2014 AP Micro FRQ A #1 (Unit 4: Monopoly in Product Market) 1.
The graph below shows the demand curve (D), marginal revenue curve
(MR), marginal cost curve (MC), average total cost curve (ATC), and
long-run average total cost curve (LRATC) for a monopolist. (a)
Using the numbers given in the graph, identify each of the
following for the profit-maximizing monopolist. (i) The quantity
produced (ii) The price (iii) The allocatively efficient quantity
(b) At the profit-maximizing quantity from part (a)(i), is the
monopolist experiencing economies of scale? Explain. (c) Now assume
that the monopolist produces 10 units. Using the numbers given in
the graph, calculate each of the following. Show your work. (i) The
monopolists economic profit (ii) The consumer surplus (iii) The
deadweight loss (d) At what quantity is demand unit elastic? (e)
Suppose the monopolist perfectly price discriminates and chooses
the quantity that maximizes profit. Determine the dollar value of
each of the following. (i) The monopolists profit (ii) The consumer
surplus MR MC=ATC=LRATC D 0 2 4 5 6 8 10 12 QUANTITY Price $60 $50
$40 $35 $30 $20 $10 Slide 2 MR MC=ATC=LRATC D 0 2 4 5 6 8 10
12QUANTITY Price $60 $50 $40 $35 $30 $20 $10 (a)(i)
profit-maximizing quantity = 4 (a)(ii) profit-maximizing price =
$40 (a)(iii) Allocatively efficient output = 8 (b) The firm is NOT
experiencing economies of scale, because the LRATC is NOT downward
sloping as output increases or LRATC remains constant as output
increases. (c)(i) (P-ATC) X Q = ($10 - $20) X 10 = -$100 (c)(ii) CS
= ($60 - $10) X 10 = $250 (c)(iii) DWL = ($20 - $10) X (10 8) = $10
(d) Quantity = 6 (e)(i) [($60 - $20) X 8] = $160 (e)(ii) Consumer
Surplus is zero Slide 3 2. Rays Stable hires workers in a perfectly
competitive factor market for unskilled labor. (a) Using correctly
labeled side-by-side graphs for the labor market and Rays Stable,
show each of the following. (i) The equilibrium wage and quantity
for unskilled labor, labeled W E and Q E, respectively. (ii) The
wage paid by Rays Stable and the quantity of unskilled labor hired,
labeled W R and Q R, respectively (b) Is the marginal factor cost
of unskilled labor for Rays Stable greater than, less than, or
equal to W E ? Explain. (c) Now assume that the government imposes
an effective minimum wage for unskilled labor. (i) Show the minimum
wage on your graphs in part (a), labeled W MIN. (ii) On the labor
market graph in part (a), show the quantity of unskilled labor
supplied in the labor market as a result of the minimum wage,
labeled Q S. (iii) As a result of the new minimum wage, will the
marginal revenue product of the last worker hired by Rays Stable
increase, decrease, or stay the same? 2014 AP Micro FRQ A #2 (Unit
5: Resource Market) Slide 4 (a)(i) W E & Q E (a)(ii) W R &
Q R (c)(i) W MIN (above W E ) (c)(ii) Q S (c)(iii) Marginal revenue
product of last worker hired will increase. QSQS QRQR DLDL SLSL
Wage Q QEQE WEWE Industry Q Rays Stable D L =MRP S L =MFC WRWR W
MIN S=MFC MIN (b) Rays Stables marginal factor cost = W E The firm
is a wage taker in the labor market and/or the market sets the
wage. Slide 5 3. Assume that gasoline is sold in a competitive
market in which demand is relatively inelastic and supply is
relatively elastic. (a) Draw a correctly labeled graph of the
gasoline market. On your graph show the equilibrium price and
quantity of gasoline, labeled P E and Q E. (b) Suppose the
government imposes a $2 per unit tax on the producers of gasoline.
On your graph from part (a), show each of the following after the
tax is imposed. (i) The price paid by buyers, labeled P B (ii) The
after-tax price received by sellers, labeled P S (iii) The
quantity, labeled Q T (c) Using the labeling on your graph, explain
how to calculate the total tax revenue collected by the government.
(d) Will the tax burden fall entirely on buyers, entirely on
sellers, more on buyers and less on sellers, more on sellers and
less on buyers, or equally on buyers and sellers? Explain. 2014 AP
Micro FRQ A #3 (Unit 2: Tax) Slide 6 (a)P E & Q E (b)(i) P B
above P E, derived from D at Q T (b)(ii) Q T < Q E (c) Total Tax
Revenue = (P B X Q T ) (P S X Q T ) = (P B - P S ) X Q T = $2 X Q T
(d) Tax burden will fall more on buyers and less on sellers because
the demand curve is more inelastic than the supply curve. QTQT PBPB
QEQE PEPE Price Quantity S D S Tax PSPS Slide 7 2013 AP Micro FRQ A
#1 (Unit 4: Monopoly in Product Market) 1. The graph below
illustrates the demand, marginal revenue (MR), marginal cost (MC),
and average total cost (ATC) curves for a profit-maximizing
monopolist. (a) Assume that the profit-maximizing monopolist is
unregulated. Using the labeling in the graph, identify each of the
following. (i) The monopolists quantity of output (ii) The
monopolists price (iii) The profit earned by the monopolist (iv)
The deadweight loss (b) Now assume that the monopolist can
perfectly price discriminate. Using the labeling of the graph,
identify each of the following. (i) The quantity produced (ii) The
total revenue received by the monopolist (c) Instead, assume the
monopolist charges a single price and is regulated to produce the
socially efficient quantity. Using the labeling of the graph,
identify each of the following. (i) The socially efficient quantity
(ii) The consumer surplus at the socially efficient quantity (d) Is
the monopolist facing the regulation in part (c) earning a positive
economic profit, earning zero economic profit, or incurring a loss?
Explain. (e) Is point f in the elastic, inelastic, or unit elastic
portion of the demand curve? Explain MR P3P2P1P3P2P1 MC=ATC Demand
Q 1 Q 2 Q 3 Q 4 0 P4P4 Quantity $/Unit a e f b c d Slide 8 (a)(i)
The monopolists quantity of output = Q1 (a)(ii) The monopolists
price = P3 (a)(iii) The profit earned by the monopolist = P1P3ac
(a)(iv) The deadweight loss = acf (b)(i) The quantity produced = Q3
(b)(ii) The total revenue received by the monopolist = P4fQ30
(c)(i) The socially efficient quantity = Q3 (c)(ii) The consumer
surplus at the socially efficient quantity = P1p4f (d) The
monopolist is earning zero economic profit because the price equals
ATC. (e) Point f is in the inelastic portion of the demand curve
because MR is negative. Slide 9 2. There are two pizza restaurants
in College Town, PieCrust and LaPizza. Each company must decide
whether to advertise or to not advertise. In the payoff matrix
below, the first entry in each cell indicates PieCrusts daily
profit, and the second entry indicates LaPizzas daily profit. Both
firms have complete information. 2013 AP Micro FRQ A #2 (Unit 4:
Oligopoly) (a) What strategy should PieCrust choose if LaPizza
chooses to advertise? Explain using the dollar values in the payoff
matrix. (b) What is the dominant strategy, if any, for LaPizza?
