AP Microeconomics Unit 2: Supply and Demand

Master AP Microeconomics Unit 2 by connecting demand, supply, elasticity, equilibrium, public policy, and international trade outcomes.

Covered syllabus points

2.1 Demand 2.2 Supply 2.3 Price Elasticity of Demand 2.4 Price Elasticity of Supply 2.5 Other Elasticities 2.6 Market Equilibrium and Consumer and Producer Surplus 2.7 Market Disequilibrium and Changes in Equilibrium 2.8 The Effects of Government Intervention in Markets 2.9 International Trade and Public Policy

[Maximum number: 5]

In the local market for Good X, there are four individual buyers: Emily, Wu, Omar, and Fernanda. The quantities that each individual buyer would be willing and able to purchase at different prices are included in the table provided.

Table for Question Unit 2: Supply and Demand question 1 — AP Microeconomics

(a)

The local market for Good X has a perfectly elastic supply. Draw a correctly labeled graph for the local market for Good X with a market equilibrium price of $ 5. Label the equilibrium price as $ 5, and label the equilibrium quantity for the market with a specific value based on the data provided in the table.

[ 2 ]

(b)

Assume the cost of production increases, which causes the price of Good X to increase from $5 to $7.

[ 2 ]

(i)

Calculate the price elasticity of demand for Good X as the price increases from $5 to $7. Show your work.

[ 1 ]

(i) Calculate the magnitude of the price elasticity of demand as 1.25 and show your work. 1 point

\begin{aligned} \text { Price Elasticity of Demand } & =\frac{\text { Percentage Change in Quantity Demanded }}{\text { Percentage Change in Price }} \\ & =\frac{\left|\left(\frac{4-8}{8}\right) \times 100\right|}{\left|\left(\frac{7-5}{5}\right) \times 100\right|}=\frac{50 \%}{40 \%}=1.25 \end{aligned}

=\frac{\left(\frac{4-8}{8}\right) \times 100}{\left(\frac{7-5}{5}\right) \times 100}=\frac{-50 \%}{40 \%}=-1.25

(ii)

Identify whether the demand for Good X is elastic, inelastic, or unit elastic in that range of prices.

[ 1 ]

(c)

Could Emily's marginal benefit for the second unit of Good X equal $4.50 ? Explain.

[ 1 ]

[Maximum number: 1]

For an upward-sloping now sell supply curve of dog treats, which of the following is truc?

Selling an additional unit of dog treats will decrease total revenue.

An increase in the price of dog treats will lead to an increase in the supply of dog treats.

An increase in the price of dog treats will lead to an increase in the quantity supplied of dog treats.

A decrease in the price of peanut butter, a: input to dog treats, will lead to a decreas in the quantity demanded for dog treats.

A decrease in the price of chew toys for dogs, a substitute in consumption for do: treats, will lead to an increase in the quantity supplied of dog treats.

[Maximum number: 1]

Arzeye Pharma has a patent, a legal barrier to entry, on its newly developed eye treatment that cures common eye problems. Arzeye Pharma is currently earning positive economic profit and is producing the profit-maximizing quantity of eye treatments.

Suppose Arzeye Pharma wants to charge a price that maximizes its total revenue rather than its profit.

At quantity $\mathrm{Q}_{\mathrm{R}}$ identified in part (b)(i), is the demand for eye treatments elastic, inelastic, or unit elastic?

[Maximum number: 27]

The markets for bananas, muffins, and coffee are interrelated, and each market is perfectly competitive.

(a)

In the market for bananas, the equilibrium price is $ 1.00 per pound, and the equilibrium quantity is 1,000 pounds per week. Suppose the government imposes a price floor on bananas at $1.20 per pound, causing the quantity supplied to increase to 1,500 pounds per week.

[ 6 ]

(i)

Would the price floor result in a shortage, a surplus, or neither? Explain.

[ 4 ]

(ii)

Calculate the price elasticity of supply if the price increases from $1 to $1.20. Show your work.

[ 1 ]

- One point is earned for correctly calculating the price elasticity of supply.
Students can use either the midpoint formula or the point elasticity formula.

\begin{aligned} & \mathrm{E}=(500 / 1250) /(0.2 / 1.1)=2.2 \\ & \mathrm{E}=(50 \% / 20 \%)=2.5 \\ & \mathrm{E}=(500 / 0.2) \times(1 / 1000)=2.5 \\ & \mathrm{E}=[(1500-1000) / 1000] /[(1.2-1) / 1]=0.5 / 0.2=2.5 \\ & \mathrm{E}=(500 / 0.2) \times(1.2 / 1500)=2 \end{aligned}

(iii)

Between $1 and $1.20, is the supply elastic, unit elastic, or inelastic? Explain.

[ 1 ]

(b)

Bananas are an input for muffins.

[ 6 ]

(i)

Draw a correctly labeled graph of the market for muffins indicating the equilibrium price and quantity, labeled $\mathrm{P}_{0}$ and $\mathrm{Q}_{0}$ , respectively.

[ 4 ]

3 points:

Figure for Answer to Question (i) — AP Microeconomics

- One point is earned for drawing a correctly labeled graph and for showing the equilibrium price and quantity, labeled $\mathrm{P}_{0}$ and $\mathrm{Q}_{0}$ , respectively.

(ii)

On the graph drawn in part (b)(i), show the impact of an increase in the price of bananas on the muffin market, labeling the new equilibrium price and quantity $\mathrm{P}_{1}$ and $\mathrm{Q}_{1}$ , respectively.

[ 1 ]

- One point is earned for shifting the supply curve to the left and for showing the new equilibrium price and quantity, labeled $\mathrm{P}_{1}$ and $\mathrm{Q}_{1}$ , respectively.

(iii)

On the same graph, completely shade the area that represents the change in the consumer surplus caused by the increase in the price of bananas.

[ 1 ]

(c)

In the market for coffee, the equilibrium price is $ 3.00 per cup and the equilibrium quantity is 100 cups per week. The cross-price elasticity of coffee with respect to muffins is -2.

[ 15 ]

(i)

Are coffee and muffins normal goods, inferior goods, complementary goods, or substitute goods?

[ 5 ]

(ii)

Assume the supply of coffee is perfectly elastic. Using the equilibrium price and quantity given above, draw a correctly labeled graph for the coffee market, and show the impact of an increase in the price of muffins on the coffee market.

[ 2 ]

(iii)

Given the original quantity of 100 cups of coffee per week, if the increase in the price of muffins is 10%, calculate the new equilibrium quantity in the coffee market. Show your work.

[ 8 ]

- One point is earned for correctly calculating the new equilibrium quantity and showing the work.

\% \Delta Q=(10 \% \times-2)=-20 \%

New Equilibrium Quantity $=100 \times(-20 \%)=80$
OR
New Equilibrium Quantity $=100-(0.2 \times 100)=80$

(Using the midpoint formula is also acceptable.)

7 points (1+1+1+1+3)

All question bank results loaded

Covered syllabus points

Unit 2: Supply and Demand question 1

Question (a)

Question (b)

Question (i)

Question (ii)

Question (c)

Unit 2: Supply and Demand question 2

Unit 2: Supply and Demand question 3

Unit 2: Supply and Demand question 4

Question (a)

Question (i)

Question (ii)

Question (iii)

Question (b)

Question (i)

Question (ii)

Question (iii)

Question (c)

Question (i)

Question (ii)

Question (iii)