Name Block Date. Three parts: 1) Additional Concept practice; 2) Concept Review Qs; 3) Graphing Review

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1 Name Block Date Choose-Your-Own S1 Study Adventure AP Microeconomics Three parts: 1) Additional Concept practice; 2) Concept Review Qs; 3) Graphing Review Part 1: Additional concept practice Perfect competition final practice 1. Draw side- by- side graphs for market for staplers and Stapler Steve, a typical stapler producer, in long- run equilibrium. Assume that producers are in a constant- cost industry (all producers face the same cost curves). Check your labels: Identify which graph is the industry Identify which graph is the firm Label Pm1, Qm1 for market P&Q Label Pf1, Qf1 for firm P&Q. Label all curves S, D, MC, ATC, AVC, MR DARP MC hits ATC at its minimum AVC is below ATC 2. Imagine American schools move to one- to- one classrooms and away from paper- based teaching, decreasing demand for paper. Assume that paper and staples are complements. Show the effect on the market for staples and Stapler Steve in the short run. Label Pm2, Qm2 for market Label Pf2, Qf2 for firm Label S2 and/or D2 (and identify S1 or D1) Label any new curves (and identify which was the old one) 3. How does the ATC for Stapler Steve at Qf2 compare with Pm2? 4. In the long run, what should Stapler Steve do? Explain. 5. In the long run, what additional effect will one- to- one classrooms have on the market for staplers? Explain. Extra: Will any stapler producers survive? Under what circumstances? Perhaps consider the role of economies of scale. 1

2 Additional perfect competition review questions: 2

3 Comparative advantage, PPF, gains from trade The table below shows the total minutes of labor required to change a diaper and the total minutes of labor to grade a paper for Ms. Person and Mr. Currie, respectively. Ms. Person Mr. Currie Change diaper 5 minutes 10 minutes Grade paper 10 minutes 15 minutes 1) Who has the absolute advantage in preparing tax returns? 2) Who has the absolute advantage in changing diapers? 3) Calculate the opportunity costs for each individual: Opp. Cost Ms. Person Mr. Currie Change diaper ½ graded paper Grade paper 4) Explain who should specialize in what task using the concept of comparative advantage. 5) If each person specialized completely, and if there were 20 diapers to change and 4 papers to grade, how long will it take both of them to finish? 6) How do Ms. Person and Mr. Currie gain from trade? 3

4 Supply and Demand, Consumer Surplus Here is a graph of supply and demand in a competitive market for dates (the fruit). A. Why is demand downward sloping? B. Why is supply upward sloping? C. What is the current equilibrium price and quantity in this market? D. Why couldn t one producer just lower her prices to take more business? E. Calculate or shade in on the graph consumer surplus in this market. F. Calculate or shade in on the graph producer surplus in this market. G. Is total surplus maximized in this market? How does this indicate that this market is efficient? H. For each of the following, indicate with words or with a drawing how demand will shift, supply will shift, or whether it is simply a movement along the demand or supply curve. Make sure you say whether demand will shift left or right and show or explain what happens to price and quantity. 1. New medical research has shown that dates make people more attractive to romantic partners. 2. The price of dates drops causing more people to buy dates. 3. A terrible plague of locusts destroys the date crop in Europe. 4. Figs, a substitute for dates, increase in price. 5. Date growing technology improves and, at the same time, a financial crisis causes many family incomes to fall drastically. 4

5 Price controls, taxes, elasticity, deadweight loss A. To close the gap in pay, the government is considering a minimum wage for female workers. It is depicted by the graph below. W = Wage (or price of female labor) and QL is Quantity of female labor. Please use the graph and your knowledge of economics to answer the questions below. 1. Which wage, W1 or W2, represents the minimum wage in this labor market? 2. Is the minimum wage considered a price floor or a price ceiling? Explain. 3. After the minimum wage is put into place, what quantity of female workers will have a job, Q1, Q2, or Q3? 4. Will the new minimum wage cause a surplus (unemployment) or a shortage (need) of workers? 5. Is this policy efficient? Why or why not? 6. What is the unintended consequence of this policy? B. Imagine instead that policymakers think placing an excise tax on labor would be better. Policymakers think perhaps they may use the additional tax revenue to subsidize math and science programs for girls. The tax is paid by the workers (supply). Supply0 is the supply of labor people are willing to supply at the market price. Supply1 shows how people s willingness to supply their labor changes due to the tax. 1. What is the new quantity of labor supplied in the market, Q0 or Q1? 2. What wage do employers have to pay after the tax is imposed, P0, P1, or P2? 3. What wage do workers receive in their pocket after the pay the tax, P0, P1, or P2? 4. What is the government s tax revenue? Shade it in or describe the rectangle. 5. Is there any deadweight loss or inefficiency in this market due to the tax? Explain. 6. What does elasticity mean? 5