Explain using the dollar values in the payoff matrix. (c) In the
Nash equilibrium, determine each of the following. (i) PieCrusts
daily profit (ii) LaPizzas daily profit (d) Suppose that
advertising costs increase by $60 per day. Redraw the payoff matrix
to reflect the effect of the higher advertising costs. LaPizza
AdvertiseNot Advertise PieCrust Advertise$250,$200$450,$300 Not
Advertise $180,$500$390,$400 Slide 10 (a) PieCrust should advertise
because it makes greater profit by advertising: $250> $180. (b)
LaPizza does not have a dominant strategy. LaPizzas best choice
depends on the strategy chosen by PieCrust. When PieCrust
advertises, LaPizza does better by not advertising ($300>$200);
When PieCrust does not advertise, LaPizza does better by
advertising ($500 >$400). (c) Daily profit for PieCrust is $450,
and for LaPizza is $300. (d) LaPizza Advertise Not Advertise
PieCrust Advertis e $190,$140$390,$300 Not Advertis e
$180,$440$390,$400 Slide 11 3. For special occasions some people
purchase and set off fireworks in their backyards. Assume the
market for fireworks is perfectly competitive. (a) Draw a correctly
labeled graph of the market for fireworks and show the market
equilibrium price and quantity, labeled PE and QE. (b) Assume that
the noise from the fireworks disturbs all of the neighbors. On your
graph in part (a), show each of the following. (i) The marginal
social cost curve, labeled MSC (ii) The marginal social benefit
curve, labeled MSB (iii) The deadweight loss, if any, shaded
completely (c) Now instead assume that all of the neighbors enjoy
watching the fireworks. (i) In this case, is the market equilibrium
quantity of fireworks greater than, less than, or equal to the
socially optimal quantity? Explain. (ii) In this case, if the
government bans fireworks, will the deadweight loss increase,
decrease, or remain unchanged? 2013 AP Micro FRQ A #3 (Unit 6:
Externalities) Slide 12 (a)P E & Q E (b)(i) MSC curve above the
supply curve. (b)(ii) Labeling the demand curve MSB. (b)(iii)
Shading the area of deadweight loss. (c)(i) Market equilibrium
quantity is less than the socially optimal quantity because the
fireworks generate a positive externality or provide an external
benefit to third parties. (c)(ii) the deadweight loss will
increase. MSC Supply Demand=MSB Price($) Quantity QEQE PEPE
Deadweight Loss Slide 13 2012 AP Micro FRQ A #1 (Unit 4: Monopoly
in Product Market) 1. Steverail, the only provider of train service
operating between two cities, is currently incurring economic
losses. (a) Using a correctly labeled graph, show each of the
following. (i) Steverails loss-minimizing price and quantity,
labeled Pm and Qm, respectively (ii) The area of economic losses,
shaded completely (iii) The allocatively efficient quantity,
labeled Qe (b) If Steverail raised the price above Pm identified in
part (a)(i), would total revenue increase, decrease, or not change?
Explain. (c) Assume a per-unit subsidy is provided to Steverail.
(i) Will Steverails quantity increase, decrease, or not change?
Explain. (ii) Will consumer surplus increase, decrease, or not
change? (d) Assume instead that a lump-sum subsidy is provided to
Steverail. For the short run, answer the following. (i) Will the
deadweight loss increase, decrease, or not change? Explain. (ii)
Will Steverails economic losses increase, decrease, or not change?
Slide 14 (a)(i) 3 points: Demand & MR. Qm. (MR=MC) Pm. (a)(ii)
Shading the area of economic loss. (a)(iii) Allocatively efficient
quantity, Qe (MC = D) (b) Total revenue would decrease because the
demand is price elastic in that range of the demand curve where MR
> 0. (c)(i) Quantity will increase because the subsidy will
cause the MC curve to shift downward and intersect the MR curve at
a larger quantity. (c)(ii) consumer surplus will increase. (d)(i)
Deadweight loss will not change because the lump-sum subsidy does
not change the profit-maximizing quantity. (d)(ii) Economic losses
will decrease. QmQm Quantity Price PmPm QeQe MR D MC ATC Slide 15
2012 AP Micro FRQ A #2 (Unit 2: Consumer Choice) 2. Theresa
consumes both bagels and toy cars. Quantity of Bagels Marginal
Utility from Bagels (util) Quantity of Toy Cars Marginal Utility
from Toy Cars (utils) 18110 2728 3636 4544 5453 6362 (b) Assume
that the price of wheat, an input for the production of bagels,
increases. Will Theresas demand for bagels increase, decrease, or
not change? Explain. (c) Suppose that Theresas income elasticity
for bagels is 0.2. Does the value of Theresas income elasticity
indicate that bagels are normal goods, inferior goods, substitutes,
or complements? (d) Suppose that when the price of toy cars
increases by 10 percent, Theresa buys 5 percent fewer toy cars and
4 percent less of a different toy, blocks. Calculate the
cross-price elasticity for toy cars and blocks and indicate if it
is positive or negative. (a) The table above shows Theresas
marginal utility from bagels and toy cars. (i) What is her total
utility from purchasing three toy cars? (ii) Theresas weekly income
is $11, the price of a bagel is $2, and the price of a toy car is
$1. What quantity of bagels and toy cars will maximize Theresas
utility if she spends her entire weekly income on bagels and toy
cars? Explain your answer using marginal analysis. Slide 16 (a) 3
points: (a)(i) total utility is 24. (a)(ii) 3 bagels and 5 toy cars
will be purchased, because with this combination of bagels and
toys, the marginal utility per dollar spent on bagels equals the
marginal utility per dollar spent on toy cars. (b) Theresas demand
for bagels will not change because the increase in the price of
wheat will affect the supply of bagels, not the demand. (c) bagels
are inferior goods. (d) the cross-price elasticity for toy cars and
blocks: -0.04/0.10 = -0.4 Slide 17 2012 AP Micro FRQ A #3 (Unit 2-
Supply and Demand) 3. Sugar is freely traded in the world market.
Assume that a country, Loriland, is a price taker in the world
market for sugar. Some of the sugar consumed in Loriland is
produced domestically while the rest is imported. The world price
of sugar is $2 per pound. The graph below shows Lorilands sugar
market, and PW represents the world price. (a) At the world price
of $2 per pound, how much sugar is Loriland importing? (b) Suppose
that Loriland imposes a per-unit tariff on sugar imports and the
new domestic price including the tariff is $4. (i) Identify the new
level of domestic production. (ii) Calculate the domestic consumer
surplus for Loriland. You must show your work. (iii) Calculate the
total tariff revenue collected by the government. You must show
your work. (c) Given the world price of $2, what per-unit tariff
maximizes the sum of Lorilands domestic consumer surplus and
producer surplus? 2 6 8 10 14 Domestic Demand 0 $9 $8 $6 $5 $4 $2
Millions of Pounds Price PWPW Domestic Supply Slide 18 (a) Loriland
is importing 12 million pounds. (b)(i) the new level of domestic
production as 6 million pounds. (b)(ii) the domestic consumer
surplus as $25 million and showing the work: [($9 - $4) 10] = $25
(b)(iii) the revenue from the tariff as $8 million and showing the
work: ($4 - $2) (10 - 6) = $8. (c) the per-unit tariff that
maximizes the sum of consumer and producer surplus as $0. Slide 19
(e) Assume that regulators set an output of 11 units. (i) Is the
monopolist earning positive economic profit? Explain. (ii) Is the
monopolist earning positive accounting profit? (f) Assume instead
that regulators impose a price ceiling of $22. (i) What is the
marginal revenue for the eighth unit? (ii) What quantity will be
produced? (g) Assume instead that the monopolist practices perfect
price discrimination (also called first-degree price
discrimination). (i) What quantity will be produced? (ii) What will
be the value of the consumer surplus? 2011 AP Micro FRQ A #1 (Unit
4 Monopoly in Product Market) 1. A monopolists demand, marginal
revenue, and cost curves are shown in the diagram below. (a) Assume
that the monopolist wants to maximize profit. Using the labeling on
the graph, indicate the monopolists price. (b) When the output is 8
units, what is the profit per unit? (c) Assume that the monopolist
is maximizing profit. Is allocative efficiency achieved? Explain.
(d) Between the prices of $16 and $18, is the monopolist in the
elastic, inelastic, or unit elastic portion of its demand curve?
Explain. Marginal Revenue Demand 0 8 9 10 11 12 14 40 24 22 20 18
16 12 Quantity (Units) Price($) Average Total Cost Marginal Cost
Slide 20 (a) the profit-maximizing price as $24. ($22 is also
acceptable.) (b) the profit per unit as $6. (c) allocative
efficiency is not achieved because Price MC or MC Demand. (d)
demand is inelastic because total revenue increases as price
increases; or because the price elasticity of demand within the
price range is less than 1, or because marginal revenue is
negative. (e)(i) the monopolist is not earning positive economic
profit, because price equals average total cost. (e)(ii) the
monopolist is earning positive accounting profit. (f)(i) the
marginal revenue of the 8th unit is $22. (f)(ii) 9 units will be
produced. (g)(i) 10 units will be produced. (g)(ii) the consumer
surplus is zero. Slide 21 2011 AP Micro FRQ A #2 (Unit 3&5:
Perfect Competition in Product & Resource Market) 2. Assume
that the market for avocados is perfectly competitive. The typical
firm is earning positive economic profit in the short-run
equilibrium. (a) Draw a correctly labeled graph for the typical
firm, illustrating the short-run equilibrium and labeling the
equilibrium market price and output PE and QE, respectively. (b)
Assume there is an increase in the market wage rate for labor, a
variable input. Show on your graph in part (a) the effect of the
wage increase on the marginal cost curve in the short run. (c)
Assume that avocado producers hire workers from a perfectly
competitive labor market. Draw a graph of labor supply and demand
for the typical firm and label the supply curve MFC and the demand
curve MRP. Assume the market wage rate increases from w1 to w2.
