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AP Microeconomics 2.8 The Effects of Government Intervention in Markets Questions

Analyse price controls, taxes, subsidies, and government buying programmes by tracing market quantities, welfare transfers, public costs, and deadweight loss.

Syllabus
Effective Fall 2022
Course
AP Microeconomics

Exam points

  • apply binding price ceilings and floors to quantities traded, shortages, surpluses and buyer or seller gains
  • calculate surplus, government purchases and deadweight loss under a price-control programme
  • use a per-unit tax wedge to find the buyer price, seller price and post-tax quantity
  • calculate tax revenue and trace changes in consumer surplus, producer surplus and total surplus
  • use relative demand and supply elasticities to assign tax incidence between buyers and sellers

Covered syllabus points

POL-1.A—a. Define forms of government price and quantity intervention. b. Explain (using graphs where appropriate) how government policies…

Question 1

[Maximum number: 3]

Deskward is a typical profit-maximizing firm that produces and sells wooden desks in a constant-cost, perfectly competitive market that is in long-run equilibrium.

Question (a)

(a)

Suppose the government is considering granting a per-unit subsidy to producers of wooden desks. On your market graph in part A, show the short-run effect of a per-unit subsidy on each of the following.

[ 2 ]

Question (i)

(i)

The new market equilibrium price and quantity of wooden desks, labeled P* and Q*, respectively

[ 1 ]

Question (ii)

(ii)

The area representing the total cost of the subsidy to the government, shaded completely

[ 1 ]

Question (b)

(b)

Instead of the per-unit subsidy, suppose the government imposes a binding price floor in the market for wooden desks. Will the price floor result in a shortage of wooden desks, a surplus of wooden desks, or neither? Explain.

[ 1 ]
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