ANSWER KEY & EXPLANATIONS

Section I

1. (C) The three fundamental questions forced by scarcity. 2. (A) Next-best forgone alternative = the $60 tutoring session. Not $85 (don't add), not $90 (that's the chosen option's value). 3. (E) Specialized resources → increasing opportunity costs → concave PPC. 4. (B) Inside → onto the curve = putting idle resources to work; the curve itself never moved. 5. (D) More capital today builds productive capacity → future PPC shifts out farther. 6. (A) Vex: 1 board = 2 chips; Wren: 1 board = 1.2 chips → Wren's boards are cheaper; Vex's chips (½ board) beat Wren's (5/6 board). 7. (C) Board price must lie between 1.2 (Wren's cost) and 2 chips (Vex's cost) → 1.5 works. (A) and (E) exceed Vex's cost; (B) is below Wren's. 8. (E) Per 24 h: Pia 12 vases or 3 lamps (1 lamp = 4 vases); Quon 8 vases or 4 lamps (1 lamp = 2 vases). Quon's lamps cheaper; Pia's vases cheaper (¼ lamp < ½ lamp). 9. (B) Income ↓ + normal good → demand left → P ↓, Q ↓. (C) is the movement-along trap. 10. (E) Supply right (P↓, Q↑) + demand right (P↑, Q↑) → Q rises; P depends on magnitudes. 11. (D) 200 − 5P = 40 + 3P → 160 = 8P → P = 20; Q = 200 − 100 = 100. Check: 40 + 60 = 100 ✓. 12. (A) Above equilibrium: Qs > Qd = surplus → price falls. 13. (C) %ΔQ = −60/100 = −60%; %ΔP = 4/10 = 40%; |PED| = 60/40 = 1.5 → elastic. 14. (B) Price ↑ and TR ↑ → inelastic (price effect dominates). 15. (D) Positive cross-price elasticity → substitutes. 16. (A) Time to adjust all inputs (and for entry) makes supply responsive. 17. (E) Trades between the ceiling quantity and Q had WTP > cost but can't legally happen at the capped price. 18. (C) Floor above equilibrium → buyers are the short side → Qd rules. 19. (B) The relatively inelastic side (here buyers) bears more of any tax, regardless of legal incidence. 20. (D) DWL = ½ × ΔQ × tax = ½ × 40 × 4 = $80. (C) forgets the ½; (B) is revenue. 21. (A) Demand intercept $40. CS = ½ × 10 × (40 − 30) = $50. 22. (E) MUg/Pg = 6/1 = 6 must equal MUj/Pj = MUj/2 → MUj = 12. 23. (C) TU(3) − TU(2) = 72 − 54 = 18. 24. (B) Diminishing returns is a short-run law — it needs a fixed input to crowd. 25. (D) 56 − 40 = 16. 26. (A) ΔTC/ΔQ = 42/2 = $21. 27. (C) AFC = TFC/Q → falls forever; the others turn upward. 28. (E) ATC = AVC + AFC → the gap is AFC (shrinking but positive). 29. (B) The average-marginal rule: MC pulls each average to its minimum crossing point. 30. (D) All inputs variable + entry/exit possible — capability, not calendar. 31. (A) Output rising more than proportionally to inputs → falling LRATC → economies of scale. 32. (C) Economic profit = 400k − 250k − 130k implicit = $20,000. 33. (E) Tiny market share + identical products → no pricing power. 34. (B) Horizontal firm demand: P = MR = AR. P = MC only at the chosen output (not everywhere), so (C) is wrong. 35. (D) (9 − 6.50) × 400 = $1,000. 36. (A) P ($5) < min AVC ($6): production can't cover even variable cost → shut down; loss = TFC. 37. (C) The entry mechanism, run to its zero-profit endpoint. 38. (B) The price cut on all prior units drags MR below P. 39. (D) Quantity from MR = MC; price from the demand curve: $22. 40. (A) Restrict, raise, and lose surplus — the monopoly signature. 41. (E) DWL = surplus on the unproduced units between Qm and the P = MC output. (A)/(B) are transfers, not losses. 42. (C) Power, segmentation, no-resale (and differing elasticities to exploit) are needed; MC shape is irrelevant. 43. (B) D becomes MR → produce to WTP = MC: efficient output, zero DWL, zero CS. 44. (D) P = ATC → total revenue = total cost → normal profit; some DWL remains (not A/E). 45. (A) With ATC still declining, MC < ATC → P = MC < ATC → per-unit losses → subsidy needed. 46. (E) Tangency equilibrium: zero economic profit but P > MC and excess capacity. 47. (C) Tangency on ATC's downslope → output short of min-ATC scale. 48. (B) X: vs. Low, 16 > 12; vs. High, 6 > 4 → High dominant. Symmetric for Y. (High, High) = (6, 6): neither gains by unilateral switch (6 → 4). 49. (D) Factor demand is derived from the product market — here, passenger travel. 50. (A) MP₅ = 92 − 80 = 12 units; MRP = 12 × $6 = $72. 51. (C) Hire until MRP = wage (MFC in a competitive labor market). 52. (E) Productivity ↑ → MRP ↑ → labor demand right. (A)/(C) are movements along; (B)/(D) shift left. 53. (B) Monopsony: MRP = MFC at lower L, wage read off supply — below MRP. 54. (D) Labor: 30/10 = 3 per $; capital: 60/30 = 2 per $ → shift toward labor until ratios equalize. 55. (A) Producers equate MPB with MPC, ignoring the external cost → overproduction. 56. (C) Pigouvian tax = marginal external cost → MPC rises to MSC → market picks Qopt. 57. (E) Positive externality → underconsumption → subsidize by the external benefit per unit. 58. (B) Non-excludability → free riding → voluntary payment collapses → underprovision. 59. (D) Rival + non-excludable = commons → tragedy of overuse. 60. (A)* Closer to the diagonal = more equal = smaller area A = lower Gini.

