The free-response questions account for one-third of the total score for each of the exams. There are three free-response questions on each exam. The first is worth about 50 percent of your free-response score. The second and third questions are each worth about 25 percent of your free-response score. The purpose of these questions is to test your analytical and organizational skills, and you will most likely be asked to apply your knowledge of economic graphs and tables. You will be allowed 10 minutes to read over the questions and think about your answers, and then 50 minutes to answer the questions. It is recommended that you allocate 25 minutes to the long question and 12.5 minutes to each of the two short questions. All topics are fair game on the free-response section, so be prepared!
Avoid rambling blindly into inaccuracy. Your first task after reading a free-response question is to determine which of your economic tools to apply to its solution. The use of graphs, equations, and structured reasoning will guide you to correct answers and allow you to check for potentially incorrect statements (if you are unsure of where to start).
Experimenting with possible approaches to the problem is not a bad idea. Apply the graphs, equations, or tables that seem the most relevant; if they don’t lead to an answer, try another approach.
President Bill Clinton was elected twice and became the most popular second-term president in half a century—even after being impeached—because of one truth that he understood well: “It’s the economy, stupid.” The strong economy led directly to more dollars in citizens’ pockets. Indirectly, it resolved many more problems involving the deficit, unemployment, and welfare. For you, the secret is this:
It’s the graphs, stupid!
Since 1996, students have been required to draw and label their own graphs for some parts of the free-response questions on the AP Microeconomics Exam. Drawing graphs is not only the key to earning points on graph questions, but it is also the secret to solving problems that may not even require a graph. Have you noticed that economists seem compulsive about drawing graphs? It’s not that they are repressed artists. Rather, they know this secret: economics may seem very hard to sort out in your head but it can be relatively easy with a few illustrations. Invest the time necessary to learn to draw the graphs. Resist the temptation to interpret the question with words alone. Although the graders often permit a high point allocation for good prose (word-only) responses, the most successful prose responses are typically explanations of graphs that show that the students understood the graphs and visualized them in their minds.
Consider the following question:
4. Suppose there is a drought and a successful advertising campaign for parsley in the same year.
(a) Draw a correctly labeled supply and demand diagram to represent this scenario.
(b) Explain how the shift identified in part (a) will affect the equilibrium and quantity of parsley.
The first part of a free-response question often involves sketching the situation, but even when it doesn’t, or if you are dealing with a tricky multiple-choice question, you still want to be able to quickly draw the basic situation. The only difference is that because you’re handing in this chart, you’ll want to make sure you clearly label everything.
(b) Because a drought decreases supply from S0 to S1 and successful advertising increases demand from D0 to D1, the new equilibrium price will be higher and the quantity may increase or decrease depending on the size of the supply and demand curve shifts.
Don’t lose points by making the following common mistakes:
• Mislabeled or Unlabeled Graphs
Labels matter. Just because you drew lines shaped like supply and demand curves when the question clearly is looking for them doesn’t mean the graders will assume you knew what you were doing. Label every line and every axis.
• Skipped Steps in the Story
Don’t hold back information that is part of the answer even if it seems obvious. The graders want to read about every step between cause and effect. Don’t just say, for example, that expansionary monetary policy increases aggregate demand. Explain how the Fed’s expansionary action shifts the money supply curve to the right, thus lowering interest rates. Explain how the lower interest rates attract more investment, shifting the aggregate expenditure function upward. Explain how the autonomous shift in aggregate expenditures results in an ultimate increase in aggregate demand equal to the change in investment times the multiplier.
• Illegible Graphs or Writing
Don’t be in such a hurry that your brilliant answers turn into wasted ink.
• Saying Too Much
Don’t stray into unquestioned territory. You won’t get points for the right answer to the wrong question and your reader might think you don’t know what you’re talking about!
• The Punt
Even if you don’t think you can answer a question or a part of a question, first answer the parts about which you are more confident, and then use any spare time to make your best attempt at writing something logical and coherent. Some questions might not be asking for as much complexity as you think. You might pick up a point or two if you show enough signs of intelligent life. Unfortunately, some students give up and write down jokes instead. Not even the best joke will earn any partial credit.
• Examples without Explanations
Too often, questions that seek definitions or conditions are answered merely with examples. If a question asks, for example, “What is distinct about public goods?” explain how they are nonrival and nonexcludable. Don’t just say, “National defense is an example of one.”
