The 2014 AP Microeconomics Exam Pamela Schmitt United States Naval Academy, Chief Reader

Agenda Exam Developers Scores Areas of Strength Areas of Weakness

Microeconomics Committee Chair Ellen Sewell, University of North Carolina at Charlotte Michael A. Brody, Menlo School Committee Members Joyce Jacobsen, Wesleyan University Margaret Ray, Mary Washington College Dee Mecham, The Bishop’s School Sandra K. Wright, Adlai E. Stevenson High School College Board Advisor Mary Kohelis, Brooke High School Chief Reader Pamela Schmitt, United States Naval Academy ETS Assessment Specialists Fekru Debebe Hwanwei Zhao Marwa Hassan

Exams 57,000 U.S. Exams 14,000 International Exams 8,000 Alternate Exams

Mean / Standard Deviation / Max Monopoly 4.64 2.60 10 Labor Markets/Min Wage 2.72 1.66 6 Taxes/Tax Revenue 3.24 1.81 6

Scores 2014 5 14% 4 28.5% 3 21.9% 2 16.0% 1 19.6%

Scores 2014 14% 28.5% 21.9% 16.0% 19.6% 2013 16.7% 28.4% 20.6% 15.4% 18.9% 2012 14.8% 28.3% 21.8% 16.3% 18.8% 5 4 3 2 1

Students Did Great On Equilibrium Price and Quantity QE and PE with Supply and Demand in a product market (85% in Q1) WE and QE with Supply and Demand in a labor market (74% in Q2)

Students Did Great On Understanding that after the imposition of a tax, quantity will fall QT< QE (80%) Understanding that the price the buyers pay after a tax is imposed will be higher than the equilibrium price PB > PE , PB is on the Demand Curve at QT (69%)

Students Did Great On Understanding that an effective minimum wage is above the equilibrium wage Wmin> WE (73%) Monopoly Graph Finding the profit maximizing quantity where MR = MC (68%) Price on Demand Curve above Q* (60%)

10 Most Common Errors AP Microeconomics 2014

Overview of Trouble Spots 10. Showing the formula for calculating tax revenue 9. Calculating profits for a monopolist that over-produces 8. Calculating CS for a monopolist that over-produces 7. Explaining that the MFC is equal to the equilibrium wage because firms in a PC factor market are wage takers 6. Illustrating that the supply curve is horizontal for a firm in a PC labor market 5. Explaining that constant returns to scale occur when ATC is constant 4. Determining that consumer surplus is zero if a monopolist perfectly price discriminates 3. Explaining the relative relationship between supply and demand elasticities and tax burden 2. Calculating Deadweight Loss if the Monopolist over-produces Showing Profit with perfect price discrimination

Overview of Trouble Spots 10. Showing the formula for calculating tax revenue 9. Calculating profits for a monopolist that over-produces 8. Calculating CS for a monopolist that over-produces 7. Explaining that the MFC is equal to the equilibrium wage because firms in a PC factor market are wage takers 6. Illustrating that the supply curve is horizontal for a firm in a PC labor market 5. Explaining that constant returns to scale occur when ATC is constant 4. Determining that consumer surplus is zero if a monopolist perfectly price discriminates 3. Explaining the relative relationship between supply and demand elasticities and tax burden 2. Calculating Deadweight Loss if the Monopolist over-produces Showing Profit with perfect price discrimination

Overview of Trouble Spots 10. Showing the formula for calculating tax revenue 9. Calculating profits for a monopolist that over-produces 8. Calculating CS for a monopolist that over-produces 7. Explaining that the MFC is equal to the equilibrium wage because firms in a PC factor market are wage takers 6. Illustrating that the supply curve is horizontal for a firm in a PC labor market 5. Explaining that constant returns to scale occur when ATC is constant 4. Determining that consumer surplus is zero if a monopolist perfectly price discriminates 3. Explaining the relative relationship between supply and demand elasticities and tax burden 2. Calculating Deadweight Loss if the Monopolist over-produces Showing Profit with perfect price discrimination

10. Micro 3 (c) Question: Assume that gasoline is sold in a competitive market in which demand is relatively inelastic and supply is relatively elastic: (c) Using the labeling on your graph, explain how to calculate the total tax revenue collected by the government. 31.4% of students answered this correctly

