Learn Extracted exam questions AP Microeconomics 2015 Free Response
2015 Free Response
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A typical profit-maximizing firm in a perfectly competitive constant-cost industry is earning a positive economic profit.
Is the market price greater than, less than, or equal to the firm's price? Explain.
Draw correctly labeled side-by-side graphs for both the market and a typical firm and show each of the following.
Market price and quantity, labeled $P_m$ and $Q_m$
The firm's quantity, labeled $Q_f$
The firm's average revenue curve, labeled AR
The firm's average total cost curve, labeled ATC
The area representing total cost, shaded completely
If one firm in the market were to raise its price, what will happen to its total revenue? Explain.
Now suppose the market is in long-run equilibrium. The government gives a lump-sum subsidy to each firm producing in the industry. Indicate whether each of the following will increase, decrease, or remain the same.
The firm's quantity in the short run. Explain.
The market price and quantity in the long run. Explain.
Breadbasket and Quicklunch are the only two sandwich shops serving a small town. Each shop can choose to set a high price or a low price for sandwiches. The payoff matrix below shows the daily profits for each combination of prices that the two shops could choose. The first entry shows Breadbasket's profits, and the second entry shows Quicklunch's profits. Assuming that both shops know the information shown in the matrix, answer the following.
[Payoff matrix titled "Quicklunch" across the top with columns "High Price" and "Low Price"; rows labeled "Breadbasket" with row headers "High Price" and "Low Price". Cell values are (Breadbasket's profit, Quicklunch's profit):]
| Quicklunch: High Price | Quicklunch: Low Price | |
|---|---|---|
| Breadbasket: High Price | $105, $110 | $40, $130 |
| Breadbasket: Low Price | $120, $80 | $75, $70 |
Does each shop have a dominant strategy to set a high price, a dominant strategy to set a low price, or does it have no dominant strategy?
Breadbasket
Quicklunch
If the two shops do not cooperate on setting prices, what will be the profit for each shop?
Breadbasket
Quicklunch
The town government is concerned that food prices are too high. It decides to give a daily subsidy of $20 to any shop that chooses to set a low price for its food items. Redraw the payoff matrix under the government subsidy system.
Using your redrawn payoff matrix, answer each of the following.
Would Quicklunch choose to set a high price or a low price? Explain using specific values from your redrawn matrix.
Would the profits for Breadbasket increase, decrease, or stay the same? Explain with a comparison to your answer in part (b)(i). Use the specific values.
The graph below shows the market for widgets. The government is considering intervening in this market.
[Graph of the market for widgets; x-axis "Quantity" from 0 to 32 (gridlines every 2 units); y-axis "Price" from $0 to $40 (gridlines every $10, with intermediate gridlines implied every $2 based on the grid). A downward-sloping line labeled "Demand" runs from approximately $(0, \$38)$ through $(10, \$30)$, $(20, \$20)$ to about $(32, \$8)$ — reading the plotted points, Demand passes through $(0, 38)$ and $(20, 20)$, i.e. price falls as quantity rises. An upward-sloping line labeled "Supply" runs from the origin $(0, \$0)$ through $(10, \$10)$, $(20, \$20)$, to $(30, \$32)$ approximately — Supply passes through the origin and $(20, 20)$. The two lines intersect at the equilibrium point $(20, \$20)$, i.e. equilibrium price = $20 and equilibrium quantity = 20.]
Calculate the total producer surplus at the market equilibrium price and quantity. Show your work.
If the government imposes a price floor at $16, is there a shortage, a surplus, or neither? Explain.
If instead the government imposes a price ceiling at $12, is there a shortage, a surplus, or neither? Explain.
If instead the government restricts the market output to 10 units, calculate the deadweight loss. Show your work.
Assume the price decreases from $20 to $12.
Calculate the price elasticity of demand. Show your work.
In this price range, is demand perfectly elastic, relatively elastic, unit elastic, relatively inelastic, or perfectly inelastic?