• Breaking the Golden Rule of Economics: MC = MB
One of the primary lessons in economics is that we should do whatever we do until the marginal cost (MC) equals the marginal benefit (MB). Marginal cost is the cost of one more and marginal benefit is the benefit from one more. The answers to many questions have to do with equating marginal cost and marginal benefit, after adapting these terms to the situation. For firms, the marginal “benefit” is generally assumed to be marginal revenue, and every type of firm maximizes profits or minimizes losses by producing where marginal cost equals marginal revenue (if they should operate at all). Likewise, we assume that individuals seek to maximize utility, which is accomplished by consuming goods until the marginal cost to individuals (the price) equals the marginal utility (measured in dollars). We should also continue until MC = MB when renting pizza ovens, searching for a job, studying, eating, shopping, etc.
The reasoning behind this rule is straightforward. Regardless of what we are buying, selling, making, or doing, if one more unit costs less than the benefit it adds, there is a net benefit from proceeding with it. If one more unit costs more than the benefit it adds, we should not proceed with it. So in terms of the AP Economics exam, if you’re struggling with a question that has to do with how much of something should happen, try to identify the marginal cost and marginal benefit for the decision maker and suggest that they be equated.
For example, suppose you are asked how a competitive firm should decide how many workers to hire in the short run. The MC of hiring a worker is the worker’s wage. The MB is the worker’s marginal product (MP)—how many widgets that worker will produce—times the price per widget.
Even if you don’t remember the jargon that MC = MB = MP × P, you should earn worthwhile partial credit for explaining that the firm should hire workers until the last worker’s wage equals the last worker’s contribution to output times the price.
At the same time, the rule that MC = MB applies to you too! If you’ve been writing for 25 minutes on the long question, even if you feel you have more to say, ask yourself “Does the marginal benefit of writing an extra few sentences on this question equal the marginal cost of maybe not finishing the short questions because I run out of time?” Probably not.
Now use the advice above to help you answer the following sample of a free-response question.
1. The formula for the price elasticity of demand is
(i) Explain why price elasticity of demand values is typically negative.
(ii) Explain the relationship between the price elasticity of demand and the slope of a demand curve.
(iii) Explain why a monopoly should never operate on the inelastic portion of its demand curve.
Here’s How to Crack It
Although the question does not ask for a graph, the use of graphs will lead you to the correct answer and help convey that answer to the graders.
For part (i), draw a typical demand curve graph and remember the law of demand: when the price goes up, the quantity demanded goes down, and vice versa. In the elasticity formula, price (P) and quantity (Q) will always be positive. According to the law of demand, if the change in the price demanded is positive, the change in quantity demanded will be negative. If the change in the price demanded is negative, the change in quantity demanded will be positive. Either way, there will be a single negative value on the top or bottom of the formula, resulting in a negative elasticity value. After drawing the graph, you can explain this answer to the grader just as it is explained above.
For part (ii), you should gather your thoughts on the two items in question before venturing into a comparison. You probably remember that slope is “rise” over “run.” Draw a complete demand curve graph including the axes. You will note that the vertical change, or “rise,” in the demand curve represents a change in the price and the horizontal change, or “run,” is a change in quantity. Thus,
A comparison of this formula with the elasticity formula clearly shows that slope and elasticity are not the same. Slope is the inverse of the elasticity formula without the P and Q. Thus, as slope increases, elasticity decreases (and vice versa), but elasticity also changes when P and Q change regardless of the slope. Use of the graph, the slope equation, and this explanation of the nature of the inverse relationship should yield a high score.
Part (iii) might seem difficult until you construct some visual cues. Because the question is about a monopoly, draw a complete monopoly graph including D, MR, and MC. Perhaps you remember the relationship between demand elasticity and MR: demand is elastic where MR is positive, is elastic where MR is zero, and is inelastic where MR is negative. Putting this information together with what is on the graph will tell you the answer. Because MC is always positive and firms operate where MR = MC (if at all), the firm must operate where MR is positive. Producing on the inelastic portion of the demand curve is equivalent to producing where MR is negative, meaning that total revenue would increase by producing less.
If you don’t remember the relationship between MR and elasticity, there is still hope. Because the question asks about elasticity, draw a very inelastic (steep) and very elastic (almost flat) demand curve to exaggerate the characteristics of these two types of demand. On the relatively inelastic demand curve, if the monopoly raises prices and correspondingly lowers production, total revenue (the rectangle on the graph representing price times quantity of output) increases. With revenues increasing and output (and therefore costs) decreasing at the same time, profits must be rising. Thus, the monopoly should keep increasing prices as long as it is operating on the inelastic portion of the demand curve. It is clear from the elasticity formula that as price increases and quantity decreases, demand becomes more and more elastic. On the exaggerated elastic demand curve, since price increases result in lower revenues, before a monopolist raises prices, he or she should determine whether the loss in revenues is less than the decrease in costs. If we lower P to sell one more unit, Qd will change by a smaller percent so that P × Q = TR will fall.
