2025 AP Microeconomics FRQ Answers Explained (Set 1)

Part (a)

Draw the single-firm monopoly graph and mark its profit-maximizing quantity and price, an ATC curve consistent with a loss, and the shaded deadweight loss.

Draw a downward-sloping demand curve (D) with a marginal revenue curve (MR) below it, plus an upward-sloping marginal cost curve (MC).

Find QM where MR = MC, then drop straight down to label the quantity axis.

Read PM up from QM to the D curve and across to the price axis; price always comes off demand, not MR.

Because the firm earns a loss, draw the ATC curve entirely above the demand curve at QM (so price is below ATC), with MC cutting ATC at ATC's minimum.

Shade the deadweight loss triangle between the D and MC curves, from QM out to the quantity where D meets MC.

5 points: D+MR below it; rising MC, QM at MR=MC; PM off demand; ATC above demand, MC through its min; shaded DWL.

Part (b)

On the part A graph, mark the socially optimal (allocatively efficient) quantity of bottled water.

Label QS where the demand curve intersects the MC curve.

Allocative efficiency requires price (the marginal benefit read off D) to equal marginal cost, and D = MC is the only point that satisfies that. QS lies to the right of QM.

1 point: QS at the intersection of D and MC.

Part (c)

State what a per-unit subsidy does to the monopolist's profit-maximizing output and explain why.

The profit-maximizing quantity increases.

A per-unit subsidy lowers the firm's marginal cost, shifting MC down and to the right, so MC now meets MR at a larger quantity. Treating the subsidy instead as added revenue shifts MR right into MC at a larger quantity, which gives the same result.

1 point: quantity increases, with a valid MC (or MR) shift explanation.

Part (d)

Say whether demand for Voda's water becomes more elastic, less elastic, or unchanged as rival producers enter.

Demand for Voda Reservoir's water becomes more elastic.

New producers give buyers more substitutes, and more available substitutes make a firm's own demand more responsive to its price changes.

1 point: more elastic.

Part (e-i)

State what happens to Voda's demand for labor when demand for bottled water rises, and explain.

Voda's demand for labor increases.

Higher demand for bottled water raises its price and the firm's marginal revenue, which raises the marginal revenue product of labor (MRP = marginal product times marginal revenue). Since labor demand is the MRP curve, it shifts right.

1 point: labor demand increases, explained through a higher marginal revenue product of labor.

Part (e-ii)

State the short-run effect on the market wage of raising the minimum working age, and explain.

The market wage increases in the short run.

Raising the minimum employment age removes some potential workers, decreasing labor supply. With supply shifted left along a given labor demand, the equilibrium wage rises.

1 point: wage increases, explained by a leftward shift (decrease) in labor supply.

Part (a)

Calculate total economic surplus at the market equilibrium and show the work.

Total economic surplus is $270.

Equilibrium is Q = 60 at P = $4, where supply meets demand.

Surplus is the triangle between demand and supply from 0 to 60: (1/2) x ($10 - $1) x 60 = (1/2) x $9 x 60 = $270. Splitting it also works: CS = (1/2) x $6 x 60 = $180 plus PS = (1/2) x $3 x 60 = $90.

1 point: $270 with supporting work.

Part (b)

State whether a $3 price floor produces a surplus, a shortage, or neither, and explain.

Neither a surplus nor a shortage.

The equilibrium price is $4, so a floor set at $3 sits below equilibrium and is non-binding. The market still clears at $4 and 60 bushels, so no surplus or shortage forms.

1 point: neither, because the floor is below equilibrium (non-binding).

Part (c-i)

At a world price of $5, state whether Rushland exports or imports rice and support it with graph numbers.

Rushland exports rice.

At $5, domestic quantity supplied is 80 bushels while domestic quantity demanded is 50 bushels. Supply exceeds demand by 30 bushels, and that 30-bushel surplus is exported.

1 point: exports, supported by Qs = 80 > Qd = 50 (a 30-bushel surplus).

Part (c-ii)

Calculate domestic consumer surplus once Rushland trades at the world price, and show the work.

Domestic consumer surplus is $125.

At the world price of $5, domestic quantity demanded is 50 bushels. CS is the triangle under demand and above $5: (1/2) x ($10 - $5) x 50 = (1/2) x $5 x 50 = $125.

1 point: $125 with supporting work.

Part (c-iii)

Calculate the total revenue Rushland's farmers earn at the world price, and show the work.

Total revenue is $400.

Farmers produce the quantity supplied at $5, which is 80 bushels, and sell every bushel at the world price: $5 x 80 = $400.

1 point: $400 with supporting work.

Part (a)

Given that Bitaly picks Silver, state whether Unique is Tony's best choice and use the payoff numbers.

No.

If Bitaly chooses Silver, Tony earns $20 from Unique but $21 from Typical. Since $21 > $20, Typical is the better response, so Unique is not Tony's best choice.

1 point: No, because Typical's $21 beats Unique's $20 in the Silver column.

Part (b)

State whether Bitaly has a dominant strategy and justify it with the payoff numbers.

Bitaly has no dominant strategy.

When Tony plays Unique, Bitaly prefers Gold ($21 > $19). When Tony plays Typical, Bitaly prefers Silver ($16 > $7). Because Bitaly's best choice depends on Tony's choice, no single strategy dominates.

1 point: no dominant strategy (Gold best vs Unique, Silver best vs Typical).

Part (c)

Identify every Nash equilibrium in the game.

There are two Nash equilibria: (Unique, Gold) with payoffs $15, $21, and (Typical, Silver) with payoffs $21, $16.

In each of these, neither firm can raise its own profit by switching strategies while the other holds still.

1 point: both (Unique, Gold) and (Typical, Silver).

Part (d)

From the listed options, give the smallest profit increase to Typical that makes it Tony's dominant strategy.

$6.

Typical already beats Unique when Bitaly plays Silver ($21 > $20). The binding case is when Bitaly plays Gold, where Typical's $10 must exceed Unique's $15, so the increase must be more than $5. Of the choices ($2, $4, $6, $11, $15), $6 is the smallest that pushes $10 to $16 > $15.

1 point: $6.

Part (e)

If the two firms merge to maximize combined profit, calculate the largest combined profit and show the work.

The maximum combined profit is $39.

Add the two payoffs in each cell: Unique/Gold = 36, Unique/Silver = 39, Typical/Gold = 17, Typical/Silver = 37. The largest sum is $20 + $19 = $39 at Unique, Silver.

1 point: $39 (Unique, Silver: $20 + $19).