MC scoring note: Answer distribution: A×13, B×12, C×12, D×12, E×11 — no letter-clustering.

Section II

FRQ 1 rubric (10 points)

• (a) 4 pts: Downward D with MR below it (twice the slope) (1); upward MC, U-shaped ATC (1); Qm at MR = MC with Pm read up to the demand curve (1); profit rectangle between Pm and ATC(Qm) over Qm units, with Qe marked where MC crosses D (1).
• (b) 2 pts: DWL = triangle between D and MC from Qm to Qe (1); it exists because units between Qm and Qe are valued above their marginal cost yet go unproduced — the monopolist stops where MR (not P) equals MC (1).
• (c) 1 pt: Elastic — at Qm, MR = MC > 0, and positive MR occurs only on the elastic portion of a linear demand curve.
• (d) 2 pts: (i) No change in Qm or Pm — a lump-sum fee is a fixed cost, which affects neither MR nor MC, so the MR = MC intersection is unchanged (1). (ii) Economic profit falls by the amount of the fee (ATC shifts up) (1).
• (e) 1 pt: Output rises (to where P = MC), price falls, and deadweight loss is eliminated.

FRQ 2 rubric (5 points)

• (a) 1 pt: MP₃ = 122 − 90 = 32 bushels; MRP₃ = 32 × $5 = $160.
• (b) 2 pts: 3 workers (1). Hire while MRP ≥ wage: MRP₁ = 250, MRP₂ = 200, MRP₃ = 160 all ≥ $130, but MRP₄ = (146 − 122) × 5 = $120 < $130, so the 4th worker would subtract from profit (1).
• (c) 1 pt: More — 4 workers. At $7.50: MRP₄ = 24 × 7.50 = $180 ≥ 130 but MRP₅ = 16 × 7.50 = $120 < 130. The higher product price raises MRP at every employment level (derived demand).
• (d) 1 pt: Market labor demand (ΣMRP) shifts right → equilibrium wage rises and market employment rises (correctly labeled W/L axes, D_L and S_L, rightward D_L shift).

FRQ 3 rubric (5 points)

• (a) 1 pt: Low is dominant for Chrono: if Tempo prices High, 52 > 40; if Tempo prices Low, 18 > 10 — Low wins either way.
• (b) 2 pts: Nash equilibrium = (Low, Low) with payoffs (18, 18) (1). Given the rival plays Low, switching to High cuts profit from 18 to 10 for either firm — no unilateral deviation pays (1).
• (c) 1 pt: From (High, High) = (40, 40), either firm that secretly cuts to Low jumps to 52 (while the loyal partner falls to 10) — cheating is individually profitable whatever the rival does, so the cartel unravels.
• (d) 1 pt: No — joint profits at (18, 18) = 36 are lower than (40, 40) = 80; individually rational play lands the firms on an outcome jointly worse (the prisoner's dilemma).

Scoring worksheet

Calibration: 68+ ≈ 5 · 55–67 ≈ 4 · 42–54 ≈ 3 · 32–41 ≈ 2. (Bands approximate real AP cut ranges, which vary year to year.)

Diagnostic map

Final calibration advice: If your composite lands in the 5 band, shift remaining prep to FRQ graph-drawing speed. In the 4 band, autopsy every MC miss by error type — most 4s are one systematic confusion away from a 5 (usually movement-vs-shift or price-from-MR). Below that, re-run the diagnostic map lessons and retake this mock in a week — question-level memory fades fast; model-level understanding is what you're checking.