Answer to AP Problem on the back of Thursday’s Do Now:
This question was worth 5 points.
a. 2 pts: 1 point for identifying Q1 and P5 as the profit-maximizing quantity and price, 1 point for identifying line segment AC as the segment of the demand curve that is elastic.
b. 1 point: for identifying the allocatively efficient level of output at Q3
c. 2 points: 1 point for identifying a per unit subsidy to lead the monopolist to produce the allocatively efficient level of output, 1 point for the explanation that by imposing a per unit subsidy, MC will shift down, so the new MR = MC will be at a higher level of output closer to Q3.
Answer to Question #2 on yesterday’s homework packet (GCR Company):
This question was worth 12 points.
a. 4 points: 1 point is earned for correctly labeled axes and an MR curve below a downward sloping demand curve, 1 point is earned for showing profit-maximizing quantity (Q) where MR = MC, 1 point is earned for identifying price (P) on the demand curve above Q, 1 point is earned for showing that P > ATC at Q
b. 3 points: 1 point is earned for stating that the profit-maximizing quantity Q and price P will not change, 1 point is earned for the explanation that the lump sum tax will not affect MC, and 1 point is earned for concluding that profits will decrease.
c. 3 points: 1 point is earned for stating that quantity Q will increase and price P will decrease, 1 point is earned for explaining that the MC curve shifts down, and 1 point is earned for concluding that profits will increase.
d. 2 points: 1 point is earned for concluding that GCR’s profits will fall in the long run and 1 point is earned for stating that new firms will exit the market
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