able to double their productivity.
Notice that with our workers productivity being doubles it is now profitable to hire the 6th worker as she brings in $160 and we only pay her $90. We wouldn't hire the 7th worker as he only brings in $40 but would cost us $90.
Answer (i) - If technology increases the productivity of the workers then more workers can potentially be hired as they become marginally profitable. MRP curve will shift rightward. QL hired will increase.
Laymen's terms (if you make money off of them - hire them)
Answer (ii) - I would not pay them higher wages. If I buy new machines that make my workers more productive why on the green Earth would I pay them more money. Remember my goal is to make a profit. I pay my workers enough to keep them working for me. I invest in new technology and expect to make more profit. Competition is what raises wages not benevolence. This assumes that I'm the only one with the new technology.
But, If the problem says that the the MARKET has the new technology then everyone will become more productive and I will have to pay my people more money as wages will rise. I will have to attract more people into the industry to work for me.
Check out my cheat sheet, Labor Cheat Sheet
Freak-onomics podcast - How to be more productive - Here
Saturday, October 22, 2016
2007 Microeconomics FRQ #1
2007 Microeconomics FRQ #1
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| Sometimes music makes it go down smooth. https://www.youtube.com/watch?v=_NNOaYNqLo8 |
So, you must understand that a patent is a government sanctioned monopoly. Yes, I know that seems dramatic but a patent is a governmental guaranteed or privilege that allows you to sue anyone that copies your idea and the courts will find in your favour if you have a patent.
(A) Assume that GCR is making economic profit. Draw a correctly labeled graph and show the profit-maximising price and quantity.
(B) Assume that the government imposes a lump-sum tax on GCR.
(i) What will happen to the price and quantity? (Explain.)
(ii) What will happen to GCR profits?
Ok, so the important thing to know about lump-sum taxes is that they don't effect the MC curve.
What in the F&#$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.
Wednesday, October 12, 2016
Wednesday, September 21, 2016
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
Friday, August 26, 2016
2016 AP Macroeconomics Exam FRQ #3
2016 AP Macroeconomics Exam FRQ #3
Watch me answer it here
It is very nice of the College Board to have set the problem up in this helpful way.
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THANK YOU!!
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(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.
Thursday, August 25, 2016
2016 AP Macroeconomics FRQ #2
2016 AP Macroeconomics FRQ #2
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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
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(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.
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.)
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