AP Microeconomics-øveprøve: enhed 1 til 6

• A. 2 hours
• B. 3 hours
• C. 4 hours
• D. 5 hours

Svar: B. 3 hours

Keep adding hours while the marginal benefit is at least the marginal cost. Hours 1, 2 and 3 are worth $40, $32 and $24, all above the $18 cost, so each adds to net benefit. Hour 4 is worth $16, which is less than $18, so it would reduce net benefit. The best choice is 3 hours. Total benefit keeps rising through hour 5, but the goal is the largest benefit minus cost, not the largest benefit.

• A. The quantity demanded of coffee rises along the existing demand curve, and the equilibrium price is unchanged
• B. The supply of coffee falls, so the equilibrium price rises and the quantity falls
• C. The demand for coffee increases, so the equilibrium price and the quantity both rise
• D. The demand for coffee decreases, so the equilibrium price and the quantity both fall

Svar: C. The demand for coffee increases, so the equilibrium price and the quantity both rise

When tea gets more expensive, some tea drinkers switch to coffee at every coffee price. That is a rightward shift of the coffee demand curve, which raises both the equilibrium price and the equilibrium quantity. The first option confuses a shift with a movement along the curve: the price of tea is not on the coffee axis, so it shifts the curve. Nothing in the story changes how coffee is produced, so supply does not move.

• A. Demand is inelastic, and total revenue rises
• B. Demand is elastic, and total revenue falls
• C. Demand is unit elastic, and total revenue is unchanged
• D. Demand is inelastic, and total revenue falls

Svar: A. Demand is inelastic, and total revenue rises

The price rises 2/10 = 20 percent and the quantity falls 15/100 = 15 percent, so the price elasticity of demand is 15/20 = 0.75. That is below 1, so demand is inelastic: buyers respond less than proportionally. When demand is inelastic, a price increase raises total revenue. It was 10 x 100 = $1,000 and is now 12 x 85 = $1,020. The midpoint method gives about 0.89, which is still inelastic.

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• A. Quantity demanded exceeds quantity supplied by 80 units
• B. The number of units actually bought and sold falls to 60
• C. Consumer surplus is certain to increase
• D. A deadweight loss appears
• E. The market quantity stays at 100 because the price signal still works

Svar: A. Quantity demanded exceeds quantity supplied by 80 units, B. The number of units actually bought and sold falls to 60, D. A deadweight loss appears

At $5 buyers want 140 units and sellers will only supply 60, a shortage of 80. Trade can only happen on the short side of the market, so 60 units are sold, not 100. The 40 units that would have been traded at $8 are lost, and the surplus on them disappears, which is a deadweight loss. Consumer surplus is not certain to rise: the buyers who get a unit pay less, but other buyers lose the units they would have bought, so the net effect depends on how responsive supply is. The quantity does not stay at 100, because the ceiling stops the price from rising.

A $3 per-unit tax is placed on sellers of a good whose price was $10 before the tax. After the tax, buyers pay $12 and sellers keep $9 on each unit after paying the tax. Buyers bear _____ of the tax on each unit, and because buyers bear the larger share, demand is _____ than supply.

Muligheder for felt 1: $1, $2, $3, $12

Muligheder for felt 2: less elastic, more elastic, equally elastic

Svar: $2, less elastic

Buyers went from paying $10 to paying $12, so they bear $2 of the $3 tax. Sellers went from receiving $10 to keeping $9, so they bear the other $1. The two shares add up to the tax. The side of the market that is less elastic cannot easily walk away from the good, so it ends up with the larger share. Buyers bear more, so demand is less elastic than supply.

• A. The first worker
• B. The second worker
• C. The third worker
• D. The fourth worker

Svar: C. The third worker

Marginal product is the change in total output from one more worker: 10, 15, 12, 8 and 5. It rises for the second worker, which is increasing returns from specialization, and then falls for the first time with the third worker (12 is less than 15). Diminishing marginal returns begin there. Total output keeps rising through the fifth worker, but that does not matter: diminishing returns means the additions get smaller, not that output falls.

• A. Marginal cost is $24, which is above the average total cost of $20, so average total cost rises
• B. Marginal cost is $24, but average total cost still falls because the extra unit spreads the fixed cost
• C. Marginal cost is about $20.19, so average total cost does not change
• D. Marginal cost is $424 divided by 21 units, so average total cost falls

Svar: A. Marginal cost is $24, which is above the average total cost of $20, so average total cost rises

Marginal cost is the change in total cost from one more unit: 424 - 400 = $24. Average total cost at 20 units is 400/20 = $20. When marginal cost is above average total cost, the extra unit pulls the average up, so average total cost rises, to about $20.19 at 21 units. Spreading fixed cost over more units is real, but it is already inside the average. The rule to remember is that the marginal curve pulls the average toward itself.

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• A. Price is greater than marginal cost
• B. Price equals marginal cost
• C. Price equals the minimum of average total cost
• D. Each firm earns zero economic profit
• E. New firms keep entering the market

Svar: B. Price equals marginal cost, C. Price equals the minimum of average total cost, D. Each firm earns zero economic profit

A competitive firm maximizes profit where price equals marginal cost, and in the long run entry and exit push the price down to the minimum of average total cost. At that price each firm covers all its costs, including the owner's opportunity cost, so economic profit is zero. Price is not above marginal cost, because the firm is a price taker and produces until the two are equal. Entry stops at this point: new firms enter only while economic profit is positive, and leave while it is negative.

