2008 Micro FRQ #3

2008 Micro FRQ #3

(A) For a competitive market for which there is a binding (effective) price ceiling , draw a CLG and label the price ceiling Pc & the quantity sold, Qa, and the socially efficient output Qb.

(B) (i) Using the labelling in the graph, identify the profit-maximising output and the socially efficient output. (Output means Quantity)

(B) (ii) At the socially efficient output is the monopoly making a profit or incurring a loss. Identify the area of profit or loss.

2008 B Macro FRQ #2

2008 B Macro FRQ #1

(A) Will each of the following groups benefit from the decrease in the tariff rate?

(i) Mexican consumers

If the Mexican government reduces the tariffs (tax) on cars being imported from other countries then importers will be able to sell those cars for less. This means Mexicans will be able to buy cars at a cheaper price and be able to spend the surplus savings on other goods like, education, healthcare, entertainment, food, clothing. Yes, I would say that this is a benefit.

(ii) Mexican automobile manufacturers. Explain.

No Mexican automobile manufacturers would like tariffs to be higher not lower. If tariffs were higher then the Mexican manufacturers would be able to raise the prices of their domestically produced cars. Mexican automobile manufacturers would not benefit. 

If tariffs are reduced then importers can charge less for each car. Consumers will be able to buy cheaper cars. Domestic producers of cars will have to lower their prices to compete with the imports.

(B) How would the decrease in the tariffs rate affect each of the following in Mexico?

(i) Current Account Balance. Explain.

We must first know what the Current account is.

If the current account balance is (imports & exports) goods and services.

If Mexico lowers its tariffs on automobiles imported then the price of imported automobiles will fall and more automobiles will be imported. Therefore their will be a current account deficit as imports will be increasing relative to exports..

(ii) Capital (financial) account balance.

If the current account is in a deficit, and therefore the capital account must be in a surplus. 

Think of it like this - If you buy food from the grocery store you have imported goods into your household and therefore your current account is in a deficit. When you paid for the food you bought at the store that money is counted in the financial (capital account). The grocery store will take this cash and spend it at your advertising firm by buying your services.

When Americans buy cars from Germany our current account goes into a deficit but we paid for the cars with cash, and this cash will be used to buy property and goods from America. 

(C) Given the change in Mexico's current account in part (B)(i), what will happen to the aggregate demand in Mexico.

If Imports increase then net exports must decrease and therefore AD will decrease as Net exports is a component of AD.

2008 B Micro FRQ #3

2008 B Micro FRQ #3

watch me answer it here

https://youtu.be/g0Adx3-66Ts

(A) After which worker do diminishing marginal returns begin?

Make a chart.

What is Diminishing Marginal Returns?

From the Resource Costs (Labor) Cheat Sheet here.

The MRP, marginal revenue product increases to $20 with the hiring of the 1st worker. The second worker brings in $32. The third worker brings in $20 and every worker hired after the second brings in less revenue. The returns fall after hiring the second worker.

(B) Calculate the Marginal Physical Product of the 5th worker.

What is the marginal physical product?

For the AP exam, where the input of labor (number of workers hired) increases by one at a time you should use MP marginal product and Marginal Physical Product interchangeably. MP & MPP are different when hiring more than one labourer at a time.

The marginal product (product produced by the 5th worker) is 5 units of the good.

Understand that the change in production from the 4th worker to the hiring of the 5th worker created an additional 5 hats.

Again, the question is simply asking how many hats are produced by the 5th worker.

(C) Calculate the marginal revenue product of the 3rd worker.

Chart - 

3rd worker - MP(10) X P(2) = $20

The 3rd worker brings in $20 and costs us $15

(D) How many workers will be hired to maximise profit?

Profit Max for hiring is where MRP  = MRC

Or as close as possible without losing money.

**hiring the 4th worker makes us $1 of profit.

but

**hiring the 5th worker would cost us $5, a loss

(E) If GW has fixed costs equal to $20, what will be the company's show-run profit from hiring 

two workers?

Remember don't you, that MC (wage) is a variable cost and VC+FC = TC

So, if the wage of each worker is $15 then the wage for the two workers is $30. This is the VC. The fixed cost is $20. ((This is not $20 per worker so don't double it.)) 

VC ($30) + FC ($20) = TC ($50)

Remember that Profit = TR - TC

The MRP or Total Revenue earned from hiring two workers is ($20 + $32) = $52

So, TR($52) - TC($50) = Profit of $2

(F) If the price of hats increases, what will happen to the number of workers hired in the short-run? Explain.

MRP (additional revenue per additional worker hired) The formula for MRP is MP x P = MRP.

So if either the MP (productivity) or the P (price of the good) increases then the MRP will increase.

If the MRP increases then more workers will be hired as now it will be more profitable to hire an additional worker.

I had answered this problem in an earlier post, here.

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.