Answers to Study Guide and Price Controls Handout

Study Guide Answers:

1. None because above the equilibrium price.

2. QD increases to 55, QS decreases to 40, resulting in a shortage of 15 bikes.

3. No because of the shortage.

4. QD falls to 40, QS rises to 70, resulting in a surplus of 30 bikes.

5. No impact because equilibrium price is already obeying the law.

6. Shortage, price falls, QD rises, QS falls.

7. Shortage, sellers worse off because the price is lower, some buyers are worse off because they can’t buy the good due to the shortage.

8. No impact because equilibrium price is already obeying the law.

9. Surplus, price rises, QD falls, QS rises.

True/False.

1. False, no impact.

2. False, a shortage.

3. True

4. False, some teens won’t be able to find a job due to the surplus of available workers.

5. False, only if the price floor is set above the equilibrium price.

Multiple Choice

1. B

2. A

3. D

4. B

5. C

6. C

7. E

8. A

9. C

10. E

11. D

12. A

Answers to Price Controls Handout

1. Market for cheese:

a. Binding price floor: set above equilibrium price.  Price rises, quantity of cheese sold falls.  Surplus.

b. Yes because they lost customers, so even though price is higher, they’ve lost too many buyers to sustain their revenue.

c. Farmers benefit.  Government loses.

2. Market for Frisbees:

a. $8, 6 million Frisbees

b. $10, 2 million Frisbees sold

c. Price ceiling of $9 is above the market equilibrium price of $8; therefore, we return to equilibrium because the new price ceiling is ineffective/non-binding.  6 million Frisbees will be sold at $8 each.

3. Market for labor and minimum wage:

a. Employment will decrease, wages of employed workers will increase.

b. Unemployment will increase (surplus of labor).

Advertisements

Friday, September 30th, 2011

Answers to the PPF problems at the end of the review packet:

Germany and Poland problem:

This is an output problem (Foregone item goes on top!)

Germany: 1500 computers, 500 tons of grain opportunity cost of computers (forego grain): 1/3 tons of grain, opportunity cost of grain (forego computers): 3 computers

Poland: 400 computers, 400 tons of grain, opportunity cost of computers (forego grain): 1 ton of grain, opportunity cost of grain (forego computers): 1 computer

In your PPF make sure you have the following:

-title

-axes labeled

-straight line frontiers

-frontiers labeled for each country

-numbers for amounts produced (Germany: 1500 computers, 500 tons of grain, Poland: 400 computers, 400 tons of grain)

Absolute advantage in computers: Germany (greater number of outputs with the same number of inputs)

Comparative advantage in grain production: Poland because the opportunity cost of producing grain is less for Poland than it is for Germany

If Poland could only produce one ton of grain/worker (100 tons of grain total), Poland’s opportunity cost of production would change.  The opportunity cost of producing computers for Poland would be 1/4 tons of grain.  The opportunity cost of producing grain is 4 computers.  Therefore, Poland would now have a comparative advantage in computer production because the opportunity cost of producing computers is less than Germany’s.

 

Argentina and Peru problem:

Argentina has a comparative advantage in beef production (opp. cost of beef is 1/2 fruit compared to Peru’s 1 fruit).

Peru will export fruit because it has a comparative advantage in fruit production (opportunity cost of fruit production is smaller for Peru than it is for Argentina).

The price of fruit, measured in beef, is between 1 and 2 metric tons of beef.

Absolute advantage in beef: Argentina because it can produce more beef with the same amount of inputs as Peru.

AP Microeconomics Summer Assignment

AP Microeconomics Summer Assignment

Congratulations, and welcome to the wonderful world of economics!! As a student in next year’s class, you are also the lucky recipient of a summer assignment giving you a preview of the topics we will focus on in the coming school year. Below, you will find the details of this assignment. My email address is rstern2@boston.k12.ma.us should you need to contact me for any reason.

Your task:
• Read the assigned chapters from the book, Naked Economics: Undressing the Dismal Science by Charles Wheelan.
• Answer the accompanying questions about the reading.
• For each section, please write one question related to the reading that you would like answered.

***Make sure to acquire the fully revised and updated 2010 version of the book!!!! ***

Written responses to the questions below must be turned in on Friday, September 16th, 2010.
Responses must be written in complete sentences and must be typed, double-spaced, 12 point Times New Roman font with standard margins. For each response, you must support your answer with specific evidence from the book.

