# MICRO FINAL EXAM Study Guide

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1 AP MICROECONOMICS-217 Name: MICRO FINAL EXAM Study Guide Instructions: Please fight senioritis! Study & be efficient with your time. DUE: Friday April 28 th (Multiple choice block 4/26 th or 27 th Free Response = Friday 4/28 th ) If you have an A- or above in the class, you can skip the first 3 sections if they are not helpful to preparing Section 1: PRODUCTION POSSIBLITIES FRONTIER Qty Food B Graph A 5 1 Qty Shelter Graph B 1) The graphs above are 2 different production possibilities frontiers. Recall that the PPF curve displays trade-offs between 2 goods. It assumes a society uses all its scarce resources to produce only two goods. a. Graph A is classified as a cost PPF curve and Graph B would be a cost PPF curve. b. Graph A: Any point below B would be considered an use of scarce resources. c. Graph A: Any point above B is considered in the short run with existing resources. d. If society increases efficiency (productivity) this would shift the PPF curve to the: ( Left, Right, Not Shift ). e. An decrease in population would shift the PPF curve to the ( Left, Right, Not Shift) f. The long term goal of a society is to shift PPF to the ( Left, Right, Not Shift) g. A bowed PPF Graph demonstrates the law of h. Explain why a rise in the unemployment rate would NOT shift the PPF curve 2) The word utility in economics means: SATISFACTION (OR BENEFIT) a. As you consume more of any good (like pizza) utility per slice (marginal utility) starts to because of the law of. You continue to consume pizza as long as the marginal utility of the next slice is than the marginal cost. (This is one reason demand curves slope downward.) b. In economics all decisions are made at the. Consumers attempt to maximize their own utility by setting MB = MC. You did this when you chose what college to attend next year! 1

2 Section 2: SUPPLY & DEMAND 3) Determinants of Demand shift the demand curve. (called a CHANGE IN DEMAND) a. TIPSEN stands for: 4) Determinants of Supply shift the supply curve (called a CHANGE IN SUPPLY) a. TINE & TP stands for: 5) Remember a change in Quantity Demanded or Quantity Supplied is not a shift of either curve! (know this!) It occurs when only price changes. Instead of shifting either curve, you simply move along the existing demand or supply curve. Energy Drinks (Graph A) S 1 P E 1 D 1 Q 1 T-Shirts Qty 6) Graph A: Assume there is a sudden decrease in the price of soda (a substitute for Energy Drinks) a. Shift the appropriate curve & find the new market equilibrium. Label P 2, Q 2 & E 2 b. Circle the 2 terms below that describe the change in graph A: (only 2 apply to graph) change in demand change in quantity demanded change in supply change in quantity supplied (Graph B) S 1 P 1 E D 1 Q 1 Qty T-Shirts Recall : whenever both curves shift, one variable will have an indeterminate outcome (either P or Q) 7) Graph B: Assume there is a sudden rise in the taste for T-Shirts => Demand would shift Assume there is a sudden rise in the technology of producing T-shirts => Supply would shift a. Shift the appropriate curves & find the new market equilibrium and label it P 2, Q 2 & E 2 b. What can you say about the new equilibrium : (higher, lower or indeterminate) c. What can you say about the new equilibrium Quantity (higher, lower or indeterminate) 8) A price ceiling will cause a of supply when it is set market equilibrium and will cause DWL 9) A price floor will cause a of supply when it is set market equilibrium & will cause DWL. 2

3 Section 3: ELASTICITY SECTION: ELASTIC DEMAND INELASTIC DEMAND D 1 D 1 1) Formula for elasticity of demand is: % / %. (i.e. change in divided by change in ) 11) Elastic goods have E d 1 while Inelastic goods have E d 1. Unit elastic has E d 1. 12) List 3 factors which cause a good to have elastic demand: (3 determinants of elasticity) 13) When prices rise on elastic goods, Total Revenue: (falls, rises, stays the same) (pick one) 14) When prices rise on unit elastic goods, Total Revenue: (falls, rises, stays the same) (pick one) 15) Inferior goods have income elasticity. Meaning that when Income Demand for the good. 16) Substitutes have cross-price elasticity which is (positive, negative) pick one 17) Complements have cross-price elasticity which is (positive, negative) pick one 18) Please fill in the blank labels below: D MR 19) Remember that all linear demand curves have both inelastic and elastic ranges. The transition from the Elastic Demand range to the Inelastic Demand range occurs when you reach unit elasticity. This occurs when marginal revenue =. When MR = you know that Total Revenue is at a. (do you understand why?) 2) Firms always operate in the part of a demand curve. (again, do you understand why?) 3

6 Section 6: COST CURVE SECTION 27) The Total Product Curve illustrates the total output of goods or services. Marginal Product begins to decline once you reach the point of. When MP falls => marginal cost (MC) must start to. 28) Cost curves are derived from the product curves above. Label all 4 cost curves below: (ATC, AFC, AVC, MC) ** Remember that MC crosses the ATC & AVC curve at the minimum. 29) Label the region of Economies of scale and Diseconomies of Scale on the ATC curve a. Hint the MC curve separates the two regions.. 3) In the short run, a firm should SHUTDOWN when is less than 31) In the long run, a firm should EXIT the industry when is less than Section 7: MARKET STRUCTURE SECTION Market (a) Initial Condition Firm Supply, S MC ATC P P 1 Demand, D 1 Q 1 Quantity (market) Quantity (firm) Market for Bicycles 32) The perfectly competitive market above is in long run equilibrium (i.e. zero economic profit, min. of ATC, efficient scale) a. Modify both graphs for a increase in demand for bicycles in the entire market. b. Explain why this new equilibrium will not last in the long run: 6

