Microeconomics Section II: Free-Response Questions
Directions: You have one hour to answer all three free-response questions: one long and two short questions. Spend the
first 10 minutes for planning, and in the remaining 50 minutes construct your responses. Explain your answers thor-
oughly with examples and illustrations if appropriate.
- Farmer Joe grows peaches and sells them in a perfectly competitive market.
A. Draw and label farmer Joe’s cost curves for growing peaches and the market supply and demand curves for
peaches. For the cost curves, include the marginal cost, average total cost, and average variable cost curves.
Assume Farmer Joe’s marginal revenue is equal to his profit maximizing price.
B. What is Farmer Joe’s profit maximizing output and price? Also, show Farmer Joe’s total revenue.
C. Suppose the market demand for peaches suddenly decreases. Describe the effects of such a change on
Farmer Joe’s cost curves.
D. Suppose many peach farmers, not including Farmer Joe, are producing at a point below their average
variable cost.
(i) What will these peach farmers do in the long run?
(ii)Describe the effects of this choice on the industry supply and how it will effect the other farmers.
E. Suppose Farmer Joe monopolizes the peach industry. Describe the changes in the quantity supplied, market
price, and how these numbers are determined.
F. Suppose only six farmers, including Farmer Joe, remain in the peach industry, effectively creating an
oligopolistic market. The six farmers plan to collude, form a cartel, and charge a monopoly price and
quantity. Describe the outcome of the market in the long run.
G. Suppose that in a perfectly competitive peach industry the government decides to set a price floor.
(i) Draw and label a diagram showing the price floor set by the government.
(ii)Discuss the long term effects of a price floor on the peach industry. - Assume that California cheese and Wisconsin cheese are close substitutes, both are in their own perfectly
competitive markets, and the demand for both is price elastic. Also assume that California cheese and Wisconsin
cheese are the only cheeses available in California. What would happen to the cheese markets in California if the
California government places a tax on all Wisconsin cheese sold in California.
A. Draw and label the effects of the Wisconsin cheese tax on the California cheese market in California.
(i) What will happen to the equilibrium price of California cheese in California?
(ii)What will happen to the equilibrium quantity of California cheese purchased?
B. Now draw and label the effects of the Wisconsin cheese tax on the Wisconsin cheese market in California.
(i) What will happen to the equilibrium price of Wisconsin cheese in California?
(ii)What will happen to the equilibrium quantity of Wisconsin cheese purchased in California?
C. Explain what will happen to the total expenditures on Wisconsin cheese in California (remember that the
demand for Wisconsin cheese is price-elastic). - Assume that pistachios and walnuts are substitutes and both exist in a perfectly competitive long-run market
industry that is in equilibrium.
A. Jack, a small owner of a pistachio grove, engineers a new tool that can reduce the cost of picking pistachios.
Discuss in detail how the new tool will affect each of the following:
(i) The price of production of the final product
(ii)The quantity of pistachios produced
B. Jack patents the new tool and makes it available to other pistachio producers for purchase.
(i) What will happen to the overall market price of pistachios?
(ii)What will happen to the production of pistachios?
Microeconomics Full-Length Practice Test 1Microeconomics Full-Length
Practice Test 1
GO ON TO THE NEXT PAGE