Foreword by Burton G. Malkiel

1. The study of economics has often been criticized for a variety of reasons. What are those reasons?

2. The influence of economics is present in many business, financial, and government communities. What are some institutions and agencies that rely on economics in some significant way?

Introduction

3. Give one example of a politician (in the United States or abroad) who has failed to understand economics and as a result, failed to understand how to solve a problem society faces.

Chapter 1: The Power of Markets

4. What does it mean to “maximize your utility?”

5. What are some “barriers to entry” that make it so only seller can provide a good or service? Why are barriers to entry important?

6. What is meant by “price discrimination?” Why do you think airlines are able to price discriminate?

7. What does Wheelan mean when he says the market economy operates as an “amoral force?”

8. Besides prices, what is another way that firms can compete in order to outperform their competition?

9. According to Wheelan, what makes markets a good way to organize economic activity?

Chapter 2: Incentives Matter

10. What problem do communal resources present, as compared to privately owned resources?

11. Why do incentives matter? Use an example from the book as well as from your own life to explain your response.

12. The law of unintended consequences states that “actions of people – and especially of government – always have effects that are unanticipated or unintended” (The Concise Encyclopedia of Economics). While important to recognize, politicians often fail to understand its significance. Provide one example mentioned in the reading that illustrates this point.

13. “Capitalism can be a brutal, cruel process…But ‘creative destruction’ (Joseph Schumpeter) is a tremendous positive force. Competition means losers, which goes a long way to explain why we embrace it in theory and fight it bitterly in practice.” Explain this statement, and give an example.

Chapter 3: Government and the Economy

14. What positive and negative externalities are associated with cigarette smoking? Can you make the case that the positives outweigh the negatives?

15. What makes taxation a good solution the problem of negative externalities?

16. List all of the ways that government is essential in order for a market economy to operate successfully.

You are an AP student. Lesson # 1: Do Not Procrastinate!

Monday, March 14th, 2011

Answers to the Market Structures Study Review Guide:

1. close substitutes

2. owns a key resource

3. Natural monopoly

4. no resale of good, market power, and the ability to separate customers according to their willingness to pay.

5. deadweight loss and consumer surplus

6. Collusion

7. Prisoners’ dilemma

8. dominant strategy

9. figure out what the dominant strategy is for the player that has one and then choose the best option given that information.

10. interdependent

11. tacit collusion

12. differentiated (similar but not identical)

13. socially/allocatively

14. productively

15. ease of entry/exit

16. left

17. legal services in a big city

18. ATC curve at Q

19. lose

20. lump sum tax

21. per unit subsidy

22. Organization of Petroleum Exporting Countries

23. MR = MC

24. implicit costs (normal profit)

25. normal profit

AP Open Response 2001 (Game Theory Question):

a. Oligopoly because they are two firms selling similar products that are interdependent

b. Evening

c. Morning

d. No because if Windward chooses morning, Airtouch should choose morning, but if Windward chooses evening, Airtouch should choose evening.

e. $700

AP Open Response 2004 #3 (Monopolistic Competition question):

a. 1 pt for a graph with a downward-sloping demand curve with correctly labeled axes

1 pt for downward-sloping marginal revenue curve below the demand curve

1 pt for Q found where MR = MC and P from demand directly above Q

1 pt for long-run equilibrium, ATC tangent to demand at Q

b. 1 pt for individual firm’s output level does not change

1 pt for the explanation that a license fee is a fixed cost, thus it does not affect the firm’s marginal cost.

1 pt for stating economic profits increase

1 pt for explanation that if fixed cost is decreased, ATC decreases.

Wednesday, January 26th, 2011

Answers to the midterm study review guide:

1. B

2. D

3. D

4. E

5. A

6. D

7. D

8. B

9. A

10. C

11. D

12. A

13. A

14. E

15. C

16. B

17. A

18. A

19. B

20. D

21. B

22. C

23. A

24. D

25. C

Tuesday, December 7th, 2010

Answers to the Practice Problems from class:

1. a. There is no deadweight loss if no tax has been imposed.  Deadweight loss only occurs when the market is no longer in equilibrium.

1. b. Consumer surplus decreased.   Produced surplus decreased.  Tax revenue increased (from zero before the tax). Deadweight loss increased (from zero before the tax).