Show the effect of the wage increase on the graph, labeling the
initial quantity of labor hired QL1 and the new quantity of labor
hired QL2. Slide 22 (a) 3 points: a horizontal demand curve at the
equilibrium price, PE. the equilibrium quantity, QE, at MR = MC.
ATC is below demand or MR at Q. (b) a leftward shift of the MC (c)
2 points: a horizontal MFC1 curve at w1 and a MRP curve and showing
QL1. shifting the MFC curve up to w2 and showing the new
equilibrium quantity of labor hired, QL2 (smaller than QL1). Slide
23 2011 AP Micro FRQ A #3 (Unit 6: Externality) 3. Assume that the
market for good X is perfectly competitive and that the production
of good X creates a negative externality. (a) Draw a correctly
labeled graph of the market for good X and show each of the
following. (i) The marginal private cost and marginal social cost
of good X, labeled MPC and MSC, respectively (ii) The market
quantity, labeled Qm (iii) The allocatively efficient quantity,
labeled Qs (iv) The area of deadweight loss, shaded completely (b)
Assume that a lump-sum tax is imposed on the producers of good X.
What happens to the deadweight loss? Explain. Slide 24 (a)(i) MSC
above MPC. (a)(ii) correctly labeled graph with MPC & MSB and
the private market equilibrium, Qm. (a)(iii) the allocatively
efficient quantity QS with QS < Qm. (a)(iv) shading the area
representing the deadweight loss. (b) the deadweight loss does not
change because marginal cost does not change. MSC MPC Demand=MSB
Price($) Quantity QMQM Deadweight Loss QSQS Slide 25 2011 AP Micro
FRQ B #1 (Unit 3: Perfect Competition in Product Market) 1. Suppose
that roses are produced in a perfectly competitive, increasing-cost
industry in long-run equilibrium with identical firms. (a) Draw
correctly labeled side-by-side graphs for the rose industry and a
typical firm and show each of the following. (i) Industry
equilibrium price and quantity, labeled Pm and Qm, respectively
(ii) The firms equilibrium price and quantity, labeled Pf and Qf,
respectively (b) Is Pm larger than, smaller than, or equal to Pf?
(c) Assume that there is an increase in the demand for roses. On
your graphs in part (a), show each of the following. (i) The new
short-run industry equilibrium price and quantity, labeled Pm2 and
Qm2, respectively (ii) The new short-run profit-maximizing price
and quantity for the typical firm, labeled Pf2 and Qf2,
respectively (d) As the industry adjusts to a new long-run
equilibrium, (i) what will happen to the number of firms in the
industry? Explain. (ii) will the firms average total cost curve
shift upward, shift downward, or remain unchanged? (e) In the long
run, compare the firms profit-maximizing price to each of the
following. (i) Pf in part (a)(ii) (ii) Pf2 in part (c)(ii) Slide 26
P f2 Q f2 P m2 Q m2 QfQf D S PmPm QmQm P Q P Q D ATC MC Industry
Firm PfPf 1 1 2 2 (a)(i) market graph and Pm & Qm. (a)(ii) Pf
& Qf, at MC = MR with a horizontal demand curve. (a)(ii)
minimum ATC intercepts demand curve at Qf. (b) Pm is equal to Pf.
(c)(i) market demand shifts to the right, and Pm2 & Qm2.
(c)(ii) Pf2 and Qf2. (d)(i) the number of firms increases because
of short-run profits attracts new firms to enter the industry.
(d)(ii) the firms ATC curve will shift upward. ATC stays the same
(e)(i) the long-run profit-maximizing price will be higher than Pf.
Pf stays the same (e)(ii) the long-run profit-maximizing price will
be lower than Pf2. Slide 27 2011 AP Micro FRQ B #2 (Unit 6:
Externality) 2. Suppose research shows that the more college
education individuals receive, the more responsible citizens they
become and the less likely they are to commit crimes. (a) Draw a
correctly labeled graph for the college education market and show
each of the following. (i) Private market equilibrium quantity and
price of college education, labeled Qm and Pm, respectively (ii)
Socially optimal quantity of education, labeled Qs (iii) Deadweight
loss at the market equilibrium, completely shaded (b) Assume that
the government imposes an effective (binding) price ceiling on the
price of college education. (i) Show the price ceiling on your
graph in part (a), labeling the price ceiling Pc. (ii) Does this
price ceiling increase, decrease, or have no impact on the
deadweight loss in this industry? Explain. (c) Assume that instead
of the price ceiling, the government grants each student a subsidy
for each unit of college education purchased. Will the new
equilibrium quantity of college education purchased be greater
than, less than, or equal to Qm from part (a) ? Slide 28 (a)(i) a
correctly labeled market graph and Pm & Qm. (a)(ii) MSB above
MPB and the socially optimal quantity, Qs. (a)(iii) shading the
area of the deadweight loss. (b)(i) an effective price ceiling (P C
) is below Pm. (b)(ii) price ceiling will increase the deadweight
loss, because providers will decrease the quantity of education
offered. (c) the new equilibrium quantity will be greater than Qm.
Price Of A College Education Quantity Of College Educations D 1
=MPB S=MSC D 2 =MSB QMQM QSQS PLPL PMPM PCPC Deadweight Loss Slide
29 2011 AP Micro FRQ B #3 (Unit 5: Monopsony in Resource Market) 3.
Woodland is a small town in which everyone works for TreeMart, the
local lumber company. TreeMart is a monopsonist in the labor market
and a perfect competitor in the lumber market. In the short run,
labor is the only variable input. The labor market for TreeMart is
given in the graph above. (a) Identify the profit-maximizing
quantity of labor for TreeMart. (b) Identify the wage rate TreeMart
pays to hire the profit-maximizing quantity of labor. (c) Identify
the quantity of labor hired in each of the following situations.
(i) TreeMart operates in a competitive labor market. (ii) The
government imposes a minimum wage of $12.5. Explain. 25 50 100 150
200 250 300 Marginal Revenue Product 25 20 17.5 15 12.5 10 Quantity
of Labor Wage($) Supply of Labor Marginal Factor Cost Slide 30 (a)
the profit-maximizing quantity of labor as 100 units. (b) the wage
rate TreeMart pays as $10. (c)(i) the quantity of labor in a
competitive labor market as 200 units. (c)(ii) quantity of labor,
150 units, given a minimum wage of $12.5. MFC curve (or the supply
curve for labor) becomes horizontal at the minimum wage up to a
quantity of 150. Slide 31 2010 AP Micro FRQ B #1 (Unit 4: Monopoly
in Product Market) (a) Assume that a private firm owns the bridge
and maximizes profits. Based on the diagram, determine each of the
following. (i)Output(ii) Price (b) Now assume that a municipality
owns the bridge and sets the price to achieve allocative
efficiency. Based on the diagram, determine each of the following.
(i) Output(ii) Price (c) At a price of $1, is the municipalitys
accounting profit positive, negative, or zero? Explain. (d) Suppose
that the municipality sets a break-even price that generates
revenues to just cover all economic costs. (i) Based on the
diagram, determine the break-even output. (ii) At the output you
determined in part (d)(i), is the demand relatively elastic,
relatively inelastic, unit elastic, perfectly elastic, or perfectly
inelastic? (e) If a company begins to provide access to the island
via commercial watercraft, what will happen to each of the
following in the diagram? (i) The demand curve for bridge
crossings(ii) The profit-maximizing output (f) Suppose the long-run
average total cost is strictly downward sloping. Would it be
efficient to build a second bridge? Explain. Marginal Revenue
Demand= Marginal Social Benefit Q1 Q2 Q3 Q4 8721087210 Output
Price/Cost($) Marginal cost=0 Average Total Cost 1. The diagram
above shows the cost and revenue curves for a bridge to a popular
island. The marginal cost of crossing the bridge is zero and is
indicated in the diagram as the horizontal axis. The price is the
toll to cross the bridge, and the output is the number of autos
that cross the bridge each day. Slide 32 (a)(i) output = Q2.
