D.
(i)Any farmer who is producing at a point below his average variable cost curve is operating with losses.
In the long run these farmers will leave the peach industry and try to find an industry that has profit to
be captured.
(ii)Industry supply will decrease as a result of farmers exiting the market for peaches. This decrease in
supply will increase the price of peaches slightly.
E.If Farmer Joe monopolizes the peach industry, there will be a new price and quantity supplied in the market
place. The quantity supplied will decrease to the point at which marginal cost is equal to marginal revenue, and
the price will be increased to either the maximum amount a consumer will pay for peaches or to the price that
corresponds to the new higher price read off the demand curve for peaches.
F. In the short run, the farmers would collude and charge the monopolistic price and quantity for peaches. In the
long run, the cartel would fail because of the increased incentive of each farmer to produce a little more output
to capture more revenue. Because of the higher price in the peach market, each farmer has a higher incentive to
produce more peaches. This extra production of peaches by each farmer will work to decrease the price of
peaches because of the extra supply in the market. In the long run the cartel would collapse.
G.
(i)(ii)A price floor effectively sets a price higher-than-market price; in this case equilibrium market price is at
PE, and the price floor price has been set at P(f). At this new higher price for peaches, consumer demand
less peaches than the equilibrium quantity (consumers now demand QD amount of peaches as opposed
to the equilibrium level of QE amount of peaches). Also, at the new higher price farmers want to produce
more peaches than the equilibrium quantity (producers now produce Q(S) amount of peaches as opposed
to the equilibrium quantity of QE amount of peaches). In the long run, there will be a surplus of peaches
in the market because of this inequity between the quantity supplied and quantity demanded.- A.Since we assumed that California cheese and Wisconsin cheese are substitutes and that they are the only two
cheeses available in California, the tax on Wisconsin cheese would cause the demand for California cheese to
shift out. The equilibrium price of California cheese would increase, and the equilibrium quantity would increase.
The following graph illustrates this.
Q(D) Q(e) Q(S) QuantityP(e)P(f)Price
SDMicroeconomics Full-Length Practice Test 1Microeconomics Full-Length
Practice Test 1