Correct Answer and Standards for 1996 Micro Free Response

1.   Grading Rubric for Microeconomics Question 1: 9 Points

 Part (a) 3 points

The correct monopolist diagram with output determined at the MR=MC point and with price read from the demand curve.

Points:   The graph must show:

• 1 point - MR curve below a downward sloping demand curve
• 1 point - Quantity determined correctly (MR=MC)
• 1 point - Price determined correctly; read from the demand curve, up from the profit-maximizing output

Part (b): 2 Points

Conditions that might lead to an increase in the number of sellers are:
(1 point for each condition up to a maximum of two points)

• reduction in the barriers to entry,
• profits which were earned by the monopolist.
• returning property rights to original owners.

[Appealing but irrelevant responses such as, technological progress, subsidies, and population growth are not acceptable.]

 Part (c): 2 Points

An individual seller will determine the profit-maximizing output by equating MR to MC.  For a competitive firm P=MR.  Price is determined in the market or industry and is NOT determined by the individual seller.  Merely asserting that the firm is a price taker is insufficient for credit.

• 1 point - Recognizing output is produced where MC=MR
• 1 point - Recognizing in some form that P=MR

 Part (d): 2 Points

Under perfect competition the industry is operating more efficiently.  Economic efficiency includes having P=MC (allocative efficiency) and P = min ATC (productive efficiency).

• 1 point - Some correct definition of economic efficiency (P=MC or P=min ATC)
• 1 point - Comparison indicating that monopolist charges P>MC while the perfect competitor charges P=MC, or comparison indicating that monopolist does not necessarily produce at the minimum ATC while the perfect competitor must (in long run equilibrium).

2.   Grading Rubric for #2:  5 Points

Part (a) 2 points

The trapeze act will cause an increase in demand (shift right in the demand curve) increasing the price, but quantity will remain the same because the quantity is fixed at 40,000 seats.

• 1 point - Price increases as a result of the demand increase
• 1 point - Quantity remains the same

Part (b) 2 points

The price ceiling must be set below the equilibrium price with the new trapeze act.  The quantity demanded, will increase; however, the quantity supplied will remain the same (fixed at 40,000).

• 1 point - setting the price ceiling below the equilibrium price.
• 1/2 point - quantity demanded increases
• 1/2 point - quantity supplied unchanged

Part (c) 1 point

No, a secondary market or reselling of tickets or scalping of tickets will have some circus goers paying more than the ceiling price.

• 1 point - Some version of the above.  [Note:  Radio give aways, coupons and employees do not change with the existence of the price ceiling; therefore that type of answer is incorrect.]

3.  Grading Rubric for #3:  5 Points

Part (a) 1 point

The firm will maximize profits by operating where MC=MR=P

• 1 point - MC=MR=P or MR=MC or P=MC

Part (b) 2 points

The firm will charge $25; the price is determined by the market (not the firm).

• 1 point - Price equals $25
• 1 point - Market/industry determines the price. [Simply saying that the firm is a price taker in a competitive industry is NOT  acceptable.] or Price may be used to link marginal revenue to average revenue. [Simply asserting that MR=25 is insufficient.]

Part (c) 1 point

Yes, the firm should operate in the short run because it is covering all of its variable costs and some of its fixed costs; price is greater than AVC.

• 1 point - Yes and reason P>AVC or TR>TVC.  [Price or average revenue greater than total variable cost is unacceptable; total revenue greater than average variable cost is unacceptable.  A comparison of a total concept with an average concept is incorrect.]

Part (d) 1 point

The firm will earn an economic loss because average revenue (price) is less than average total cost.

• 1 point - loss and reason -- P<ATC or TR<TC is acceptable.  [Price or average revenue less than total cost is unacceptable; total revenue less than average total cost is unacceptable.]  Revenue less than cost is acceptable.