7 \$ D Marginal (average revenue revenue) Quantity of Water 33) Note: MR is lower than demand curve (price) for all market power firms (monopoly, oligopoly, monopolistic competition) c. Linear demand curves have a MR curve with twice the slope 34) When MR crosses the X-axis Total Revenue is. & When MR =, then elasticity = Costs and Revenue Average total cost Marginal cost Demand Marginal revenue Q Q Quantity 35) Using the graph: a. Draw a market equilibrium for a single price profit maximizing Monopoly. (label P M Q M E M) (set MC = MR) b. Label the Profit Box & the deadweight loss of this monopoly c. Draw a market equilibrium for a profit maximizing competitive industry. (label P C Q C E C) (set P = MC) 36) Oligopolies are similar to monopoly market structures as they produce long run profit & DWL. However, oligopolies have the ability to collude (game theory) which if perfectly successful, makes their outcome the same as a monopoly. 37) Oligopolies tend to choose their dominant strategy, which is the (cooperative equilibrium or non-cooperative equilibrium) 38) In the game below Coke would choose and Pepsi would choose. 7

8 Monopolistic Competition MC ATC YOUR GRAPH HERE (long run) MR Demand Quantity 39) Label the short run equilibrium for the Monopolistic Competition firm in the above graph a. Shade in the area of profit 4) To the right draw the long run equilibrium for a Monopolistic Competitive firm. 41) Briefly explain why profit falls to zero in the long run in monopolistic competition but not in oligopoly. a. Hint: what market feature is different Section 8: FACTOR MARKET 42) To maximize profits a firm in the FACTOR MARKET will hire inputs until MFC = MRP. a. Marginal Factor Cost = Marginal Revenue Produce 43) An increase in demand for a product in the PRODUCT MARKET will lead to an increase in demand in the FACTOR MARKET is known as demand. 44) Marginal Revenue Product (MRP) = MP ( input, output) * MR( input, output) (circle one in each ) 45) In a competitive labor market MRP = Wage Rate and all firms are wage. (even monopolies!) 46) In the graph below, the demand for low skilled workers rises in the entire factor market. This means, holding all other factors constant, 1 individual firm will be forced to hire workers and pay a wage rate. 8

9 47) The graph below compare the demand curve for labor for a competitive industry MRPC versus for a market power industry MRPM. a. Explain why a competitive industry hires more factors of production than market power industries LABOR MARKET 48) Overall, all industries are price takers (machines) or wage takers (labor) in the factor market. This means they can hire all the machines or workers they need at the current market price. Market power industries simply demand inputs than competitive industries but both pay. 49) When hiring 2 factors of production which are SUBSTITUTES, such as machines vs. workers, firms use the Least-Cost- Rule which states hire workers and machines in a combination where: (write formula below) The ratio of = The ratio tells you the amount of output per of input SPECIAL MONOPSONY SECTION This may be annoying, but there is a special firm which is a monopoly in the factor market. It is called a monsopony. A monopsonist cannot be a wage taker, since every time they hire another worker => wages must increase for all current workers. This results in a MFC curve above the market supply curve. (Just like MR is below the demand curve!) End Result: A monopsonist will hire less workers and pays a lower wage than competitive industries in the factor market. Real world example: A factory in a small town that employs 7% of the population. If they need more workers, everyone gets a raise at the factory! All you need to know is that the outcome is all bad: Less workers hired and lower wage rate paid ================================================================================= 9

10 Section 9: Income Distribution & Taxes LORENZ CURVE Lorenz Curve A Line of Perfect equality Lorenz Curve B 5) A Lorenz Curve measures the of income by calculating a Gini Coefficient. a. Country has more inequality. 51) Why is the Lorenz curve a better measure of inequality than mean (average) income? 52) A Gini Coefficient is a number between zero and 1. a. For above graph: Country A =.25 & Country B =.6 What do these numbers imply? 53) If a Gini Coefficient is (zero), then 4% of the population must have of the income. 54) Public goods are (rival, nonrival) in consumption and (excludable, non excludable) in consumption. (circle one in each area) b. An example would be: 55) Private goods are (rival, nonrival) in consumption and (excludable, non excludable) in consumption. c. An example would be: 56) Common resources are (rival, nonrival) in consumption and (excludable, non excludable) in consumption. d. An example would be: 57) A free rider enjoys the benefits of a good but does not. This is a problem in goods. 58) Common resources are a problem because lead to. 59) Describe the 3 primary types of taxes for AP Econ: Progressive Tax Regressive Tax Excise Tax Lump Sum Tax 6) If a tax falls more heavily on low income workers then it is best classified as a tax. /5 Points Excellent Work, Good Work, Need Improvement 1

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