2. a. False; if a tax is imposed on sellers, and the supply curve is perfectly elastic, there will be no tax revenue, but there will be deadweight loss.  All sellers would leave the market due to the tax, thus leaving no revenue for the government to collect (can’t collect revenue if nothing is being sold).  Since all the sellers left the market, there can’t be any buyers either; thus, there is deadweight loss reflected in the loss of all of the participants in the market.

3. a. False; if a tax is imposed on sellers, and the demand curve is perfectly inelastic, there is no deadweight loss, but there is tax revenue.  If the tax shifts the supply curve to the left, because the demand is perfectly elastic, there is no loss in quantity bought/sold.  All of the tax burden is on the buyer.  There is tax revenue collected (Pb-P1)(Q), and there is no deadweight loss.

4. a. Most of the burden is on the demand because it is more inelastic.

4. b. Most of the burden is on the supply because it is more inelastic.

5. a. The deadweight loss would be greater in the 5th year because oil becomes more elastic over the long run.  Deadweight loss is greater the more elastic the market is.

5. b. The tax revenue would be greater in the 1st year because oil is inelastic in the short run (for both buyers and sellers).  Since people are still forced to buy the oil, you would not lose much quantity bought/sold, even with the increase in price to buyers. 

6. Taxing food is a good way to raise revenue because demand is very inelastic, so there would not be a lot of deadweight loss.  Some people would greatly oppose such a tax on food because they would say it is highly inequitable (disproportionately taxes the poor more than the rich).

7. a. Because of such a high tax rate, quantity would fall dramatically, and tax revenue would be very small (very elastic good).

7. b. Senator Moynahan probably wants to reduce/prevent the use of hollow-tipped bullets rather than make them illegal.

Answers to the study review guide:

1. a. Trip to Florida (luxury)

1. b. Next five years (time – long run)

1. c. Coca-Cola (definition of the market  – narrow)

1. d. aspirin (availability of close substitutes)

3. Same (each respond to the price change by reducing qd by 4 units).

4. Necessities – usually along the highway for motorists desperately in need of lodging.  (Hotels are more luxury lodging.)

5. a. Televisions (flexibility of sellers to increase production)

5. b. Next year (time – long run)

5. c. Print painting (flexibility of sellers to increase production)

6. Necessities vs. luxuries, availability of close substitutes, definition of the market, time.

7. Raise total revenue.  (Elasticity arrow matrix)

8. Zero (perfectly inelastic, no change in qd).

9. Indeterminate (perfectly elastic).

10. -0.5, inferior goods because negative IED.

11. Elastic because can increase production relatively easily.

12. Becomes more elastic (fish goes bad quickly, so people won’t want to buy it as much after time has passed).

13. False; elastic

14. True

15. False; more elastic this year

16. False: % change in qd/ % change in price

17. True

18. False; inelastic

19. True

20. True

21. True

22. True

23. False

24. True

25. False; inferior

26. True

27. True

28. D

29. C

30. B

31. B

32. A

33. D

34. E

35. C

36. B

37. A

38. D

39. B

40. Mistake, answer is E. E + F

41. D

42. C (most elastic)

43. A

44. D

Tuesday, November 30th, 2010

Answer to problem about illegal drugs:

1. Supply curve shifts because the US government is devoting billions of dollars each year to reduce the flow of drugs into the country.

2. Supply curve shifts to the left to reduce the amount of illegal drugs produced.

3. Price increases, quantity decreases.

4. Demand for illegal drugs is inelastic because drug users are addicted and therefore see the drugs as necessities.  Supply is also inelastic because it takes a considerable amount of time to produce more, so sellers cannot respond to a price change quickly.  Given this information, the graph should illustrate two mostly vertical lines.  When the supply shifts to the left, price increases dramatically, but quantity only falls slightly.  The large price increase, coupled with the addicted users, leads to an increase in drug-related crime as addicts resort to crime to pay for their habit.  Total revenue for sellers continues to increase, even with the reduction in supply, because of the inelastic demand for the product.

5. Drug-related crime increases because price has gone up so much, and addicts still need the drugs.

6. Rather than the supply curve shifting left, the demand curve would shift to the left instead as policymakers reduce the demand through drug education.  As a result, price would decrease, and quantity would decrease.  With a price decrease, sellers of illegal drugs would not make as much money and would lose total revenue.  This change might create an incentive to leave the drug market altogether.  There would also be a reduction in drug-related crime as a result of a price decrease.