(a)(ii) price = $7. (b)(i) output = Q4. (b)(ii) price = $0. (c) the
accounting profit is positive, because the firm earns zero economic
profit. (Economic profit = Total revenue - Explicit costs -
Implicit costs.) (d)(i) break-even quantity as Q3. (d)(ii) demand
at Q3 is relatively inelastic. (e)(i) demand curve for bridge
crossings will shift down or to the left. (e)(ii) the
profit-maximizing output will fall. (f) building a second bridge
would be inefficient, because there are economies of scale,
building a second bridge would raise the ATC. Slide 33 2010 AP
Micro FRQ B #2 (Unit 5: Perfect Competition in Resource Market) 2.
The table above gives the short-run marginal revenue product of
labor per day for a perfectly competitive firm. The firm is
currently selling its product at the market price of $5. Number of
Workers Marginal Revenue Product per day 1$450 2$500 3$450 4$400
5$300 6$100 (a) Calculate the marginal (physical) product of the
third worker. (b) Define the law of diminishing marginal returns
and explain why it occurs. (c) Diminishing marginal returns first
occur with the hiring of which worker for the firm? (d) What is the
highest daily wage that the firm is willing to pay to hire the
fifth worker? (e) What will happen to the demand for labor if the
market price of the product increases? Explain. Slide 34 (a)
marginal product of the 3 rd worker: $450/$5 per unit = 90 units.
(b) 2 points: the law of diminishing returns: as more and more
units of a variable input are added to a fixed input, the output
increases at a decreasing rate. diminishing returns occur because
of the overuse of the fixed input. (c) diminishing marginal returns
first occur with the hiring of the 3 rd worker. (d) $300. (e) the
demand for labor will increase because the increase in the product
price raises the marginal revenue product of labor. Slide 35 2010
AP FRQ B #3 (Unit 2: Supply and Demand: Elasticity) 3. (a) The
table below gives the quantity of good X demanded and supplied at
various prices. (i) Is the demand for good X relatively elastic,
relatively inelastic, unit elastic, perfectly elastic, or perfectly
inelastic when the price decreases from $30 to $20 ? Explain. (ii)
Is the supply of good X relatively elastic, relatively inelastic,
unit elastic, perfectly elastic, or perfectly inelastic when the
price decreases from $30 to $20 ? Explain. (iii) If a per-unit tax
is imposed on good X, how is the burden of the tax distributed
between the buyers and sellers of good X? (b) Assume that the
income elasticity of demand for good Y is 2. Using a correctly
labeled graph of the market for good Y, show the effect of a
significant increase in income on the equilibrium price of good Y
in the short run. Price (dollars)Quantity Demanded (units) Quantity
Supplied (units) 3013 2033 1043 Slide 36 (a)(i) the demand for good
X is relatively elastic, because the elasticity coefficient > 1
OR because total revenue rises as price decreases from $30 to $20.
(a)(ii) supply is perfectly inelastic, because there is no change
in the quantity supplied as the price changes OR because the supply
elasticity is zero. (a)(iii) all of the burden of a per-unit tax
falls on sellers (b) 2 points: a correctly labeled graph of supply
& demand. showing a leftward shift of the demand curve and a
decrease in the equilibrium price. Slide 37 2010 AP Micro FRQ A #1
(Unit 3: Perfect Competition in Product Market) 1. Assume that corn
is produced in a perfectly competitive market. Farmer Roy is a
typical producer of corn. (a) Assume that Farmer Roy is making zero
economic profit in the short run. Draw a correctly labeled side-by
side graph for the corn market and for Farmer Roy and show each of
the following. (i) The equilibrium price and quantity for the corn
market, labeled as PM1 and QM1, respectively (ii) The equilibrium
quantity for Farmer Roy, labeled as QF1 (b) For Farmer Roys corn,
is the demand perfectly elastic, perfectly inelastic, relatively
elastic, relatively inelastic, or unit elastic? Explain. (c) Corn
can be used as an input in the production of ethanol. The demand
for ethanol has significantly increased. (i) Show on your graph in
part (a) the effect of the increase in demand for ethanol on the
market price and quantity of corn in the short run, labeling the
new equilibrium price and quantity as PM2 and QM2, respectively.
(ii) Show on your graph in part (a) the effect of the increase in
demand for ethanol on Farmer Roys quantity of corn in the short
run, labeling the quantity as QF2. (iii) How does the average total
cost for Farmer Roy at QF2 compare with PM2? (d) Corn is also used
as an input in the production of cereal. What is the effect of the
increased demand for ethanol on the equilibrium price and quantity
in the cereal market in the short run? Explain. Slide 38 (a)4
points: a correctly labeled graph of the corn market (S, D, PM1,
QM1). graph of the firm with a horizontal demand curve at PM1.
profit-maximizing quantity, QF1, at MC = MR. minimum ATC on the
horizontal demand curve at QF1. (b) demand curve for Farmer Roys
corn is perfectly elastic because Farmer Roy is a price taker or
because he can sell all that he wants at the market price. (c) 4
points: shifting the market demand curve to the right and showing
PM2 and QM2. shifting the firms demand curve upward to the level of
PM2. the profit-maximizing quantity, QF2, at MC = new MR. ATC at
QF2 is lower than PM2. (d) equilibrium quantity will decrease and
the equilibrium price will increase, because the increase in the
price of corn causes a decrease in the supply of cereal. Slide 39
2010 AP Micro FRQ A #2 (Unit 3&5: Perfection Competition in
Product & Resource Market) 2. The John Lamb Company, a
profit-maximizing firm producing widgets, is in a perfectly
competitive widget market. Assume John Lamb employs a fixed number
of employees and rents a machine for a variable number of hours
from a perfectly competitive market. (a) Using correctly labeled
side-by-side graphs of the factor market for machines and the John
Lamb Company, show each of the following. (i) The equilibrium
rental price of machines in the factor market, labeled as PR (ii)
John Lambs equilibrium rental quantity of machines, labeled as QL
(b) Assume that the popularity of widgets declines, decreasing the
demand for widgets. What will happen to each of the following? (i)
Marginal product curve for machine-hours (ii) Marginal revenue
product curve for machine-hours. Explain. (c) John Lamb is
employing the cost-minimizing combination of inputs. The marginal
product of labor is 28 widgets per worker hour and the wage rate is
$14 per hour. The marginal product of the machine is 60 widgets per
machine-hour. What is the hourly rental price of a machine? Slide
40 (a)(i) correct side-by-side graphs with a horizontal machine
supply curve for John Lamb (S, D, PR, SM). (a)(ii) the equilibrium
rental quantity of machines, QL, at the intersection of MRP and the
horizontal supply curve. (b)(i) there will be no change to the
marginal product curve for machine-hours. (b)(ii) MRP curve for
machine-hours will decrease (shift to the left) because the
decrease in demand decreases the price of widgets. (c) calculating
the rental price of a machine: MPL/w = MPK/r = 28/14 = 60/r.
Therefore, r = $30. Slide 41 2010 AP Micro FRQ A #3 (Unit 3&6:
Perfect Competition & Externality) (a) Using the labeling on
the graph, identify the area representing each of the following at
the market equilibrium. (i) The consumer surplus(ii) The producer
surplus (b) Assume that the production of each unit of candy
creates a negative externality equal to (P 5 -P 2 ). Using the
labeling on the graph, identify the socially optimal quantity. (c)
Assume that the government imposes a per-unit tax of (P 5 -P 2 ) to
correct for the negative externality. Using the labeling on the
graph, identify the area representing each of the following. (i)
The consumer surplus(ii) The deadweight loss 3. The graph above
shows the perfectly competitive market for hard candies in Country
Alpha. In the graph the letters correspond to points, not areas.
