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).

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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.

Monday, October 4th, 2010

Test tomorrow on the first unit!!!

Answer key to the practice problem on Argentina and Peru:

1. Opp cost of beef (forego fruit) for Argentina: 1/2 fruit

Opp cost of beef (forego fruit) for Peru: 1 fruit

Opp cost of fruit (forego beef) for Argentina: 2 beef

Opp cost of fruit (forego beef) for Peru: 1 beef

Argentina has a comparative advantage in beef.  (Peru has a comparative advantage in fruit.)

2. Peru will export fruit because it exports the item for which it has a comparative advantage, and it has a comparative advantage in fruit.

3. Between 1 to 2 metric tons of beef/month.

4. Argentina has an absolute advantage in beef production because it can produce more beef with the same inputs as Peru.

Monday, September 27th, 2010

Reminder AP Micro Students: You have a quiz on PPFs, comparative and absolute advantage on Wednesday!  I will be available after school on Monday from 2-3:30 and on Tuesday from 2:30-3:30 for anyone who would like extra help.

Answers to handout entitled, “Practice Problems: Production Possibilities and Trade” (what you were working on in class):

1. a. Wheat: neither,  Cloth: Country B because it can produce 300 yards of cloth, and Country A can only produce 100 yards of cloth.

b. Country A has the comparative advantage in wheat, Country B has the comparative advantage in cloth.

c. Country B should import wheat because it produces (and will export) cloth.

d. Country B is importing wheat.  Since two yards of cloth is less than Country B’s opportunity cost of producing wheat (3 yards of cloth), Country B gains from trade.

2. Absolute advantage shows who has the ability to produce using the least amount of inputs (or greater amount of outputs).  Comparative advantage shows who has the ability to produce using the lower opportunity cost.  Use comparative advantage for determining trade patterns.

SKIP # 3.

4. THIS IS AN IB PROBLEM.  Given that Diane has the comparative advantage in calculations, and it takes Diane 12 hours to complete the calculations, it will take 12 hours to complete calculations.  Given that Gary has the comparative advantage in slides, and it takes Gary 10 hours to complete the slides, it will take 10 hours to complete the slides.  The total amount of hours to complete the project is 22 hours.

Answers to the Multiple Choice and True/False homework assignment:

1. D

2. A

3. D

4. A

5. D

6. A

7. C

8. B

9. C

10. SKIP

11. A

12. D

13. A

14. B

15. C

16. A

17. False (absolute should be comparative)

18. False (absolute should be comparative)

19. True