10. Micro 3 (a), graph similar

10. Micro 3 (c) Question: Assume that gasoline is sold in a competitive market in which demand is relatively inelastic and supply is relative elastic: (c) Using the labeling on your graph, explain how to calculate the total tax revenue collected by the government. Answer: (PB - PS ) * QT = 2 * QT Key is making sure PB and PS are not equal to PE

9. Micro 1 (c)(i) Question: Now assume that the monopolist produces 10 units. Using the numbers given in the graph calculate each of the following. Show your work. (i) The monopolist’s profit Q 27.4% Answered Correctly

9. Micro 1 (c)(i) Answer: Profit = (P – ATC)*Q =($10 – $20)*10 Loss of $100 Q

8. Micro 1 (c)(ii) Question: Now assume that the monopolist produces 10 units. Using the numbers given in the graph calculate each of the following. Show your work. (ii) The consumer surplus Q 24.6% Answered Correctly

8. Micro 1 (c)(ii) Answer: CS = ½ b*h = ½ ($60 –$10)*10 = ½ ($50)*10 Must show calculation! Q

7. Micro 2 (b) Question: Ray’s Stable hires workers in a perfectly competitive factor market for unskilled labor. (b) Is the marginal factor cost of unskilled labor for Ray’s Stable greater than, less than or equal to WE (equilibrium wage for the labor market found in (a))? Explain. 24% of students answered this correctly.

7. Micro 2 (b) Question: (b) Is the marginal factor cost of unskilled labor for Ray’s Stable greater than, less than, or equal to WE? Explain. Answer: The marginal factor cost is equal to WE because the firm is a wage taker in the labor market.

6. Micro 2 (a)(ii) Question: Ray’s Stable hires workers in a perfectly competitive factor market for unskilled labor. Using correctly labeled side-by-side graphs for the labor market and Ray’s Stable, show each of the following. (ii) The wage paid by Ray’s Stable and the quantity of unskilled labor hired, labeled WR and QR, respectively.

6. Micro 2 (a)(ii) W D S WF QF Wage WR S MFC QR

(24% answered correctly) 6. Micro 2 (a)(ii) Wage WR S=MFC D=MRP QR (24% answered correctly) Answer: (ii) WR is equal to the horizontal supply curve for Ray’s Stables.

5. Micro 1 (b) Question: At the profit maximizing quantity from part (a)(i), is the monopolist experiencing economies of scale? Explain. Q 23.2% Answered Correctly

5. Micro 1 (b) Answer: The firm is not experiencing economies of scale. Explain: LRATC is not downward sloping. The ATC remains constant as output increases. Q 23.2% Answered Correctly

4. Micro 1 (e)(ii) Question: Suppose the monopolist perfectly price discriminates and chooses the quantity that maximizes profit. Determine the dollar value of each of the following: (i) The consumer surplus 22.9% Answered Correctly

First identify Qperfect price discrimination = 8 Qpd

4. Micro 1 (e)(ii) Answer: The consumer surplus under perfect price discrimination is equal to zero. This results from understanding that perfect price discrimination implies each consumer is charged their marginal benefit (MB) or the maximum price the consumer is willingness to pay. Since CS is the difference between the MB and the price, consumer surplus is zero. 

3. Micro 3 (d) Question: Assume that gasoline is sold in a competitive market in which demand is relatively inelastic and supply is relatively elastic. (d) Will the tax burden fall entirely on buyers, entirely on sellers, more on buyers and less on sellers, more on sellers and less on buyers, or equally on buyers and sellers? Explain. 22.5% Answered Correctly

3. Micro 3 (d) (d) Will the tax burden fall entirely on buyers, entirely on sellers, more on buyers and less on sellers, more on sellers and less on buyers, or equally on buyers and sellers? Explain. Answer: The tax burden will fall more on buys and less on sellers because the demand curve is more inelastic than the supply curve. Key is the comparison between elasticity of supply and demand. 22.5% of students answered this correctly

2. Micro 1 (c)(iii) Question: Now assume that the monopolist produces 10 units. Using the numbers given in the graph calculate each of the following. Show your work. (iii) The deadweight loss Q 22.3% Answered Correctly

Calculate DWL triangle:

1. Micro 1 (e)(i) Question: Suppose the monopolist perfectly price discriminates and chooses the quantity that maximizes profit. Determine the dollar value of each of the following: (i) The monopolist’s profit 15.9% Answered Correctly

First identify Qperfect price discrimination = 8 Qpd

Calculate profit triangle: Profits = 1/2[($60 − $20) × 8] = $160

Questions?