MPC denotes marginal private cost and MSB denotes marginal social
benefit. R Demand=MSB QUANTITY PRICE Supply=MPC q 1 q 2 q 3 q 4 q 5
P5P4P3P2P1P5P4P3P2P1 K M N U S T L J Slide 42 (a)(i) consumer
surplus as P3JM. (a)(ii) producer surplus as P1P3M. (b) socially
optimal quantity as q1. (c)(i) consumer surplus as P5JK. (c)(ii)
there is no deadweight loss. 2010 AP Micro FRQ A #3 (Unit 3&6:
Perfect Competition & Externality) R Demand=MSB QUANTITY PRICE
Supply=MPC q 1 q 2 q 3 q 4 q 5 P5P4P3P2P1P5P4P3P2P1 K M N U S T L J
Slide 43 2009 AP Micro FRQ B #1 (Unit 4: Monopolistic Competition)
1. Mary & Company, operating in a monopolistically competitive
industry, produces a cleaning product called BriteKlean. The
company currently produces the profit-maximizing quantity of
BriteKlean but is operating at a loss. (a) Draw a correctly labeled
graph for Mary & Company and show each of the following. (i)
The profit-maximizing output and price, labeled as QM and PM,
respectively (ii) The area of loss, shaded completely (b) What must
be true in the short run for the company to continue to produce at
a loss? (c) Assume now that the demand for cleaning products
increases and that the company is now earning short-run economic
profits. Relative to this short-run situation, how does each of the
following change in the long run? (i) The number of firms (ii) The
companys profit (d) In the long run, if the company continues to
produce, will it produce the allocatively efficient level of
output? Explain. (e) In the long run, will the company be operating
in a region where economies of scale exist? Explain. Slide 44 (a) 4
points: correctly labeled graph with a demand and MR below demand.
the profit-maximizing output, QM, at MC = MR. PM on the demand
curve above QM. shaded the area of loss. (b) price is greater than
average variable cost, or total revenue is greater than total
variable cost. (c)(i) the number of firms will increase. (c)(ii)
economic profits will fall to zero or fall to a normal profit. (d)
2 points: No. The firms price is greater than marginal cost. (e) 2
points: Yes. The firm produces a quantity of output in the
declining portion of its long-run ATC. Slide 45 2009 AP Micro FRQ B
#2 (Unit 2: Consumer Choice) 2. Sasha is a utility-maximizing
consumer who spends all of her income on peanuts and bananas, both
of which are normal goods. (a) Assume that the last unit of peanuts
consumed increased Sashas total utility from 40 utils to 48 utils
and that the last unit of bananas consumed increased her total
utility from 52 utils to 56 utils. (i) If the price of a unit of
peanuts is $1 and Sasha is maximizing utility, calculate the price
of a unit of bananas. (ii) If the price of a unit of peanuts
increases and the price of a unit of bananas remains unchanged from
the price you determined in part (a)(i), how will Sashas purchase
of peanuts change? (b) Assume that the cross-price elasticity of
demand between peanuts and bananas is positive. A widespread
disease has destroyed the banana crop. What will happen to the
equilibrium price and quantity of peanuts in the short run?
Explain. (c) Assume that the price of bananas increases. (i) Will
the substitution effect increase, decrease, or have no effect on
the quantity of bananas demanded? (ii) What happens to Sashas real
income? Slide 46 (a)(i) calculating the price of a unit of bananas,
$4/8 = $0.50. (a)(ii) Sasha will purchase fewer peanuts. (b) 2
points: the equilibrium price and quantity of peanuts will both
increase. peanuts and bananas are substitutes, and since the price
of bananas increased, it would cause the demand for peanuts to
increase. (c)(i) the substitution effect causes the quantity of
bananas demanded to decrease. (c)(ii) Sashas real income will
decrease. Slide 47 2009 AP Micro FRQ B #3 (Unit 4: Oligopoly) (a)
If Easy Ride chooses to maintain its current fare, which strategy
is better for City Wheels? Explain. (b) Is there a dominant
strategy for Easy Ride? Explain. (c) Assume that the companies must
make their decisions simultaneously and do not cooperate. What will
be the daily profit for each firm? (d) If these two firms could
cooperate, which strategy would each firm choose? (e) Suppose that
the local government decides to provide a subsidy of $40 per day to
the bus companies. However, only a company that agrees to lower its
fare is eligible to receive the subsidy. Draw a new payoff matrix
to reflect the change in government policy. City Wheels Maintian
FareLower Fare Easy Ride Maintian Fare $150,$180$130,$120 Lower
Fare $120,$130$140,$110 3. Two interdependent bus companiesCity
Wheels and Easy Rideprovide transportation services in the same
city. Following a change in costs that affects both companies, each
company must decide whether to lower its fare or maintain its
current fare. In the payoff matrix below, the first entry in each
cell indicates the daily profit to Easy Ride and the second entry
indicates the daily profit to City Wheels. Both companies know all
of the information in the matrix Slide 48 (a)City Wheels maintains
its current fare, since $180 > $120. (b) 2 points: Easy Ride
does NOT have a dominant strategy. Easy Rides best move depends on
City Wheels move. (c) profit to Easy Ride is $150 and the profit to
City Wheels is $180. (d) the cooperative solution is for both to
maintain their current fares. (e) City Wheels Maintian FareLower
Fare Easy Ride Maintian Fare $150,$180$130,$160 Lower Fare
$160,$130$180,$150 Slide 49 2009 AP Micro FRQ A #1 (Unit 4:
Monopoly in Product Market) 1. CableNow is the only supplier of
cable TV services offering a wide range of TV channels. CableNow is
an unregulated firm and is currently earning an economic profit.
Assume that CableNow does not practice price discrimination. (a)
Draw a correctly labeled graph for CableNow and show each of the
following. Make sure your graph is large enough to be legible.
(i)The profit-maximizing quantity of cable services, labeled as Q*
(ii)The profit-maximizing price, labeled as P* (iii)The area of
economic profit, completely shaded (iv)The socially optimal level
of cable services, assuming no externalities, labeled as QS (b)
Assume that the government grants CableNow a lump-sum subsidy of $1
million. Will this policy change CableNows profit-maximizing
quantity of cable services? Explain. (c) Instead of granting a
subsidy, assume now that the government chooses to require CableNow
to produce the quantity at which CableNow earns zero economic
profit. On the graph you drew in part (a), label this quantity QR.
(d) At QR, is the firms accounting profit positive, negative, or
zero? Explain. (e) Assume that a new study reveals there are
external benefits associated with watching TV. Will the socially
optimal quantity of cable services now be larger than, smaller
than, or equal to the QS you identified in part (a)(iv) ? Slide 50
(a) 5 points: a correctly labeled graph for CableNow, demand and MR
below the demand curve. profit-maximizing quantity, Q*, at MC = MR.
profit-maximizing price, P*, on the demand curve above Q*. shaded
the area of economic profit, completely. the socially optimal
quantity, QS, where MC intersects demand (b) 2 points: the lump-sum
subsidy will have no impact on the quantity of services CableNow
produces. lump-sum subsidy will not affect MC. (c) quantity of
cable services, QR, where the ATC curve intersects the demand
curve. (d) 2 points: accounting profit is positive. accounting
profit excludes implicit costs. (e) socially optimal quantity will
be larger than QS Slide 51 2009 AP Micro FRQ A #2 (Unit 2: Tax
& Elasticity) 2. The graph above illustrates the market for
calculators. S denotes the current supply curve, and D denotes the
demand curve. (a)Calculate the producer surplus before the tax.
(b)Now assume a per-unit tax of $2 is imposed whose impact is shown
in the graph above. (i) Calculate the amount of tax revenue. (ii)
What is the after-tax price that the sellers now keep? (iii)
Calculate the producer surplus after the tax. (c) Is the demand
price elastic, inelastic, or unit elastic between the prices of $5
and $6 ? Explain. (d) Assuming no externalities, how does the tax
affect allocative efficiency? Explain. Price($) $8 $6 $5 $4 $2 60
90 Quantity D S S+Tax 0 Slide 52 (a) producer surplus: (1/2) $3 90
= $135. (b)(i) tax revenue: $2 60 = $120. (b)(ii) after-tax price
received by sellers: $4. (b)(iii) producer surplus: (1/2) $2 60 =
$60. (c) demand price is elastic AND showing the correct
calculation of the elasticity coefficient using endpoint or
midpoint method, or the correct calculation using the total revenue
formula. (d) owing to the tax, the market is no longer allocatively
efficient AND that total surplus decreases or the tax creates a
dead-weight loss. Slide 53 2009 AP Micro FRQ A #3 (Unit 4:
Oligopoly) 3. Two competing retail firms, Red Shop and Blue Mart,
are studying potential locations for new stores in the suburbs of a
major city. Each firm must choose between a location north of the
city and a location south of the city. The payoff matrix is shown
below, with the first entry in each cell indicating Red Shops daily
profit and the second entry indicating Blue Marts daily profit.
