Questions Regarding 2011 AP Microeconomics Exam

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This link (http://www.collegeboard.com/student/testing/ap/economics_micro/samp.html?micro has a list of released Microeconomics AP free-response questions. I have a question concerning the 2011 primary released exam.

See the questions here http://apcentral.collegeboard.com/apc/public/repository/ap11_frq_microeconomics.pdf and the solutions here http://apcentral.collegeboard.com/apc/public/repository/ap11_microecon_scoring_guidelines.pdf.

Notice Question 1 Part (f): The marginal revenue of the eighth unit is apparently $22. However, to me it appears to be $12, as per the MR slope. Can anyone explain?

Also, Question 3 Part (a): Notice the two triangles created by the MSC curve; I would have thought that the DWL (Dead Weight Loss) was the bottom triangle, since the top triangle was never used. Any thoughts?
 

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  • #2
Dbouchard92
As an answer to part f: The marginal revenue of the eighth unit is $22. Part f says that there is an effective price ceiling of $22. That means that $22 is the highest price allowed to be charged. Monopolies produces at the quantity at which marginal revenue equals marginal price. Because an effective price ceiling is in tact, the monopolist can only charge $22. Marginal revenue is the additional revenue received from producing an additional unit of a good. To calculate the marginal utility of producing the 8th unit, you must look at the revenue received from producing 7 units and 8 units, and find the difference. When a monopolist produces 7 units, he charges $22. He would normally charge more, but a binding price ceiling is in place. His revenue from producing 7 units is 7x22=154. When producing 8 units revenue is 8x22=176. Calculate the difference of the two and the result is $22. (176-154=22.)
 
  • #3
Matterwave
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Remember that the MR curve is under the demand curve because there is an assumption of 1 price. If you produce 1 more unit, you must price ALL units lower. This is not the case if there is a price ceiling. If the monopolist produces 7 units, he can only price them at $22 a unit. If he produces 8 units, he still will price them at $22 a unit. With this price ceiling, the MR curve has changed!

The MR curve is now a flat line at $22 until unit 9, at which point it drops (dicontinuously to 0 at the 10th unit). This also explains why the monopoly produces 9 units now, since that's where the MR curve meets the MC curve now.
 
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Dbouchard:

Great explanation; completely explained 1.f.i. for me. Thanks a lot!

Matter Wave:

Your first paragraph made sense; thanks for the new information about the change of the MR curve with the implementation of a price ceiling.

However, I got lost in your last paragraph. Could you sketch or draw the MR curve on the graph to illustrate what you're describing? If the MR curve drops to zero right after unit nine, then the MR curve NEVER interesects the MC curve, correct? In that case, how would you figure out what quantity the monopoly produces with the price ceiling in place? By maximizing the profit area?

-----------------------------------------------

Also, does anybody care to field the second of my two original questions? Question 3 Part (a): Notice the two triangles created by the MSC curve; I would have thought that the DWL (Dead Weight Loss) was the bottom triangle, since the top triangle was never used. Thoughts, anyone?
 

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