Unit 2 Big Test

1. Unit 2 Big Test Scoring Guidelines – what I will be looking for – if I do not finish, then go to AP Central and find the questions

2. Question 1 Graphs to learn and love….

3. Question 1 – 12 point question • (a) 4 points • 1: correctly labeled market graph of the dairy industry • 1: correctly labeled equilibrium industry price and quantity • 1: drawing a horizontal demand curve for Bestmilk at the market price • 1: equilibrium quantity for Bestmilk where price =MC and ATC • (b) 4 points • 1: decrease in market demand • 1: decrease in equilibrium market price and quantity • 1: change to a new lower profit maximizing price and quantity for Bestmilk • 1: shading the area of loss for Bestmilk • (c) 1 point • 1 P is greater than or equal to AVC, or TR is greater than or equal to TVC or P is greater than AVC or TR>TVC or losses are less than total fixed cost • (d) 3 points • 1: industry price returns to the original long run equilibrium price • 1: output of a typical firm returns to the original profit maximizing quantity • 1: decrease in the number of firms

4. Question 2 graphs

5. Question 2 – 10 points • Find the graphs on line • (a) 4 points • 1: graph of corn market (S,D, P-M1 and Q-M1) • 1: firm with horizontal demand curve at P-M1 • 1: profit maximizing quantity Q –F1 at MC=MR • 1: minimum ATC on the horizontal demand curve at Q – F1 • (b) 1 point- demand curve for Farmer Roy’s is perfectly elastic because he is a price taker • (c) 4 points • Shift demand market demand curve to the right and showing P-M2 and Q-M2 • Shifting the firm’s demand curve upward to the level of P-M2 • Profit maximizing quantity Q-F2 at MC = new MR • ATC at Q – F2 is lower than P-M2 • (d) 1 point – equilibrium quantity will decrease and the equilibrium price will increase – increase in the price of corn causes a decrease in the supply of cereal

6. Question 3 graph

7. Question 3 = 10 points • (a) 1 point – identifying profit maximizing price as $24 • (b) 1 point – identifying profit per unit as $6 • (c) 1 point – allocative efficiency is not achieved because price is not equal to MC or MC does not equal demand • (d) 1 point – demand is inelastic since TR increases as price increases from $16 to $18; price elasticity of demand within the price range is less than one • (e) 2 points – • Monopolist is not earning economic profit because P=ATC • Monopolist is earning positive accounting profit • (f) 2 points • MR of 8th unit is $22 • 9 units will be produced • (g) 2 points • State units will be produced • Consumer surplus is 0

9. Question 5 – 7 point question • (a) 1 point: TFC is $20 • (b) 1 point: MC of the first unit is $7 • (c) 2 points • Profit maximizing output = 4 units (or between 4 and 5 units) • MR>MC for all units until Q=5 (or direct calculation of TR-TC) • (d) 2 points • Number of firms will increase • Profits attract new firms to enter the industry • (e) 1 point – no change in the profit maximizing output

10. Question 6: 5 points • (a) 1 point • Marginal utility is the extra satisfaction received from consuming an additional unit of a good/service • (b) 2 points • Mandy should purchase more fudge and less coffee • Per dollar MU for fudge is greater than the per dollar MU for coffee • (c ) 2 points • Price elasticity of demand for Good R is zero • None of the tax will be paid by the seller of a good R or that buyers will pay all of the tax

11. Question 7: 6 points • (a) 1 point – (1/2) x $3x90=$135 • (b) 3 points • Tax revenue: $2 x 60 = 120 • After tax price received by sellers: $4 • Producer surplus: (1/2) x $2x60=$60 • (c) 1 point – demand price is elastic and showing calculation of the elasticity coefficient using endpoint method – TR revenue formula • (d) 1 point– market is no longer allocatively efficient and that the total surplus decreases or the tax creates a dead weight loss

12. Question 8: 6 points • (a) 1 point – oligopoly – only two firms and mutually interdependent • (b) 1 point – Rankin Wheels will choose early departure • (c) 1 point – Roadway’s dominant strategy is early departure • (d) 2 points – • 1: early departure is not a dominant strategy for Rankin Wheels • 1: Roadway chooses late departure, Rankin Wheels is better off choosing a late departure • (e) 1 point – identifying $900 as Rankin Wheels daily profit

13. Question: Demonstrate…

14. Demonstrate Question • (a) 3 points • Price charged will remain the same as price is determined by the market and not the firm • Quantity produced will increase as costs are lowered and revenue remains the same, shifting the MC=MR intersection to a new, higher level of output • Profits will increase as cost per unit is lowered and revenue per unit remains the same • (b) 3 points • As new firms will enter the industry because of the economic profit, this will increase Supply in the market and drive the price down • Equilibrium quantity will increase as supply as increased • Profits of individual firms will return to normal (zero) as a new long run equilibrium is established • (c) 1 point • Price and quantity will increase as demand for the product increases, establishing a new equilibrium • (d) 1 point – firms will experience short run economic profits • (e) 1 point – new firms will enter the market in the long run and decrease the price as supply increases, reestablishing a new long run equilibrium for firms at which they earn normal/zero profits

15. Question 2: identify curves • (a) 2 points • Curve 1 – Marginal Cost • Curve 2 – ATC • Curve 3 – AVC • Curve 4 - AFC • (b) 1 point – it is not possible to determine the market structure form cost information alone • (c) 1 point – any price above point 6 could exist in the short run as this would maximize profit (minimize losses). If price falls below minimum AVC, the firm will minimize losses in the short run by shutting down • (d) 1 point • The only price that could exist in the long run is at point 5, as this is the break even or normal profit price

16. Consumer and Producer Surplus • (a) – 1 point – consumer surplus would be A,B,F • (b) – 1 point – producer surplus would be C,D, G • (c) – 1 point – total surplus would be A, B,C,D,F,and G • (d) – 2 points • An effective price ceiling would have to be set below the equilibrium price. In this case $15. If a price ceiling was set above equilibrium price it would have no effect on the actual price. • (e) 3 points • New consumer surplus: A,B,C • New producer surplus: D • New total surplus: A, B, C and D

17. Karen and Lauren • (a) 1 point - Oligopoly • (b) 2 points • Karen and Lauren would both pursue a low price strategy. This is the Nash equilibrium. Each will maximize profits by choosing a lower price strategy over a higher price strategy at each pricing combination • (c) 2 points • Karen has a dominant strategy as her best strategy – low price regardless of what strategy Lauren pursues • (d) 2 points • Lauren has a dominant strategy as her best strategy of low price regardless of what strategy Karen pursues • (e ) 1 point – they would both pursue a high price strategy as this would result in the largest profits for both firms

18. Chase Company question

19. Chase Company • (a) 2 points • Graph labeled firm (all labels must be present) • Show P* and Q* on your graph • (b) – 2 points • Draw an industry graph (all labels) • Show P* and Q* • (c) 2 points • Demand increases, see the graph above • Increase, output increases and profit increases – show on graph above • (d) 2 points • New firms will enter the industry resulting in an increase in market supply. The increase in supply will lower the market equilibrium price. The market received by firms will decrease resulting in a return to a new break even long run equilibrium.