Both firms know all of the information in the payoff matrix. (a) If
Red Shop chooses a location south of the city, which location is
better for Blue Mart? Explain. (b) Is choosing a location to the
south of the city a dominant strategy for Red Shop? Explain. (c) If
the two firms cooperate in choosing locations, where will each firm
locate? (d) Assume that the south suburb has enacted an incentive
package to attract new business. Any firm that locates south of the
city will receive a subsidy of $2,000 per day. Redraw the payoff
matrix to include the subsidy. Blue Mart Red Shop NorthSouth
North$900,$1,800$3,000,$3,500 South $5,000,$4,000$1,500,$1,000
Slide 54 (a) 2 points: Onorth will be better for Blue Mart. Blue
Mart earns a higher profit by locating north than it does by
locating south ($4,000 versus $1,000). (b) 2 points: choosing south
is not a dominant strategy for Red Shop. if Blue Mart chooses
south, Red Shop is better off choosing north. (Red Shops best
strategy depends on Blue Marts move.) (c) Red Shop chooses south
and Blue Mart chooses north. (d) Blue Mart Red Shop NorthSouth
North$900,$1,800$3,000,$5,500 South $7,000,$4,000$3,500,$3,000
Slide 55 2008 AP Micro FRQ B #1 (Unit 4: Monopoly in Product
Market) 1. The graph above shows the demand and cost curves of a
firm that does not price discriminate. (a) Suppose the firm
produces at the profit-maximizing output. Using the labeling on the
graph, identify each of the following. (i) Level of output.
Explain.(ii) Price (b) Suppose the firm produces at the
revenue-maximizing output. Using the labeling on the graph,
identify each of the following. (i) Level of output. Explain.(ii)
Price (c) Suppose the government regulates the firms price to
produce the allocatively efficient level of output. Using the
labeling on the graph, identify each of the following. (i) The
price the government would require the firm to set (ii) The
allocatively efficient level of output (d) Suppose the firm
produces at the allocatively efficient level of output. (i) Would
it be earning a profit or incurring a loss? Explain. (ii) Using the
labeling on the graph, identify the area of the profit or loss at
the allocatively efficient level of output. (e) Using the labeling
on the graph, identify the consumer surplus at the allocatively
efficient level of output. (f) Suppose the regulators establish a
price that allows the firm to just cover all its opportunity costs.
Using the labeling on the graph, identify the price the regulators
would set to achieve this objective. Marginal Revenue
Demand=Marginal Benefit Q1 Q2 Q3 Q4 Q5 P7 P6 P5 P4 P3 P2 P1 0
Output Price/Cost (Per Unit) Marginal Cost Average Total Cost a b c
d ef g h Slide 56 (a)(i) profit-maximizing output, Q 2, because
MC=MR at Q 2. (a)(ii) P 5 on the demand curve above MC = MR. (b)(i)
the revenue-maximizing output, Q 3, since MR is zero at Q 3, TR is
at the maximum. (b)(ii) P 3 is the price corresponding to Q 3.
(c)(i) the price the government would require, P 1 (c)(ii) the
allocatively efficient output, Q 4. (d)(i) 2 points: the firm would
incur a loss, because ATC > price, P 1. (d)(ii) the area of
loss, P 1 P 2 eg. (e) the consumer surplus, P 1 P 7 g. (f) the
price, P 3 Slide 57 2008 AP Micro FRQ B #2 (Unit 2&6: Supply
and Demand & Externality) 2. Vaccinations for contagious
diseases benefit the consumers as well as others in the community.
Assume that vaccines are produced in a competitive market. (a) Draw
a correctly labeled graph 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 the
deadweight loss. (b) Is marginal social cost greater than, less
than, or equal to marginal social benefit at the market output? (c)
How will a tax on producers of the vaccines affect the deadweight
loss that you identified in part (a) (iii)? Explain. Slide 58
(a)(i) correctly labeled graph with Q m & P m. (a)(ii)
correctly identifying Q S. (a)(iii) shading the area of the
deadweight loss. (b) MSC is less than the marginal social benefit.
(c) 2 points: tax will increase the deadweight loss. tax raises the
cost and causes output of vaccine to fall. Slide 59 2008 AP Micro
FRQ B #3 (Unit 5: Resource Market) 3. GW Company produces and sells
hats in a perfectly competitive market at a price of $2 per hat.
Assume that labor is the only variable input and the wage rate is
$15 per unit of labor per day. The table below shows GWs short-run
production function for hats. (a) After which worker do diminishing
marginal returns begin? (b) Calculate the marginal physical product
of the fifth worker. (c) Calculate the marginal revenue product of
the third worker. (d) How many workers will GW hire to maximize
profit? (e) If GW Company has fixed costs equal to $20, what will
be the companys short-run economic profits from hiring two workers?
(f) If the price of hats increases, what will happen to the number
of workers hired in the short run? Explain. Number of workers per
day0123456 Output of hats per day0102636444952 Slide 60 (a) the
second worker. (b) MP of the fifth worker is five units. (c)
calculating the MRP of the third worker: $20. (d) GW will hire four
workers. (e) profit: $2. (f) 2 points: more workers will be hired.
increase in the price of hats raises the marginal revenue product,
hence the demand for labor. Slide 61 2008 AP Micro FRQ A #1 (Unit
3: Perfect Competition in Product Market & Lump-Sum Subsidy) 1.
Callahans Orchard grows apples and operates in a constant-cost,
perfectly competitive apple industry. Callahans Orchard is
currently in long-run equilibrium. (a) Draw correctly labeled
side-by-side graphs for the apple market and Callahans Orchard, and
show each of the following. (i) Market output and price, labeled as
QM and PM, respectively (ii) Callahans output and price, labeled as
QF and PF, respectively (b) Now assume that the government provides
farm support to apple growers by granting an annual lump-sum
subsidy to all apple growers. Indicate the effect the subsidy would
have on each of the following in the short run. (i) Callahans
quantity of output. Explain. (ii) Callahans profit (iii) The number
of firms in the industry (c) Indicate how each of the following
will change in the long run as a result of the lump-sum subsidy.
(i) The number of firms in the industry. Explain. (ii) Price (iii)
Industry output Slide 62 (a)(i) 2 points: a correctly labeled graph
of the apple market, with P M and Q M firms price equals the market
price. (a)(ii) 2 points: the tangency of flat firm demand (P F )
and ATC. Q F is where MR (P) = MC. (b)(i) 2 points: lump-sum
subsidy will have no impact on Callahans output. lump-sum subsidy
will not affect MC (or MR). (b)(ii) Callahans profit will increase.
(b)(iii) number of firms in the industry will not change. (c)(i) 2
points: the number of firms in the industry will increase. the
existence of profits attracts new firms. (c)(ii) price will fall.
