2024 AP Microeconomics Free-Response Questions Study Notes

Examination Structure and General Instructions

The 2024 AP® Microeconomics Section II examination is structured and timed to facilitate thorough response preparation. The total time allocated for this section is 1 hour, which includes a 10-minute mandatory reading period followed by a 50-minute writing period. Students are advised to utilize the reading period to analyze all three questions and plan their answers, although writing may commence before the reading period concludes. The exam consists of three distinct questions. It is suggested that student allocate approximately half of the writing time (25 minutes) to the first question and split the remaining 25 minutes equally between the subsequent two questions (12.5 minutes each).

All responses must include correctly labeled diagrams when required or when they prove useful for explanation. A correctly labeled diagram is defined as one where all axes and curves are clearly identified and all directional changes are indicated. For any prompt that requires a calculation, the student must show every step of the work leading to the final numerical answer. All writing must be completed using a pen with black or dark blue ink. While planning may occur in the orange exam booklet, only material written in the separate Free Response booklet will receive credit.

Question 1: Perfect Competition, Market Equilibrium, and Elasticity

Question 1 concerns Soja Farm, which is characterized as a typical profit-maximizing firm operating within a soybean market. This market is defined as a constant-cost, perfectly competitive market currently in long-run equilibrium. The established market equilibrium price for soybeans is stated as $\$14$ per bushel.

Part (a) requires the construction of side-by-side graphs for both the soybean market and Soja Farm. The market graph must show the equilibrium price of $\$14$ and the market equilibrium quantity labeled as $Q_M$. The firm graph for Soja Farm must display the profit-maximizing price labeled as $P_F$ and the profit-maximizing quantity labeled as $Q_F$. Additionally, the Average Total Cost curve, labeled as $ATC$, must be drawn in a manner consistent with long-run equilibrium, meaning it must be tangent to the demand curve at the minimum point of the $ATC$ curve where price equals marginal cost ($P = MC = ATC$).

Part (b) explores the price-taking nature of firms in perfect competition. If Soja Farm independently chooses to increase its price to $\$15$ per bushel while all other firms maintain the market price, the firm's total revenue will decrease to $\$0$. This occurs because, in a perfectly competitive market, firms are price takers facing a perfectly elastic demand curve; consumers will shift all their purchases to competitors offering the market price of $\$14$.

Part (c) introduces a change in consumer preferences where soybeans serve as an input for tofu. As tofu becomes more popular, the demand for soybeans increases. On the previously drawn graphs, the market demand curve shifts to the right, establishing a new equilibrium price labeled $P_2$ and a new market quantity labeled $Q_2$. Consequently, Soja Farm will face a higher horizontal demand/marginal revenue curve, leading to a new profit-maximizing quantity labeled as $Q^*$.

Part (d) addresses the long-run market adjustment. Given the increase in demand and the resulting short-run economic profits (where P > ATC), the number of firms in the soybean market will increase. This is because the profit incentive attracts new firms to enter the industry until economic profits are eroded and the market returns to a long-run equilibrium.

Part (e) focuses on elasticity calculations based on market data for quinoa and tofu. A $25\%$ increase in the market price of quinoa results in a $5\%$ decrease in the quantity demanded for quinoa and a $10\%$ increase in the quantity demanded for tofu.

(i) The demand for quinoa is classified as inelastic. This is determined by the price elasticity of demand formula: $\text{Elasticity} = \frac{\%\Delta Q_D}{\%\Delta P} = \frac{5\%}{25\%} = 0.2$. Since the absolute value of the elasticity ($0.2$) is less than $1$, the demand is inelastic.

(ii) The cross-price elasticity of demand between quinoa and tofu is calculated as follows: $\text{Cross-Price Elasticity} = \frac{\%\Delta \text{Quantity Demanded of Tofu}}{\%\Delta \text{Price of Quinoa}} = \frac{+10\%}{+25\%} = +0.4$. The positive value indicates that quinoa and tofu are substitute goods.

Question 2: Market Equilibrium and Social Efficiency

Question 2 examines a perfectly competitive market for Good X. Based on the provided graphical data, students must perform specific identification and calculation tasks regarding market efficiency.

Part (a) requires identifying the specific market equilibrium price and market equilibrium quantity from the provided graph.

Part (b) requires the calculation of deadweight loss ($DWL$) at the current market equilibrium. Students must show the specific mathematical work, typically involving the area of the triangle representing lost gains from trade: $DWL = \frac{1}{2} \times \text{base} \times \text{height}$.

Part (c) addresses government intervention to eliminate deadweight loss. The student must determine whether a per-unit tax or a per-unit subsidy to consumers would achieve this goal. This choice must be explained based on whether the market is currently under-producing (requiring a subsidy) or over-producing (requiring a tax) relative to the socially optimal quantity. Furthermore, the student must identify the specific dollar value of this per-unit tax or subsidy.

Part (d) asks if a government-imposed price ceiling of $\$10$ would achieve the socially optimal quantity of Good X. The explanation must analyze whether a price of $\$10$ allows the quantity supplied to equal the socially optimal quantity or if it results in a persistent shortage or unintended quantity level that remains socially inefficient.

Question 3: Game Theory and Strategic Decision-Making

Question 3 presents a game theory scenario involving two vehicle producers, Nice Ride and Field Cruiser. Nice Ride is choosing between Safety or Comfort, while Field Cruiser is choosing between Reliability or Power. The firms act independently and simultaneously, with full knowledge of the payoffs but no cooperation.

Part (a) asks for Field Cruiser’s most profitable strategy if it is known that Nice Ride chooses to improve Safety. This requires identifying the cell in the payoff matrix corresponding to "Safety" and selecting the Field Cruiser strategy with the higher numerical profit entry.

Part (b) asks if Nice Ride has a dominant strategy. A dominant strategy is one that yields a higher payoff regardless of the strategy chosen by the competitor. The explanation must use specific numbers from the payoff matrix, comparing Nice Ride's profits for Safety versus Comfort when Field Cruiser chooses Reliability, and again when Field Cruiser chooses Power.

Part (c) evaluates whether the combination of Nice Ride choosing Safety and Field Cruiser choosing Power constitutes a Nash equilibrium. To justify this, the student must use numbers from the matrix to show that, given the other firm's choice, neither firm has an incentive to unilaterally change its strategy to improve its own reward.

Part (d) considers a merger between the two firms to maximize combined profits while maintaining both vehicle lines. Assuming the payoffs remain the same, the student must identify the cell in the matrix with the highest sum of profits for both firms. The new total profit is the sum of the two entries in that specific cell.

Part (e) introduces a change in market conditions where fuel prices reduce Field Cruiser's profit for choosing Power by $\$10$ million. The student must recalculate the payoffs in the "Power" columns, identify the new Nash equilibrium for the adjusted game, and state the specific profit each firm earns at that equilibrium.