ANSWERS! 2026 Microeconomics FRQ Unboxing - (Best Guess)

Hi everybody, Jacob Reed here from reviewecon. com. Today we're going to be going over the 2026 microeconomics exam FRQ. This is my unboxing video. The exam just got released a couple of hours ago or several hours ago. Um I've now gone through the uh FRQs and uh done my best to make some guesses as to what I think the answers are. Um before we get in before we get into it, I want to admit that I'm a little sad right now because uh my own students did not get these three questions. Uh so they got one of the other versions. If that happens to you, unfortunately, I do have bad news. Uh we're not going to see those questions released. And so, unfortunately, we're not going to be dis- able to discuss them and figure out what the answers are on those. So, I hope most of you got this one. My own students are a little sad about that as well. If you didn't, they understand. They feel your pain. Uh before we get into it also, in addition to that, I want to thank everybody for supporting reviewecon. com. If you haven't done so already, I would love it if you subscribe to the channel. Um it does help us with the algorithm. Um and also like this video. If it If it's helpful for you, share it with somebody else that took the uh microeconomics exam. Hopefully, they got this same set of questions. And uh and make sure you tell your friends uh who might be taking AP Economics next year about reviewecon. com. I would appreciate the support. All right, let's go ahead and get into the questions. Oh, one more thing, I don't know for sure what the answers are going to be. These are my guesses based on previously released rubrics and uh my experience with AP Economics. So, but this is what I think the answers are going to be or at least what would be acceptable uh based on the rubrics is what I think. All right. So, first of all, our first question, we have a payoff matrix. This is game theory. Um and so, we have two companies. We have Ferrum and Ocell. I'm not sure if I'm pronouncing those correctly, but they O cell produces sheets of metal and steel beams and Ferrum can transport via truck or rail. And then we have a whole bunch of numbers in the payoff matrix. Those are the amounts of profit for both firms depending on where they end up and what their choices are. First question is what is Ferrum's most profitable strategy if O cell produces sheets? In order to answer that question, we're only looking in that column there and more specifically we're only looking at those two sets of numbers. Those are the payoffs or the profit if for Ferrum if O cell is producing sheets. So, they're choosing between $40 million and $50 million. We're going to go ahead and put a star there. That is $15 million of profit for Ferrum. I'm leaving the star there so that I can find the Nash equilibrium for later on in this question. And that leads me to my answer here rail. No need to explain, but it is because $50 million is greater than $40 million. On to the next part. For part B, does O cell have a dominant strategy? And we have to explain using numbers from the payoff matrix here. In order to find out if they have a dominant strategy, first we're going to find out what they would choose to do if Ferrum transports by truck. That means O cell is choosing between $95 million and $125 million. $125 million of profit is better. So, we're going to have going to go ahead and put a star there. And if they think that Ferrum is going to transport by rail, then they're choosing then O cell is choosing between $75 million and $25 million and $75 million is better. So, in one sense they will choose beams and in the other sense then in the other instance they will choose sheets. So, that means that they do not have a dominant strategy. So, my answer is no because if Ferrum transports by truck, O cell is better off producing beams. That's $125 million is greater than $95 million and if Ferrum transports by rail, Osell is better off producing sheets. $75 million is greater than $25 million. If you have an answer something like that with the numbers, I think you'll get your point there. On to part C, we have to identify a Nash equilibrium or equilibria for this game and or state that none exist. We already have one Nash equilibrium identified there, but we need to answer one more question to find out if there's a second one. So, we're going to be in that column there. We're looking at the This is if Osell produces beams, Ferrum has to choose between $20 million and $30 million and since $30 million is better, we're going to go ahead and put a star there. That leaves us with a single Nash equilibrium right there in that lower left quadrant. So, we're going to identify what we see there. Ferrum transports by rail, $50 million profit and Osell produces sheets. That's our single Nash equilibrium. Um and I also threw in the amount of profit there just for just to be safe cuz I always like to use numbers if they're possible. All right. For part D, suppose that Ferrum incurs a $20 million increase in