(c)(iii) industry output will increase. Slide 63 2008 AP Micro FRQ
A #2 (Unit 2: Tax & Consumer Choice) 2. Utility and price
elasticity of demand are important concepts in explaining consumer
behavior. (a) Define marginal utility. (b) The table below shows
the quantities, prices, and marginal utilities of two goods, fudge
and coffee, which Mandy purchases. Mandy spends all her money and
buys only these two goods. In order to maximize her utility, should
Mandy purchase more fudge and less coffee, purchase more coffee and
less fudge, or maintain her current consumption? Explain. (c)
Assume that consumers always buy 20 units of good R each month
regardless of its price. (i) What is the numerical value of the
price elasticity of demand for good R? (ii) If the government
implements a per-unit tax of $2 on good R, how much of the tax will
the seller pay? FudgeCoffee Quantity of purchase 10 pounds7 pounds
Price per pound $2 Marginal utility of last pound 1220 Slide 64 (a)
marginal utility as the extra satisfaction received from consuming
an additional unit of a good or service. (b) 2 points: Mandy should
purchase more fudge and less coffee. per dollar MU for fudge is
greater than per dollar MU for coffee. (c)(i) price elasticity of
demand for good R is zero. (c)(ii) none of the tax will be paid by
the seller of good R, or that buyers pay all of the tax. Slide 65
2008 AP Micro FRQ A #3 (Unit 2&4: Supply & Demand &
Monopoly) 3. Social efficiency is affected by government policy and
the structure of markets. (a)For a competitive market for which
there is a binding (effective) price ceiling, draw a correctly
labeled graph and label the price ceiling PC, the quantity sold QA,
and the socially efficient output QB. (b)The graph above shows a
natural monopoly. (i)Using the labeling in the graph, identify each
of the following. (1)The profit-maximizing output (2)The socially
efficient output (ii)At the socially efficient output, is the
monopoly making a profit or incurring a loss? Using the labeling on
the graph, identify the area of profit or loss. Demand Marginal
Revenue Q1 Q2 Q3 Q4 P6 P5 P4 P3 P2 P1 0 Quantity (units) Price/Cost
(Dollars) Marginal Cost Average Total Cost A B D E F C Slide 66 (a)
3 points: a correctly labeled supply and demand graph with a price
ceiling below the market equilibrium. Q A. Q B. (b)(i) 2 points: Q
1 as the profit-maximizing output. Q 3 as the socially efficient
output. (b)(ii) 2 points: Q 3, the monopolist incurs a loss. the
area of loss, P 1 P 3 DF. Slide 67 2007 AP Micro FRQ A #1 (Unit 4:
Monopoly in Product Market) 1.A patent gives inventors the
exclusive right to produce and market a product for a period of
time. GCR Company is a profit-maximizing firm. It has a patent for
a unique antispyware computer program called Aspy. (a)Assume that
GCR is making economic profit. Draw a correctly labeled graph and
show the profit-maximizing price and quantity. (b) Assume that the
government imposes a lump-sum tax on GCR. (i)What will happen to
output and market price? Explain. (ii)What will happen to GCRs
profits? (c) Assume instead that the government grants a per-unit
subsidy to GCR for Aspy. (i)What will happen to output and market
price? Explain. (ii)What will happen to GCRs profits? (d) Now
assume that GCRs patent on Aspy expires. What will happen to GCRs
economic profits in the long run? Explain. Slide 68 Slide 69 2007
AP Micro FRQ A #2 (Unit 5: Resource Market) (a)Using the specific
information above, draw a correctly labeled graph of HZRads current
supply curve for unskilled labor. (b)What is HZRads
profit-maximizing output level? Explain. (c)Suppose that HZRad is
the first company to use a new technology that increases the
productivity of its unskilled workers. (i)How will the new
technology affect the quantity of unskilled labor HZRad hires?
Explain. (ii)How will the new technology affect the wage paid to
HZRads unskilled workers? Number of unskilled Workers Hired
Quantity of Radios Produced (per day) 00 120 245 360 470 575 679
780 2. Assume that HZRad Company produces clock radios as shown in
the short-run production function in the table above. HZRad can
sell all the clock radios it produces at a market price of $20 each
and can hire all the unskilled labor it needs at a wage of $90 per
day per worker. Assume also that labor is the only variable input.
Slide 70 Slide 71 2007 AP Micro FRQ A #3 (Unit 4: Oligopoly) 3. Two
bus companies, Roadway and Rankin Wheels, operate a route from
Greensboro to Spring City, transporting a mix of passengers and
freight. They must file their schedules with the local
transportation board each year and cannot alter them during that
year. Those schedules are revealed only after both companies have
filed. Each company must choose between an early and a late
departure. The relevant payoff matrix appears below, with the first
entry in each cell indicating Roadways daily profit and the second
entry in each cell indicating Rankin Wheels daily profit. (a)In
which market structure do these firms operate? Explain. (b)If
Roadway chooses an early departure, which departure time is better
for Rankin Wheels? (c)Identify the dominant strategy for Roadway.
(d)Is choosing an early departure a dominant strategy for Rankin
Wheels? Explain. (e)If both firms know all of the information in
the payoff matrix but do not cooperate, what will be Rankin Wheels
daily profit? Blue Rankin Wheels Roadway EarlyLate
Early$1,000,$900$950,$850 Late $750,$650$700,$800 Slide 72 Slide 73
2007 AP Micro FRQ B #1 (Unit 4: Monopolistic Competition) 1.Assume
that the cellular telephone industry is monopolistically
competitive. (a) Assume that cellular telephone manufacturers are
earning short-run economic profits. Draw a correctly labeled graph
for a typical firm in the industry and show each of the following.
(i)The profit-maximizing output and price (ii)The area representing
economic profit (b) At the profit-maximizing price you identified
in part (a), would the typical firms demand curve be price
inelastic? Explain. (c) Given the information in part (a), what
happens to the demand curve for the typical firm in the long run?
Explain. (d) Using a new correctly labeled graph, show the
profit-maximizing output and price for the typical firm in the long
run. (e) Does the typical firm produce an output level that
minimizes its average total cost in the long run? (f) In long-run
equilibrium, does the typical firm produce the allocatively
efficient level of output? Explain. Slide 74 Slide 75 2007 AP Micro
FRQ B #2 (Unit 4: Oligopoly) 2. Two airline companies, Airtouch and
Windward, operate a route from City X to City Y, transporting a mix
of passengers and freight. They must file their schedules with the
National Transportation Board each year and cannot alter them
during that year. Those schedules are revealed only after both
companies have filed. Each airline must choose between a morning
and an evening departure. The relevant payoff matrix appears below,
with the first entry in each cell indicating Airtouchs daily profit
and the second entry in each cell indicating Windwards daily
profit. (a)In which market structure do these firms operate?
Explain. (b)If Windward chooses an evening departure, which
departure time is better for Airtouch? (c)Identify the dominant
strategy for Windward. (d)Is choosing an evening departure a
dominant strategy for Airtouch? Explain. (e)If both firms know all
of the information in the payoff matrix but do not cooperate, what
will be Windwards daily profit? Windward Airtouch MorningEvening
Morning$1,000,$700$700,$600 Evening $750,$950$900,$800 Slide 76
Slide 77 2007 AP Micro FRQ B #3 (Unit 3: Perfect Competition in
Product Market) 3. For each of the following statements, indicate
whether it is true, false, or uncertain and explain why. (a)Average
total cost is always greater than average variable cost by a
constant amount. (b)In the short run, a perfectly competitive firm
always maximizes profit when average total cost is at minimum.
(c)If a firm shuts down in the short run, its profits will equal
zero. Slide 78 2007 AP Micro FRQ B #3 (Unit 3: Perfect Competition
in Product Market) 3. For each of the following statements,
indicate whether it is true, false, or uncertain and explain why.
(a)Average total cost is always greater than average variable cost
by a constant amount. (b)In the short run, a perfectly competitive
firm always maximizes profit when average total cost is at minimum.
(c)If a firm shuts down in the short run, its profits will equal
zero. (c) If a firm shuts down in the short run, its profits will
equal to zero. (a)Average total cost is always greater than average
variable cost by a constant amount. (b) In the short-run, a
perfectly competitive firm always maximizes profit when average
total cost is minimum. Slide 79 2006 AP Micro FRQ A #1 (Unit 4:
Monopoly in Product Market) (i)The museum maximizes its profit.
(ii)The museum maximizes its total revenue. (iii)The museum
maximizes the sum of consumer and producer surplus. (iv)The museum
maximizes its attendance, as long as it breaks even. (b) When the
attendance is Q, is the demand price elastic, inelastic, or unit
elastic? Explain. (c) Assume that the price is set at P. Assuming
the existence of an opportunity cost, indicate whether the 2
museums accounting profits would be positive, negative, or zero.
Why. (d) Assume that the government decides the museum should
charge no admission and agrees to subsidize the museum for any
losses. (i)Using the labeling in the graph, identify the museums
attendance under that circumstance. (ii)Would the outcome be
allocatively efficient? Explain. 1.There is one art museum on the
island of Watsonia. The museums demand and cost curves are shown in
the graph above. The museum currently relies on an admission charge
for some of its funding. Its directors are debating about how to
set the admission charge. (a) Using the labeling of the graph
above, identify the price and quantity associated with the
following objectives. Marginal Revenue Demand Q1 Q3 Q5 Q6 Q7 Q2 Q4
P6 P5 P4 P3 P2 P1 0 Attendance Price/Cost Marginal Cost Average
Total Cost Slide 80 Slide 81 2006 AP Micro FRQ A #2 (Unit 3:
Perfect Competition in Product Market & Tax) (c) If the price
the firm receives for its product is $20, indicate the firms
profit-maximizing quantity of output and explain how you determined
your answer. (d) Given your results in part (c), explain what will
happen to the number of firms in the industry in the long run. (e)
Assume that this firm operates in a constant-cost industry and has
reached long-run equilibrium. If the government imposes a per-unit
tax of $2, indicate what will happen to the firms profit-maximizing
output in the long run. 2. The table above gives the short-run
total cost function for a typical firm in a perfectly competitive
industry. (a) What is the dollar value of the firms total fixed
cost? (b) Calculate the marginal cost of producing the first unit
of output. Short-Run Total Cost Function Quantity Produced Total
Cost (in Dollars) 020 127 238 353 472 595 6122 Slide 82 Slide 83
2006 AP Micro FRQ A #3 (Unit 2&6: Supply and Demand &
Externality) (a)Redraw the graph above and show how an increase in
income will affect the equilibrium price and quantity of land
converted into residential development, assuming that land for
residential development is a normal good. (b)Redraw the graph above
and show how a decrease in government per-unit subsidies to farmers
will affect the equilibrium price and quantity of land converted
into residential development. (c)Assume that the conversion of
open-space land and farmland imposes costs on the general
population, which can no longer enjoy the scenic vistas.
