1998 Micro Free Response

1.    Assume that the market supply and demand curves for wheat are price inelastic, but not perfectly price inelastic at the equilibrium price.  For ALL parts of the question, assume that price remains in the relatively inelastic portions of the supply and demand curves.

(a)    As a result of favorable growing conditions, the number of bushels of wheat produced increases.  Use a graph to explain the result of this change on each of the following.

(i)    Market price of wheat
(ii)    Industry output of wheat
(i)    Revenue of wheat farmers

(b)    Use a new graph to show what happens in the wheat market if the cost of fertilizer used in the production of wheat increases, and if the government announces that the consumption of wheat products greatly reduces the risk of having a heart attack.  Explain the impact these events have on each of the following.

(i)    Market price of wheat
(ii)    Industry output of wheat

(c)    Assume now that the government establishes an effective price floor for wheat.  Use a new graph to indicate where an effective price floor will be set.  Explain the effects of such a program on each of the following.

(i)    Consumer surplus in the wheat market
(ii)   Allocative efficiency

Answer to #1

 

2.    Suppose that the table below presents the production schedule of Company XYZ, where labor is the only variable input.

(a)    Define the law of diminishing marginal returns.

(b)    Explain why diminishing marginal returns occur.

(c)    With reference to the number of workers in this production process, at what point do  diminishing marginal returns set in?

(d)    What is the typical relationship between the average product curve and the marginal product curve?

(e)    What is the typical relationship between average product curve and the average variable cost curve?

Answer to #2

3.    Some businesses often charge one group of customers a higher price than they do another group of customers for the same good or service, even though the costs of providing the good or service are the same.

(a)    Explain how the elasticities of demand for the two different groups affect the different prices they are charged.

(b)    Graphically demonstrate how the firm would determine the profit-maximizing price and output in each market.

(c)    Identify two conditions, other than different elasticities of demand, that are necessary for businesses to charge different groups of customers different prices for the same good or service.

Answer to #3