2023 AP Microeconomics Free-Response Questions

1. RKB is a profit-maximizing monopoly that produces a new, patented electronic device. RKB is earning positive economic profit. (a) Draw a correctly labeled graph for RKB, and show each of the following. (i) The profit-maximizing quantity, labeled Q_M (ii) The profit-maximizing price, labeled P_M (iii) The average total cost curve consistent with RKB earning positive economic profit (iv) The area representing the deadweight loss, shaded completely (b) The government wants RKB to produce the allocatively efficient quantity. Would the government impose a binding price ceiling, a binding price floor, a per-unit tax, or a lump-sum tax? (c) Suppose that the government does not impose the policy you identified in part (b). Consumers now become aware of research that confirms the use of this new device harms users' vision. Given widespread consumer awareness of this research, what will happen to RKB's profit-maximizing quantity in the short run? Explain. (d) Assume that RKB hires workers in a perfectly competitive labor market. (i) Draw a correctly labeled graph for the labor market, showing the equilibrium wage and quantity of labor, labeled W_E and Q_E, respectively. (ii) Suppose immigration increases the number of workers in this labor market. On your graph in part (d)(i), show the new equilibrium wage and quantity of labor, labeled W_2 and Q_2, respectively. (iii) RKB uses the optimal combination of capital and labor in its production process. The firm rents capital at $500 per unit, and the last unit of capital rented has a marginal product of 2,500 units. If the marginal product of the last unit of labor hired is 1,000 units, calculate the wage rate. Show your work. Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.

2. The graph shows the production possibilities curves for Northland and Southland. (a) Which country has a comparative advantage in producing wheat? Explain using numbers. (b) Identify a specific number of yards of cloth that could be traded for 10 bushels of wheat and would be mutually beneficial to Northland and Southland. (c) Southland's maximum possible output of wheat falls from 100 bushels to 75 bushels. Assuming no other changes, will Southland have a comparative advantage in producing cloth? Explain using numbers. (d) Turnips are produced in a perfectly competitive market in Alderia, a third country, which does not engage in international trade. Runoff from turnip fields pollutes Alderia's rivers, hurting its residents. (i) Does the turnip market equilibrium result in an efficient allocation of resources? Explain using marginal analysis. (ii) In an effort to reduce pollution, Alderia's government imposes a lump-sum tax on turnip production. What will be the impact on the turnip market equilibrium price and quantity in the short run?

3. The graph provided shows the demand (d), marginal revenue (MR), average total cost (ATC), average variable cost (AVC), and marginal cost (MC) curves for Hansel Hangout, a typical profit-maximizing firm in a perfectly competitive market producing Good X. (a) Calculate Hansel Hangout's total fixed cost. Show your work. (b) Identify the price and Hansel Hangout's profit-maximizing quantity of Good X. (c) Calculate Hansel Hangout's economic profit at the quantity identified in part (b). Show your work. (d) As the market for Good X adjusts to the long-run equilibrium, what will happen to the price of Good X? Explain. (e) Assume the cross-price elasticity of demand between Good X and Good C is positive. Given the change in the long-run price of Good X in part (d), will the quantity demanded of Good C increase, decrease, or remain the same? Explain. Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.