Thursday, November 3, 2016

2008 Micro FRQ #1

2008 Micro FRQ #1

(A) Draw a clearly labeled side-by-side graph for the apple market and Callahan's Orchard, and show,

(i) Market output & price
(ii) Callahan's output & price

(B) Now assume that the Government provides farm support to apple growers by granting an annual lump-sum subsidy all apple growers. Indicate the effect the subsidy would have on each of the following. ((In the Short-Run))

(i) Callahan's (firms) output and quantity

Lump sums do not affect the marginal costs (no change in quantity or price) 
Perfect Competition Cheat Sheet, Here.

(ii) Callahan's Profit

Profit will increase.

(iii) The number of firms in the industry.

 The number of firms will only increase in the long-run, never in the short run.

(C) Indicate how each of the following will change in the ((long-run)) due to the subsidy.

(i) Number of firms in the industry.

In the short-run due to the lump-sum subsidy Callahan has a profit, firms in the industry are attracted to the profits and enter the industry. 

(ii) Price

As firms enter the industry they will push the price down.

(iii) Industry Output

Industry Output will increase as there are more firms producing more goods

Earlier post with some more coverage, here.

Perfect Competition Cheat Sheet (Updated)

Perfect Competition Cheat Sheet (Updated)
Need a copy - email (

2008 Macro FRQ #3

2008 Macro FRQ #3

(A) Calculate the opportunity cost of a bicycle in Artland.

Artland can produce 600 Hats or 300 Bikes.

The opportunity cost is what is given up, foregone, or sacrificed. Art land only makes two things so to produce more of one thing (hats) he must give up another thing (bikes).

600/300 = 2
   2 / 1
Hats/bikes = 2 hats to 1 bike

If Artland produces 1 bike he gives up 2 hats

If they had asked for the opportunity cost of a hat. Reverse it.
300/600 = .5
Bikes/Hats = .5 bike to 1 hat

If Artland produces 1 hat it gives up .5 bikes

(B) If the two countries specialise and trade, which country will import bicycles? Explain.

We have to compare both sides in the making of hats and bikes. 

Ray only gives up .25 of a bike to make 1 hat - most efficient - comparative advantage in hat making.
So Ray will make hats and import bikes.

Art only gives up 2 hats to make 1 bike - most efficient - comparative advantage in bikes.
Art will make bikes and import hats.

(C) If the term of trade are 5 hats for 1 bike, would trade be advantageous for each of the following?

(i) Artland
(ii) Rayland

Look at the chart again,

Ray can trade 4 hats for 1 bike - 5 hats for 1 bike is a worse deal - Not Good

Art can trade 2 hats for 1 bike - 5 hats for 1 bike is a better deal - Good

(D) If production in Artland triples, which country has the comparative advantage in hats?

So production triples, not just in hats but in bicycles also. Art land would now have the absolute advantage but the comparative advantage wouldn't have changed.

Art = 600/300 equalised = 1 to .5
Art = 1800/900 equalised = 1 to .5