3Overview of Trouble Spots 10. Monopolistic Competition and Economies of Scale9. A Tax Reduces Allocative Efficiency8. Capital Flight Decreases SLF and Increases r.7. A Lump-Sum Tax Doesn’t Effect Q* because it Doesn’t Effect MC6. Elasticity Calculation and Interpretation5. Money/Deposit Multiplier4. An Increase in the Money Supply Results (via #3) in a Decrease in Real Wages3. Real Wages Fall due to an Increase in the Price Level2. Link between Growth and Capital Formation1. SRPC Shifts due to Changes in Inflationary Expectations
410. Overseas Micro 1 (e)Question: In the long run, will the [monopolistically competitive] company be operating in a region where economies of scale exist? Explain.Answer: Yes (52 percent answered correctly), because the firm produces a quantity of output on the downward sloping portion of its long-run ATC.(27 percent answered correctly)A majority got the DWL direction correct, although a coin flip between DWL up or down would give 50% of the students this answer.The explanation is not easy. The graph is elaborate, although the intuition should be clear to good students. A tax on producers increases the marginal cost and thereby decreases the market supply, which is a sum of the firm supply curves. The DWL results from too few being produced, and the tax results in even fewer being produced because tax up => MC up => Q down. Thus, even more DWL.A lump-sum tax would cause exit as well. If a student argued that it could have been a small or one-time lump-sum tax with no effect, that would be considered.
5Monopolistic Competition Marginal Cost$/unitLong-Run Average CostPDemandQQuantityMarginal Revenue
6Monopolistic Competition Marginal Cost$/unitEconomies of ScaleLong-Run Average CostPDemandQQuantityMarginal Revenue
79. Micro 2 (d)Price ($)SD90S + Tax60$2$4$8$6$5Question:Assuming no externalities, how does the tax affect allocative efficiency? Explain.
8The tax creates deadweight loss. OR The total surplus decreases. Answer: Due to the tax, the outcome is no longer allocatively efficient.The tax creates deadweight loss.ORThe total surplus decreases.(22% answered correctly)Price ($)SD90S + Tax60$2$4$8$6$5Deadweight Loss
98. Macro 2 (b)Question: Using a correctly labeled graph of the loanable funds market in Tara, show the impact of this decision by investors [to move their funds out of the country of Tara] on the real interest rate in Tara.
11The Shift and Change 22% Correct Real interest rate SLF’ SLF r' r DLF Q’QLoanable funds22% Correct
127. Micro 1 (b)Question: Assume that the government grants CableNow a lump-sum subsidy of $1 million. Will this policy change CableNow’s profit maximizing quantity of cable services? Explain.Answer: No (46% answered correctly—note that guessing would yield 50% correct), because the lump-sum tax will not affect marginal cost (or marginal revenue, the two determinants of Q*).18% answered correctly
136. Micro 2 (c)Question: Is the demand price elastic, inelastic, or unit elastic between the prices of $5 and $6? Explain.Explain point for wrong current account change was accepted because the order of these two parts of the question was not important.
15Answer: The demand is price elastic because elasticity is [(60-90)/75]/[(6-5)/5.5] = -2.2 which is less than -1ORbecause total revenue decreased from $5 x 90 = 450 to $6 x 60 = $360 when price increased from $5 to $6.(15% answered correctly)
165. Macro 3 (a) iiQuestion: Assume that the reserve requirement is 20 percent and banks hold no excess reserves. Assume that Kim deposits $100 of cash from her pocket into her checking account. Calculate the maximum change in demand deposits in the banking system.Answer: (The money multiplier of) 5 x $100 = $500.(14% answered correctly.)
173. and 4. Macro 3 (c)Question: Given the increase in the money supply in part (b), what happens to real wages in the short run?Answer: Real wages fall (20% answered correctly) because the increase in the money supply raises the price level (or inflation).(15% answered correctly)
182. Macro 2 (c)Question: Given your answer in part (b) [that interest rates increase], what will happen to Tara’s rate of economic growth? Explain.Answer: The growth rate will fall (61% correct) because investment spending decreases, and as a result, capital formation will decrease.9% answered correctly
191. Macro 1 (f) iQuestion: Assume the Federal Reserve action [to reduce inflation] is successful. What will happen to each of the following as the economy approaches a new long-run equilibrium?(i) The short-run Phillips curve. Explain.(ii) The natural rate of unemployment.
21Answer: The SRPC will shift to the left (28% answered correctly) because the Fed policy will lower inflationary expectations.(2% answered correctly)The natural rate of unemployment will not change. (24% answered correctly)
22Screen shot of poorly labeled graph from AP Central?