Early Solutions to the 2026 AP Microeconomics FRQs | Step by Step

Duopoly Game, Merger, Monopoly, and Tax

The original payoff matrix reports profits in millions of dollars. The first number in each cell is Feram's profit; the second is Ocel's profit.

Part A: Feram's Best Response When Ocel Chooses Sheets

Part B: Does Ocel Have a Dominant Strategy?

A dominant strategy must be Ocel's best choice regardless of Feram's action.

Part C: Nash Equilibrium

• If Ocel chooses Sheets: Rail gives Feram 50 instead of 40.
• If Ocel chooses Beams: Rail gives Feram 30 instead of 20.

Thus, Rail is Feram's strictly dominant strategy. Given that Feram chooses Rail, Ocel compares 75 from Sheets with 25 from Beams, so Ocel chooses Sheets. The cell (Rail, Sheets) is therefore the only cell containing mutual best responses.

Part D: A $20 Million Increase in Feram's Rail Cost

Only the first number in each Rail cell changes.

Part E: Acier as a Monopoly

After the merger, Acier is the only steel producer, so it faces the market demand curve.

1. Draw a downward-sloping demand curve labeled D or D = AR. Draw the marginal-revenue curve below demand.
2. Draw marginal cost, MC. The profit-maximizing quantity is where MR = MC; label it \(Q_1\).
3. Move vertically from \(Q_1\) to the demand curve. The corresponding price is the monopoly price \(P_1\).
4. Draw ATC so that ATC at \(Q_1\) is below \(P_1\). This is consistent with positive economic profit: \(\pi=[P_1-ATC(Q_1)]Q_1>0\).
5. The allocatively efficient quantity is where demand equals marginal cost, labeled \(Q_c\). Since a monopolist restricts output, \(Q_1<Q_c\).
6. Completely shade the area between demand and marginal cost from \(Q_1\) to \(Q_c\). That triangle is deadweight loss because those mutually beneficial units are not produced.

Part F: Effect of a Lump-Sum Tax on Acier's Price

1. A lump-sum tax is a fixed cost: it does not depend on the number of tons of steel produced.
2. The tax raises total fixed cost and average total cost, but it does not change marginal cost.
3. Demand and marginal revenue also do not change.
4. Because the monopoly output rule is MR = MC, the profit-maximizing quantity remains \(Q_1\).
5. With the same demand curve and quantity, the price read from demand remains \(P_1\).
6. Acier's economic profit falls by the amount of the lump-sum tax, but its short-run price and output do not change.

Competitive Firm and Short-Run Costs

Part A: Market Structure

Part B: Average Variable Cost at 4 Helmets

Average variable cost is variable cost per unit: \(AVC=VC/Q\). Because \(TC=FC+VC\), first calculate variable cost.

Part C: Economic Profit at 5 Helmets

Economic profit equals total revenue minus total cost: \(\pi=TR-TC\). At 5 helmets, \(TR=P\times Q=\$60\times5=\$300\). The table gives \(TC=\$235\).

Part D: Profit-Maximizing Quantity

For a perfectly competitive firm, marginal revenue equals the market price, so \(MR=\$60\) for every additional helmet.

The table confirms that the largest profit among the listed quantities is $105 at 8 helmets.

Part E: Long-Run Market Adjustment

1. Protecto and other firms are earning positive economic profit in the short run.
2. In a perfectly competitive market, positive profit attracts new firms because entry is possible in the long run.
3. Entry increases the number of sellers and shifts the market supply curve to the right.
4. The rightward supply shift lowers the market equilibrium price.
5. Entry continues until firms earn zero economic profit in long-run equilibrium, where price equals the minimum of average total cost for a representative firm.

Free Trade and a Tariff

Part A: Original Domestic Equilibrium

Part B(i): Free Trade at a World Price of $10

The world price is below the original domestic equilibrium price: \(\$10<\$20\). Under free trade, the domestic market price falls to $10. The quantity sold by domestic producers is found where the horizontal $10 line intersects the domestic supply curve. Label that quantity \(Q_2\). Because the lower price reduces domestic production, \(Q_2<Q_1\). Domestic consumers demand more than \(Q_1\) at $10; the gap between domestic quantity demanded and \(Q_2\) is filled by imports.

Part B(ii): Effect of Free Trade on Total Economic Surplus

The lower price transfers some surplus from domestic producers to consumers, but that transfer by itself does not change total surplus. Free trade also creates net gains:

• Consumers buy additional cucumbers whose willingness to pay exceeds the $10 world cost.
• Gurkeland stops producing some high-cost domestic units and imports them at the lower world price.

The gain in consumer surplus is larger than the loss in producer surplus. The difference is the gains from trade, represented by two welfare triangles in the standard trade diagram.

Part C(i): A $5 Tariff

For a small importing country, the tariff raises the domestic price by the amount of the tariff:

Find the intersection of the $15 horizontal line and the domestic supply curve. Label the quantity produced domestically as \(Q_3\). Since $15 lies between $10 and $20, the quantities satisfy \(Q_2<Q_3<Q_1\). Domestic production rises relative to free trade, while imports fall.

Part C(ii): Effect of the Tariff on Domestic Producer Surplus

The tariff raises the price received by domestic producers from $10 to $15. Producer surplus increases for two reasons:

1. Producers receive a $5 higher price on the units they were already producing under free trade.
2. The higher price makes additional domestic production profitable, so output expands from \(Q_2\) to \(Q_3\).

Graphically, the area above the domestic supply curve and below the market price becomes larger.