5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

TIP: Quickly write down the marginal products and highlight the options that satisfy the

least-cost condition. With the price of labor being $6 and the price of lemons $2, find those

ratios that are 3:1 and ignore all other possibilities.

Part (B): 2 points

i. 1 point: Output =39 (12 from 1 labor and 27 from 4 lemons)

ii. Total revenue =$1 ¥ 39 =$39

• Total cost =$6 ¥ 1 +$2 ¥ 4 =$14
  1 point: Economic profit =$25
  Note:Once again, if you happened to pick an incorrect combination of labor and lemons
  in part (A), it may be possible to receive both points in part (B) if you find the consistent
  level of output and profit.
  Part (C): 3 points
  1 point: The profit-maximizing amount of labor is 4 (find MRP =Input price =$6).
  The profit-maximizing amount of lemons is 5 (find MRP =Input price =$2).
  i. 1 point: Output =65 (36 from 4 labor and 29 from 5 lemons)
  ii. Total revenue =$1 ¥ 65 =$65


• Total cost =$6 ¥ 4 +$2 ¥ 5 =$34
  1 point: Economic profit =$31
  Note:Once again, if you happened to pick an incorrect combination of labor and lemons
  in the first part of (C), it may be possible for you to receive the last two points in part (C)
  if you find the consistent level of output and profit.

Question 3 (5 points)

Part (A): 2 points

1 point for explaining that a negative externality creates a situation where the marginal

social cost exceeds the marginal social benefit.

1 point for explaining how this market failure results in an overallocation of resources to

pork production. Too much pork is being produced.

Part (B): 2 points

i. 1 point: The market price and quantity identified at the intersection of marginal social

benefit and marginal private costs. Note that the MSB curve can also be labeled as a

demand curve. The MPC curve can be labeled as market (or private) supply and the

MSC curve can also be labeled as the social supply curve.

ii. 1 point: The socially optimal price and quantity are identified at the intersection of

marginal social benefit and marginal social costs. Quantity must be less than the market

quantity, and price must be higher than the market price.

MSC

MSB

Quantity

Pmkt

$P

spillover

cost

Qsocial Qmkt

MPC

Psocial

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TIP

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