Correct Answer and Standards for 1999 Micro Free Response

1.    I.    Correct answer

Part (a)  With fewer firms producing textiles, the supply of textiles is reduced; the supply curve shifts to the left (inward).  With a higher price for textiles, the quantity supplied increases along an unchanged supply curve.

Part (b)  The tariff raises the per unit supply price of all units of imported textiles; the supply curve in market B shifts to the left (inward), leading to a higher equilibrium price and a lower equilibrium quantity of imported textiles.  Since imported and domestically produced textiles are close substitutes, the increase in the price of imported textiles leads to an increase in the demand for domestically produced textiles (market A).  Both the equilibrium price and quantity increase in market A.

Part (c)  A higher wage for textile workers leads to a reduced supply of domestically produced textiles.  In market A, the supply curve shifts to the left (inward), and there is an increase in the equilibrium price and a reduction in the equilibrium quantity.

Part (d)  The individual firm is a wage taker in the hiring of labor.  Thus the firm faces a perfectly elastic (horizontal) labor supply, and the firm is able to hire all the labor it wishes at this wage rate.  Given that the wage rate has increased, the firm's labor supply, while remaining perfectly elastic, shifts up to reflect the higher wage.  The firm's labor demand, its marginal revenue product of labor curve, shifts out (increases) because the price of textiles increased (in part c).  [While not required in the answer, the intersection of the firm's new labor supply and new labor demand should show a reduction in the quantity of labor employed by the firm.  Given that all firms are collectively producing fewer textiles (part c), the representative firm will produce fewer textiles and employ fewer units of labor.]


II.    Grading Rubric for #1:  9 points

Part (a)  2 points

Part (b) 4 points

(i)    Import Market B:

(ii)    Domestic market A:

Part (c): 1 point

Part (d): 2 points

Firm's labor hiring situation:  NOT the market

[Notes:  1.  The firm's quantity of labor hired should fall since each firm is producing less output from Part (c). However, the two points may be awarded even if that conclusion (which is not asked for in the question) is not reached.
                    MRP may be labeled DL if the axes are properly labeled (wage on the vertical axis and employment, or quantity of labor, on the horizontal axis); the graph must be clearly related to the firm's hiring of labor and not that of the labor market.]

2.    I.    Correct Answer

Part (a)  With equal amounts of resources and identical technologies, each country can produce the same maximum quantity of wheat.  Thus, neither country has an absolute advantage in wheat production. Country B has the absolute advantage in cloth production because it can produce more than Country A.

Part (b)    For country A the opportunity cost of a bushel of wheat is 1 yard of cloth; for Country B, the opportunity cost of a bushel of wheat is 3 yards of cloth.  Since Country A has the lower opportunity cost for producing wheat, Country A has comparative advantage in wheat production.  Alternatively, Country B has the comparative advantage in the production of cloth.

Part (c)    Given that comparative advantage is the basis for trade, Country B will specialize in the production of cloth, exporting cloth and importing wheat.

Part (d)    Country B will import wheat, exchanging 2 units of cloth for one unit of wheat.  The country benefits from trade because if it produced wheat itself, a unit of wheat would be more expensive, costing 3 units of cloth.

 

II.    Grading Rubric for #2:  5 Points

Part (a) 1 point

Part (b) 2 points

Part (c) 1 point

Part (d) 1 point

3.    I.    Correct Answer

Part (a)  The competitive firm is a price taker and faces a horizontal demand curve at the market price.  The marginal revenue curve is also horizontal at the market price, coinciding with the demand curve.  The monopoly firm faces the downward sloping market (or industry) demand curve. The marginal revenue curve is below the demand curve.  [For a linear demand curve, the slope of the marginal revenue curve is twice that of a demand curve.]

Part (b)  For the competitive firm, marginal revenue equals demand.  The competitive firm sells each unit of output at a constant price.  Thus, the additional revenue associated with an additional unit of output (or marginal revenue) is equal to the market price.

Part (c)  For the monopoly firm, marginal revenue is less than price. Unlike the perfectly competitive firm, the monopolist is a price setter.  For the monopoly firm to sell an additional unit of output, the firm must lower price on all units of output.  thus, the extra revenue received from selling an additional unit of output is offset by the selling of other units at a lower price.

II.    Grading Rubric for #3:  5 Points

Part (a) 2 points

Part (b) 1 point

Part (c) 2 points

D (or P) > MR