Learn Extracted exam questions AP Microeconomics 2021 Free Response · Set 2
2021 Free Response · Set 2
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NCHart is a corporation that has developed and patented a new drug to treat heart disease. There are no substitutes for this drug, giving NCHart a monopoly.
Draw a correctly labeled graph of NCHart making a positive economic profit, and show each of the following.
The profit-maximizing quantity, labeled $Q_m$
Draw a correctly labeled graph of NCHart making a positive economic profit, and show each of the following.
The profit-maximizing price, labeled $P_m$
At $Q_m$ from part (a)(i), is demand elastic, unit elastic, or inelastic? Explain using information from the graph.
Instead of maximizing profit, suppose NCHart considers providing the new drug to as many patients as possible as long as it can generate enough revenue to cover its total costs.
On your graph from part (a), show the quantity that is consistent with this goal, labeled $Q_z$.
At $Q_z$ from part (c)(i), is there a deadweight loss? Explain.
NCHart's patent expires next year, and a new firm, TXDrug, is considering whether to Enter this market or Stay Out. NCHart can either produce $Q_m$ or $Q_z$. The firms independently and simultaneously choose their actions. The first entry in the payoff matrix represents NCHart's payoff and the second entry represents TXDrug's payoff. Both firms have complete information. Use the payoff matrix below to answer the following questions.
[Payoff matrix: rows = NCHart's choice ($Q_m$ or $Q_z$), columns = TXDrug's choice (Stay Out or Enter). Column header "TXDrug" spans both columns; row header "NCHart" spans both rows.]
| NCHart \ TXDrug | Stay Out | Enter |
|---|---|---|
| $Q_m$ | $10, $0 | $4, $1 |
| $Q_z$ | $0, $0 | -$2, -$1 |
Does TXDrug have a dominant strategy? Explain using strategies and payoffs from the payoff matrix.
Use the payoff matrix from part (d):
| NCHart \ TXDrug | Stay Out | Enter |
|---|---|---|
| $Q_m$ | $10, $0 | $4, $1 |
| $Q_z$ | $0, $0 | -$2, -$1 |
What is the best response for NCHart if TXDrug chooses to Stay Out?
Use the payoff matrix from part (d):
| NCHart \ TXDrug | Stay Out | Enter |
|---|---|---|
| $Q_m$ | $10, $0 | $4, $1 |
| $Q_z$ | $0, $0 | -$2, -$1 |
Identify the Nash equilibrium.
Copper is produced in a perfectly competitive market with an upward-sloping supply curve and a downward-sloping demand curve. Assume the production of copper results in liquid waste, which seeps into local rivers. The contaminated river water causes human illnesses and crop failures downstream. The marginal external cost from producing copper is constant across all quantities of copper produced.
Draw a correctly labeled graph of the copper market with the marginal social benefit (MSB), marginal private benefit (MPB), marginal social cost (MSC), and marginal private cost (MPC) curves, and show each of the following.
The market equilibrium quantity, labeled $Q_M$
Draw a correctly labeled graph of the copper market with the marginal social benefit (MSB), marginal private benefit (MPB), marginal social cost (MSC), and marginal private cost (MPC) curves, and show each of the following.
The socially efficient quantity, labeled $Q_S$
Suppose the demand for copper decreases. On your graph in part (a), show the deadweight loss at the new market equilibrium, shaded completely.
Suppose the government is considering levying a tax on copper.
What per-unit tax level would achieve the socially optimal quantity?
Explain why a lump-sum tax on producers will not achieve the socially optimal quantity in the short run.
The table below shows the total cost and total benefit of advertisements placed by AZY Foods, a firm in the retail food market.
| Number of Advertisements | Total Cost ($) | Total Benefit ($) |
|---|---|---|
| 1 | 300 | 1,200 |
| 2 | 500 | 2,200 |
| 3 | 800 | 3,000 |
| 4 | 1,300 | 3,600 |
| 5 | 2,100 | 4,000 |
| 6 | 3,000 | 4,200 |
| 7 | 4,100 | 4,200 |
Calculate the total net benefit of placing three advertisements. Show your work.
Calculate the marginal net benefit of the third advertisement. Show your work.
What is the optimal number of advertisements placed by AZY Foods? Explain using marginal analysis.
Suppose over the next year the marginal benefit that AZY Foods receives from each advertisement increases by $300. Identify the optimal number of advertisements.
There are many firms in the retail food market. Each firm places its own firm-specific advertisements without considering the actions of its competitors. In what market structure is AZY Foods operating?