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 thoroughly
with examples and illustrations if appropriate.
- In the nation of Caffinia, the government regulates the coffee market by not allowing imported coffee into the
country.
A. Draw Caffinia’s current supply and demand curves, as well as the supply and demand curves of the nation if
imports are allowed in the market. Label the graph showing the different prices and quantities.
B. Using the graph from Part A, describe the differences between the price and quantity in the coffee market
when imports are allowed, as well as the price and quantity of coffee when imports are not allowed.
C. Bill, a resident of Caffinia, buys coffee in an unregulated market.
(i) Draw and label the demand and supply curves for coffee in the unregulated market.
(ii)Using the diagram from Part B(i), label and tell what region represents Bill’s consumer surplus. Why
did you choose this area?
(iii)Using the diagram from Part B(i), label and tell what region represents producer surplus. Why did you
choose this area?
D. Assume that the market for coffee is regulated and imports are not allowed into Caffinia.
(i) Draw and label, side-by-side, the supply and demand curves for the coffee industry and the cost curves
of a typical coffee producing firm. Assume the firm makes zero economic profit.
(ii)Using the graph from Part D(i), explain in detail the changes in the market supply and demand, as well
as the outcome of firms in the market in the long run if the government allows imports. - The fixed cost for a garden gnome firm to operate is $40. Labor is the only variable input; the firm can hire any
quantity of sculptors for $5 each. The firm can sell any quantity of the garden gnomes at the market price of $2
each. The following production schedule shows the total output of each sculptor.
Quantity of Sculptors Total Gnomes Produced00113223330434536637A. Is the market for garden gnomes perfectly competitive? Explain.
B. Is the labor market for garden gnome sculptors perfectly competitive? Explain.
C. Perform a marginal revenue product analysis.
(i) To maximize profits, how many sculptors should the firm hire?
(ii)What is the profit maximizing quantity of gnomes produced?
D. Using the profit maximizing quantities you determined in Part C:
(i) What is the firm’s total cost?
(ii)What is the firm’s total revenue?
(iii)Is the firm earning an economic profit? Explain.Microeconomics Full-Length Practice Test 2Microeconomics Full-Length
Practice Test 2
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