A perfectly competitive firm faces a market price of $12. At 50 units, where marginal cost is $12, the average total cost is $14 and the average variable cost is $10. In the short run the firm should _____, and its economic profit is _____.

Muligheder for felt 1: shut down, produce 50 units, produce more than 50 units, raise its price to $14

Muligheder for felt 2: a profit of $100, a loss of $100, a loss of $200, zero

Svar: produce 50 units, a loss of $100

The firm is a price taker, so it cannot raise its price, and it maximizes profit at the quantity where price equals marginal cost, here 50 units. Price ($12) is above average variable cost ($10), so selling covers the variable cost and contributes $2 per unit toward the fixed cost. The loss is (14 - 12) x 50 = $100. If the firm shut down it would still owe the fixed cost, which is (14 - 10) x 50 = $200, so staying open loses less. It would shut down only if price fell below average variable cost.

• A. $1,800
• B. $3,000
• C. $800
• D. $2,200

Svar: C. $800

Profit is (price - average total cost) x quantity = (30 - 22) x 100 = $800. Total revenue is $30 x 100 = $3,000 and total cost is $22 x 100 = $2,200, and the difference is the same $800. The value $1,800 comes from using marginal cost, (30 - 12) x 100, which is not profit. Marginal cost tells the monopolist how much to produce, and the price is read off the demand curve at that quantity.

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• A. Price is greater than marginal revenue
• B. The marginal revenue curve lies above the demand curve
• C. Price is greater than marginal cost at the profit-maximizing quantity
• D. Output is higher than the allocatively efficient output
• E. It can keep earning positive economic profit in the long run if barriers to entry remain

Svar: A. Price is greater than marginal revenue, C. Price is greater than marginal cost at the profit-maximizing quantity, E. It can keep earning positive economic profit in the long run if barriers to entry remain

To sell one more unit a monopolist must cut the price on every unit, so marginal revenue is below price and the marginal revenue curve lies below the demand curve, not above it. The monopolist produces where marginal revenue equals marginal cost, and the price on the demand curve at that quantity is higher than marginal cost. That makes output lower than the efficient level, where price equals marginal cost, so the claim that output is higher is backward, and a deadweight loss results. Barriers to entry stop new firms from competing the profit away, so it can last.

Two firms each choose a High price or a Low price. If both choose High, each earns $10 million. If both choose Low, each earns $6 million. If one chooses Low and the other High, the firm with the Low price earns $14 million and the other earns $3 million. Each firm's dominant strategy is _____, so in the Nash equilibrium each firm earns _____ million.

Muligheder for felt 1: the Low price, the High price, to copy its rival, none, because no dominant strategy exists

Muligheder for felt 2: $3, $6, $10, $14

Svar: the Low price, $6

Check each firm's best response. If the rival chooses High, Low earns $14 million against $10 million for High. If the rival chooses Low, Low earns $6 million against $3 million for High. Low is better either way, so it is a dominant strategy. Both firms play it and each earns $6 million, which is the Nash equilibrium. Both would be better off at $10 million each, but neither can stay with the High price, because the other gains by undercutting. This is the classic oligopoly dilemma.

• A. 2 workers
• B. 3 workers
• C. 4 workers
• D. 5 workers

Svar: B. 3 workers

The marginal revenue product of labor is the output price times the marginal product: $100, $80, $60, $40 and $20 for the five workers. A profit-maximizing firm hires as long as the marginal revenue product is at least the wage. The third worker adds $60 for a $50 wage, so hiring is worth it. The fourth adds only $40, which is less than $50, so the firm stops at 3 workers.

• A. Hire more workers and pay a lower wage
• B. Hire fewer workers and pay a higher wage
• C. Hire the same number of workers and pay the same wage
• D. Hire fewer workers and pay a lower wage

Svar: D. Hire fewer workers and pay a lower wage

A monopsonist faces an upward-sloping labor supply curve, so to hire one more worker it must raise the wage for all of its workers. That makes the marginal cost of labor higher than the wage. It hires up to the point where the marginal revenue product equals this higher marginal cost, which is fewer workers than in a competitive market, and it pays the wage read off the supply curve at that smaller quantity, which is lower than the competitive wage.

• A. The market quantity is too low, because marginal social benefit exceeds marginal private benefit
• B. The market is efficient, because buyers and sellers agreed to every trade
• C. The market price is below the factory's marginal private cost
• D. The market quantity is too high, because marginal social cost exceeds marginal private cost

Svar: D. The market quantity is too high, because marginal social cost exceeds marginal private cost

This is a negative externality in production. The factory counts only its private cost, so the market supply curve sits below the true marginal social cost, and the market produces more than the efficient quantity, where marginal social benefit equals marginal social cost. Mutual agreement between buyers and sellers does not make the market efficient when a third party bears a cost. A per-unit tax equal to the external cost can move the quantity back to the efficient level.