6 7. If labor supply were less elastic, would the deadweight loss be bigger or smaller? 8. What, if any, unintended consequences of the policy exist? 6

7 Part 2: Concept review questions, by chapter Chapters 1+2 1) What is scarcity? 2) What is the fundamental problem faced in all economies? 3) What is opportunity cost? 4) What do economists mean by efficiency? 5) What is the difference between efficiency and equity? 6) What is the fundamental difference between a market economy and a command economy? 7) What does the PPF show us? 8) What causes movements or shifts of the PPF? 9) How can trade allow for possible points beyond the PPF? 10) What is the difference between absolute and comparative advantage? 11) How can you calculate comparative advantage between two parties? Chapters 3 & 4 12) What is the difference between a shift in supply/demand and change in the amount supplied/demanded? 13) What are all of the determinants (shifters) of the demand curve? 14) What are the shifters of supply? 15) How do shifts to supply and demand affect the equilibrium price and quantity? 16) What s the difference between normal and inferior goods? 17) What s the difference between substitutes and compliments? 18) Describe efficiency when the market is in equilibrium. 19) How are consumer, producer, and total surplus calculated? Chapter 5, 6, & 7 20) What is a price floor? Example? 21) What effects does a price floor have on the market? 22) What is a price ceiling? Example? 23) What effect does a price ceiling have on the market? 24) When do price floors and price ceilings have no effect? 25) How do price floors and price ceilings create deadweight loss? 26) What is an excise (per- unit) tax? Sales tax? Income tax? 27) How do you calculate tax revenue in the supply and demand model? 28) What is elasticity? 29) How does elasticity of supply and demand affect who bears the tax (the tax incidence)? 30) How are price elasticities of supply and demand, cross- price elasticity, and income elasticity calculated? Chapters 9 & 10 31) What s utility? 32) How do marginal utility and total utility differ? 33) How does a person decide how much of something to consume? 34) What is the utility maximization / optimal consumption rule, given a budget constraint? 7

8 Chapters 11 & 12 35) What is the difference between short- and long- run? 36) What are the three kinds of returns to inputs? Identify why returns to inputs aren t always constant (e.g., relationship between inputs and outputs). 37) How does a firm judge its returns to scale using LRATC? 38) What are the four market structures, and how do they differ in terms of number of firms, product differentiation, barriers to entry/exit, information, and market power? 39) How are average costs derived from total costs? 40) What is marginal cost? 41) What causes a cost curve to shift upward (e.g., increase)? 42) How are MC and ATC related? 43) How is profit calculated? 44) When does a firm profit? 45) What is the only decision a firm can make in the short- run under perfect competition? 46) How does a firm decide what changes to make in production? 47) What incentives do short- run profits or losses present to a firm in the industry? Outside the industry? 48) Under perfect competition, what happens to firms in that remain in the industry in the long- run? 49) When firms under perfect competition are in long- run equilibrium, how are MC, ATC, and MR DARP related? 50) What does a firm s short- run supply curve look like? Part 3: Graphing Review Know how to draw, label, and interpret the graphs below. You also should understand how shifts will change the graph. 1) Production Possibility Frontier (or graph or curve) - see questions above. Also consider how the PPF can shift inward and outward. 8

9 2) Supply and Demand a) How do shifts in supply and demand change the price and quantity? b) How can you calculate elasticity from this graph? (don t stress about midpoint formula) c) How can you calculate consumer and producer surplus from this graph? d) What does a tax look like on the supply and demand graph and how does it change price and quantity? e) What do price controls look like on this graph? f) What creates deadweight loss on this graph? 3) Production Function A. What are the three stages of returns? B. Why does diminishing returns occur? 9

4) Short Run Costs Curves a) What does each curve represent? b) Why do the curves have the shape that they do? c) How can you calculate average fixed cost at a given quantity?

10 4) Short Run Costs Curves a) What does each curve represent? b) Why do the curves have the shape that they do? c) How can you calculate average fixed cost at a given quantity? d) Where does MC intersect the other curves (esp ATC)? 5) Long Run Cost Curves a) What is the difference between economies and diseconomies of scale? b) How is the Long Run Average Total Cost Curve created? 6) Industry and Firm in Perfect Competition 10

11 a) Why is MR = D = AR = P? b) How does the industry set the price? c) How does a firm choose how much to produce? d) How can you calculate profit? e) What is the break even price? Shut down price? f) When should a firm shut down in the short run? g) When should a firm shut down in the long run? h) What will price end up being in the long run? i) How does economic profit differ from accounting profit? 11

AP Microeconomics Review With Answers

AP Microeconomics Review With Answers 1. Firm in Perfect Competition (Long-Run Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry (which means show