Transcript Common Errors on the 2006 AP Economics Exam

Common Errors on the
2006 AP Economics Exam
Arthur Raymond
Muhlenberg College
Chief Reader, Economics
Common Errors on
the 2006 Exam
Micro 1, Part (c)
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Assume the price is set at P2. Assuming the
existence of an opportunity cost, indicate whether
the museum’s accounting profits would be positive,
negative, or zero. Explain why.
For the graph provided, P2 produces zero economic
profits. Because economic profits equal accounting profits
minus the opportunity costs of the owners’ resources, the
accounting profits must be positive.
Common Error: Unfamiliarity with the difference between
accounting profits and economic profits. A common wrong
answer was that accounting profits are zero.
Common Errors on
the 2006 Exam
Micro, Part 2 (c)
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If the price the firm receives for its
product is $20, indicate the firm’s
profit-maximizing quantity of
output and explain how you
determined your answer.
Quantity
Produced
Total Cost
(in dollars)
Marginal
Cost
0
1
2
3
4
5
6
20
27
38
53
72
95
122
7
11
15
19
23
27
The first two rows above the above table were provided on the exam and
it was stated that the firm is perfectly competitive. To maximize profits,
firms should produce if MR>MC, until MR=MC, but never produce a unit
for which MR<MC. P=MR is $20 and the MC is calculated in the second table.
Thus the first four units should be produced.
Common Error: Most students got Q=4, but the reason offered was
because MR is closest to MC at Q=4. That is NOT the reason.
Common Errors on
the 2006 Exam
Micro, Part 2 (e)
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(e) Assume this firm operates in a constant cost
industry and has reached long-run equilibrium. If the
government imposes a per-unit tax of $2, indicate
what will happen to the firm’s profit-maximizing
output in the long run.
The simplest answer is that because MC and ATC both
increase by $2, the price must also increase by $2 in the
long run because profits are always zero in the long run.
With MC and P both increasing by $2, the equilibrium
level of output will not change.
Common Error: The assumption that only MC (and ATC)
increases, so the equilibrium level of output falls.
Common Errors on
the 2006 Exam
Micro, Part 3 (c)
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Assume the conversion of open-space land and
farmland imposes costs on the general population,
which can no longer enjoy the scenic vistas.
(ii) Explain whether the private market quantity of
land converted into residential development is
socially optimal.
The private market quantity occurs where MB=MC.
Because MSC>MC, MSC>MB, which is not socially
optimal.
Common Error: Confusion about MSC, MC, and MB at the
private market quantity and at the socially optimal quantity.
Common Errors on
the 2006 Exam
Macro 1, Part (c)
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(c) Given your answer in part (b), explain what
will happen to unemployment in the United
States in the short run.
In part (b), the level of production fell, so in the
AD/AS model, employment falls in the short run
leading to an increase in unemployment
Common Error: Inability to link increasing unemployment with
falling output.
Common Errors on
the 2006 Exam
Macro 1, Part (d)
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(d) Assume the United States trades with Japan. Draw
a correctly labeled graph of the foreign exchange
market for the United States dollar. Based on your
indicated change in real output in part (b), show and
explain how the supply of the United States dollar will
be affected in the foreign exchange market.
The properly labeled graph should contain yen per dollar
on the vertical axis, the quantity of $ on the horizontal
axis with the demand and supply curves properly labeled.
The effect of reduced output in part (b) means less
income in the US, so imports will fall, leading to a reduced
supply of dollars on the foreign exchange market.
Common Errors on
the 2006 Exam
Macro 1, Part (d) – Cont’d.
Yen/$
S’$
S$
E2
E1
D$
Q of Dollars
Common Errors: Mislabeled graph, inability to link reduced
output with reduced imports and supply of dollars.
Common Errors on
the 2006 Exam
Macro 2, Part (a)
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a) Using a correctly labeled graph of the money
market, show how an increase in the income level will
affect the nominal interest rate in the short run.
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The correctly labeled graph will have the interest rate on
the vertical axis, the quantity of money on the horizontal
axis, with the supply and demand schedules properly
labeled. An increase in income will increase the demand
for money for transactions purposes, shifting Md to the
right and increasing the nominal interest rate.
Common Errors on
the 2006 Exam
Macro 2, Part (a)-Continued
i
Ms
i2
i1
M’d
Md
Quantity of Money
Common
Errors: Mislabeled Graph, shift of Ms to right.
Common Errors on
the 2006 Exam
Macro 2, Part (b)
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b) Using a correctly labeled graph of the loanable
funds market, show how a decision by households to
increase saving for retirement will affect the real
market interest rate in the short run.
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An increase in savings will increase the supply of
loanable funds, which will lower the real interest rate.
Common Errors on
the 2006 Exam
Macro 2, Part (b) – Cont’d.
r
SLF
S’LF
r1
r2
DLF
Quantity of LF
Common Errors: General unfamiliarity with the loanable funds framework.
Many used the money supply and money demand framework.
Common Errors on
the 2006 Exam
Macro 2, Part (c)
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(c) Suppose that the nominal interest rate has been 6 percent
with no expected inflation. If inflation is now expected to be 2
percent, determine each of the following.
(i) The new nominal interest rate.
(ii) The new real interest rate.
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With an increase in expected inflation of 2 percent, the nominal
interest rate will increase by 2 percent to 8%. The new real
interest rate will be 6%, the same as before the change in
expected inflation.
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Common Errors: General unfamiliarity with the effect of expected
inflation on nominal and real interest rates.
Common Errors on
the 2006 Exam
Macro 3, Part (c)
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Macro 3
(c) Assume the government reduces the level of
unemployment compensation.
(i) Explain how this affects the natural rate of unemployment.
(ii) Using a correctly labeled graph, show how this affects
the long-run Phillips Curve.
The correctly labeled graph has inflation on the vertical
axis, unemployment on the horizontal, and a vertical long-run
Phillips Curve. A reduction in unemployment compensation
reduces the benefit of unemployment, leading more active job
searches and a reduction in the natural rate of unemployment
and so a shift to the left of the long-run Phillips Curve.
Common Errors on
the 2006 Exam
Macro 3, Part (c) - Cont’d
inf
LRPC LRPC
un’nat
unnat
un
Common Error: Use of a downward sloping Phillips curve.