(i)Indicate whether the marginal social cost of converting land is
greater than, less than, or equal to the marginal private cost of
converting land. (ii)Explain whether the private market quantity of
land converted into residential development is socially optimal. 3.
The supply and demand for land for residential development is shown
in the diagram above. The land supplied for such development comes
from privately held open-space land or privately held farmland.
Price QeQe Quantity of Land for Residential Development (Acres)
Demand Supply 0 PePe Slide 84 Slide 85 1. Assume that Clark
Electronics has a monopoly in the production and sale of a new
device for detecting and destroying a computer virus. Clark
Electronics currently incurs short-run losses, but it continues to
operate. (a) What must be true for Clark to continue to operate in
the short run? (b) Draw a correctly labeled graph, and show each of
the following for Clark. (i)The profit-maximizing price and output
(ii)Area of loss (c) Assume Clark is maximizing profit. What will
happen to its total revenue if Clark raises its price? Explain. (d)
If demand for the new device increases, explain what will happen to
each of the following in the short run. (i)Profit-maximizing output
(ii)Total cost 2006 AP Micro FRQ B #1 (Unit 4: Monopoly in Product
Market) Slide 86 Slide 87 2. Assume that the market for home
security systems is perfectly competitive and currently in
equilibrium. (a) Using a correctly labeled graph of supply and
demand, show each of the following. (i)The equilibrium price and
quantity, labeled as P* and Q*, respectively (ii)The area
representing consumer surplus, labeled as CS (iii)The area
representing producer surplus, labeled as PS (b) Suppose that the
government imposes an effective (binding) price ceiling. Redraw
your graph in part (a), and label the ceiling price as P2.
Completely shade the area representing the sum of the consumer
surplus and the producer surplus after the imposition of the price
ceiling. (c) Suppose the demand for home security systems decreases
and the price ceiling remains binding. Indicate what will happen to
each of the following. (i)Consumer surplus (ii)Producer surplus
2006 AP Micro FRQ B #2 (Unit 3: Perfect Competition in Product
Market) Slide 88 Slide 89 3. Pride Textiles produces and sells
towels in a perfectly competitive market. Pride Textiles hires its
workers in a perfectly competitive labor market. Assume that the
market wage rate for workers is $80 per day. (a) State the
conditions necessary for hiring the profit- maximizing amount of
labor. (b) At the profit-maximizing level of output, suppose that
the marginal product of the last worker hired is 20 towels per day.
Calculate the price of a towel. (c) Draw a correctly labeled graph
of the labor supply and demand curves for Pride Textiles, and show
the equilibrium amount of labor hired. (d) Given your answer to
part (b), if the price of a towel increases, explain how Prides
profit-maximizing quantity of labor will be affected. 2006 AP Micro
FRQ B #3 (Unit 5: Perfect Competition in Resource Market) Slide 90
Slide 91 1.Bestmilk, a typical profit-maximizing dairy firm, is
operating in a constant-cost, perfectly competitive industry that
is in long-run equilibrium. (a) Draw correctly labeled side-by-side
graphs for the dairy market and for Bestmilk and show each of the
following. (i) Price and output for the industry (ii) Price and
output for Bestmilk (b) Assume that milk is a normal good and that
consumer income falls. Assume that Bestmilk continues to produce.
On your graphs in part (a), show the effect of the decrease in
income on each of the following in the short run. (i) Price and
output for the industry (ii) Price and output for Bestmilk (iii)
Area of loss or profit for Bestmilk (c) Following the decrease in
consumer income, what must be true for Bestmilk to continue to
produce in the short run? (d) Assume that the industry adjusts to a
new long-run equilibrium. Compare the following between the initial
and the new long-run equilibrium. (i) Price in the industry (ii)
Output of a typical firm (iii) The number of firms in the dairy
industry 2005 AP Micro FRQ A #1 (Unit 3: Perfect Competition in
Product Market) Slide 92 Slide 93 (b) Assume that the tax is now
imposed. Based on the graph, does the price paid by the buyers rise
by the full amount of the tax? Explain. (c) Using the labeling on
the graph, identify each of the following after the imposition of
the tax. (i)The net price received by the sellers (ii)The amount of
tax revenue (iii)The area representing the consumer surplus (iv)The
area representing the deadweight loss 2005 AP Micro FRQ A #2 (Unit
2: Tax) 2. The graph above shows the market for a good that is
subject to a per-unit tax. The letters in the graph represent the
enclosed areas. (a) Using the labeling on the graph, identify each
of the following. (i) The equilibrium price and quantity before the
tax (ii) The area representing the consumer surplus before the tax
(iii) The area representing the producer surplus before the tax
Price($) 13 12 11 10 80 100 Quantity Demand Supply Supply +Tax A B
C D E F G 0 Slide 94 Slide 95 3. P & L is a profit-maximizing
shirt- manufacturing firm. The firm can sell all the shirts it can
produce to retailers at a price of $20 each. P & L can hire all
of the workers it wants at a market wage of $120 per day per
worker. The table below shows the firms short-run production
function. (a) In what kind of market structure does this firm sell
its output? How can you tell? (b) In what kind of market structure
does this firm hire its workers? How can you tell? (c) Calculate
the marginal revenue product of the third worker. Show your work.
(d) How many workers should the firm hire to maximize profit?
Explain. 2005 AP Micro FRQ A #3 (Unit 5: Resource Market) Number of
workers Number of Shirts per Day 00 110 225 345 460 572 680 785 882
Slide 96 Slide 97 Petsall Corporation is a profit-maximizing
monopolist. It sells a patented rabies vaccine for pets and earns
economic profits. (a) Draw a correctly labeled graph that shows
each of the following for Petsall. (i) Output and price of the
vaccine (ii) Area of economic profits (b) Assume that Petsall hires
its production workers in a perfectly competitive labor market at
the wage rate of $20 per hour. (i) State the marginal conditions
for hiring the profit-maximizing amount of labor. (ii) Draw a
correctly labeled graph that shows the labor supply and demand
curves for Petsall and indicate the profit-maximizing quantity of
labor. (c) Suppose that the market wage rate now falls to $15 per
hour. Show on your diagram in (b) (ii) how each of the following
would be affected. (i) The supply of labor to Petsall (ii) The
amount of labor Petsall would hire (d) Given the lower wage rate in
(c), indicate how each of the following would change. (i) Total
fixed cost (ii) Marginal cost (iii) Price of the product 2005 AP
Micro FRQ B #1 (Unit 4&5: Monopoly in Product & Resource
Market ) Slide 98 Slide 99 (b) Explain why curve 1 does each of the
following as output increases. (i) Initially decreases (ii) Finally
increases (c) What measure of cost is represented by the vertical
distance between curve 2 and curve 3? (d) Explain why the vertical
distance between curve 2 and curve 3 decreases as output increases.
(e) Using the letters on the graph, identify two points on the
firms short- run supply curve. 2005 AP Micro FRQ B #2 (Unit 3:
Perfect Competition in Product Market) 2. The graph above shows the
short-run cost structure of a firm in a perfectly competitive
industry. (a) Identify the cost curves that are denoted by each of
the following labels. (i) Curve 1 (ii) Curve 2 (iii) Curve 3 Slide
100 Slide 101 3. Assume that bread and butter are complementary
goods. The government begins to subsidize the production of wheat,
which is an input in the production of bread. (a) For each of the
following markets, draw correctly labeled supply and demand graphs
and show the effect of the subsidy on the equilibrium price and
quantity in the short run. (i)The wheat market (ii)The bread market
(iii)The butter market (b) If the demand for bread is price
elastic, how will total revenues for the bread producers change as
a result of the government subsidy? 2005 AP Micro FRQ B #3 (Unit 2:
Related Goods) Slide 102