the cost of rail transport with no other changes. We're going to redraw this payoff matrix showing that increase in cost, which is really a reduction of these profits that we see here, right? Um now we're only going to change the profit for the places where Ferrum is going to be transporting by rail and that is only going to be those two numbers. The other numbers in the that row belong to Osell and Osell doesn't transport by rail. They either produce sheets or beams. So, we're going to subtract the $20 from those numbers and everything else is going to remain the same. So, I have $30 million instead of the $50 million and $10 $30 million there. And if you have that, I think you're going to get your point. On to part E, we're going to suppose that these firms work together. They now form a monopoly, and we're going to draw the graph, a properly labeled monopoly graph, for ACer, which is the new company's name, apparently. So, uh and we're going to have all of the proper things labeled. Plus, we're also going to shade in the deadweight loss. All right, so here's what we got. I have a downward-sloping demand, marginal revenue below. I think that's the first point. I think the second point will be from finding MR = MC quantity. Next price at the demand curve above. Then, you'll get a point, I think, from uh the having the ATC below the demand curve at the profit-maximizing quantity of Q1, and having it at its minimum point where it intersects the marginal cost. I think you will and then I think the last point will be for properly shading the deadweight loss, which is right there in that triangle. Now, onto the last part. This is part F. Uh we are asked if government regulators impose a lump-sum tax on ACer, if the profit-maximizing price is going to increase, decrease, or remain unchanged as a result of the lump-sum tax, and we have to explain. So, uh in order to change the price, then the MR = MC quantity is going to need to move, or the demand curve, um which moves the marginal revenue as well. So, here's my answer here. Uh no change because the lump-sum tax will only impact the ATC and will not move the marginal revenue or marginal cost. And if you have an answer something like that, I think you'll get the last point. All right, and onto part two. Question number two, we have Protecto. Uh this is their short-run cost schedule for producing helmets. They produce and sell helmets, uh and they can sell them as many as they want at $60 each, and their fixed cost is $80. First, we have to identify the market structure that Protecto sells helmets in, and here's the key here. If you read carefully, you have enough information here, and it's just in the stem. "Sells as many helmets at it as it wants at the market price. That means Protecto is a price taker and the price takers are perfectly competitive firms. So, perfect competition. Just identify it. No it No explanation needed. On the part B, we're going to calculate Protecto's average variable cost when it produces four helmets and we're going to show our work. So, if they produce four helmets, that means their total cost is going to be $200. We're going to subtract the $80 fixed cost, that'll leave us with $120 and then we simply divide by the quantity produced of four and there's our answer. So, I took the total fixed total cost minus the fixed cost divided by the quantity equals the ABC, which is $30. All right, on the part C, we're going to calculate Protecto's economic profit when it sells five helmets and we have to show our work. So, if they are producing five helmets, they have $235 of cost and we have uh $60 each is what they're selling for. So, we're going to take the $60 of price times that by five units produced and then subtract the $235 and that is $65 of economic profit. And if you have all that with the work shown, I think you'll get your point. Next, we are told to identify Protecto's profit maximizing quantity of helmets and we have to explain using marginal analysis um and numbers. So, we uh we already have our marginal analysis means marginal cost, marginal revenue or marginal benefit, marginal cost. And uh so, we're we already have that calculated. We're just going to look at that portion right there uh to speed up the process of finding it. Um the and remember that the marginal revenue is the same as the price, which is $60. So, that leads me to my answer here, eight, because that eighth unit has a marginal revenue of $60 but a marginal cost of 55 and if they produce nine, then the marginal revenue will be 60 and the marginal cost will be 65. So, that ninth one would actually decrease their profit by $5. All right, on to part E. Protecto is earning positive economic profit in the short run. As the market for helmets adjust to a new long-run equilibrium, will the market price for helmets increase, decrease, or remain the same? And we have to explain this time. Remember, perfectly competitive firms break even in the long run. And if you remember the process, this should have been an easy explanation. Decrease

because the economic profits will cause firms to enter the market and shift the market supply to the right. That lowers the price. On to part three, or question three. In Gerkland, we have a domestic market for cucumbers, and they have a regular old upward-sloping supply, a downward-sloping demand, upward-sloping supply, and they currently have an equilibrium price of $20 per bushel. We're going to draw that equilibrium market and label the equilibrium price of $20 and the market quantity of Q1. There you go. Just downward-sloping demand, upward-sloping supply, mark that quantity and the price of $20. And that, I think, you'll get 1 point for it. Now, on to part B, we're going to suppose that Gerkland engages in free trade with other countries and that the world price of cucumbers is $10 per bushel. On the graph we already drew, we're going to show the world price for cucumbers and label it $10. And the quantity of cucumbers sold by domestic producers, we're going to label that Q2. So, the world price is at $10. It's below the equilibrium. That is the world price there. I labeled it supply for the world, also. And I put it at 12 at 10 $10. And the quantity produced is going to be at the supply curve that at that at that price of $10. So, I marked it Q2, where that world supply or world price intersects the supply curve. Next, we're told that we're asked will economic surplus in Gerkland increase, decrease, or remain the same as a result of engaging in that free trade? Um our answer here is increase. You don't have to explain, but remember that uh economic surplus because they will actually produce at the quantity demanded at that $10, which means that um consumer surplus dramatically increases, and producer surplus does shrink significantly, but the increase in consumer surplus uh outweighs that decrease in producer surplus and then some. But and so the answer is increase. All right. You can check the international trade graph on ReviewEcon if you'd like. All right. So, on to the next part. Um we're going to for part C, we're going to suppose that the government um incre imposes a tariff uh $5 tariff per bushel on the import of cucumbers. On the graph we already drew, we're going to show the quantity of cucumbers and label it Q3. Uh um uh uh as that will be produced as a result of the $5 tariff. So, I'm going to shift that world price upward along with the world supply, and now I call that world supply plus the tariff, I mark it $15 because it will increase the price by $15 in this model, and at $15 we have Q3 as the quantity supplied. That will be the domestic quantity produced here. All right. On to the next part. As compared to with free trade described in part B, will domestic producer surplus in the market for cucumbers increase, decrease, or remain the same as a result of the $5 tariff imposed on the import of cucumbers, and we have to explain. So, here's my answer. It's going to increase. This producer surplus will increase, and that's because domestic producers don't pay the tariff, but they do get to sell more. Q3 is greater than Q2, and they get to sell at a higher price. And I put that higher price $15 versus the $10. I don't know that you'll need those numbers, but I put them there because when you can use numbers, you generally should. And there you go. There's my answer. And that is the end of the exam. So again, I'm not 100% sure that all of these answers are correct. Let me know in the comments what you think. You think I made any mistakes? Maybe I did. I'll admit it in the comments if I think I made a mistake. Some years I do. But thank you again very much for the support that you all had for reviewecon. com. Good luck on your macro exams. Make sure you keep on studying as much as you can until Friday when you start that exam at noon. All right, take care everybody. That's it for now. I'll see you all next time.