FRQ Practice

Market for Avocados

The U.S. market for avocados is initially in equilibrium. A new scientific study is widely publicized showing that daily avocado consumption significantly reduces the risk of heart disease. At the same time, a severe drought in Mexico, the largest avocado exporter to the U.S., destroys a significant portion of the avocado crop.

PharmaCo Patent Monopoly

PharmaCo is the sole producer of a patented drug used to treat a rare autoimmune disease. The firm faces a downward-sloping demand curve and has constant marginal costs of $20 per unit. PharmaCo is currently producing at its profit-maximizing output of 500 units per day and charging $80 per unit.

Recessionary Gap and Fiscal Policy

The economy of Econoland is currently operating below full employment, with real GDP at $800 billion and potential GDP at $1,000 billion. The marginal propensity to consume (MPC) is 0.75. The government is considering using fiscal policy to close the output gap.

Federal Reserve and Inflation

The U.S. economy is experiencing an inflationary gap, with actual GDP exceeding potential GDP. The Federal Reserve decides to take action to address rising inflation.

Stagflation and Policy Response

A major oil-producing region experiences political instability, causing a significant increase in world oil prices. This supply shock affects a large industrialized economy that was initially in long-run equilibrium.

Comparative Advantage and Tariffs

Country Alpha and Country Beta both produce steel and textiles. With all resources devoted to one good, Alpha can produce 100 tons of steel or 200 units of textiles. Beta can produce 60 tons of steel or 180 units of textiles. Currently, Country Alpha imposes no tariffs on imported steel.

Elasticity and Tax Revenue

The government is considering imposing a per-unit excise tax on two goods: Good A, a luxury sports car, and Good B, a life-saving medication with no substitutes. Both markets are currently in competitive equilibrium.

Short-Run Profits in Perfect Competition

The market for organic wheat is perfectly competitive. Currently, the market price is $8 per bushel. A typical firm in this market has total fixed costs of $1,000 per day, and its minimum average variable cost is $5 at 200 bushels. The firm is currently producing 400 bushels per day, where MC = $8 and ATC = $6.

Government Budget Deficit and Crowding Out

The government of a closed economy increases its spending significantly without raising taxes, resulting in a large budget deficit. Assume the economy was initially in equilibrium in the loanable funds market with a real interest rate of 4%.

Negative Externality in Production

A chemical plant produces industrial solvents and discharges pollutants into a nearby river as a byproduct of production. The pollution harms downstream fisheries and increases water treatment costs for the local municipality. The market for industrial solvents is competitive.

Price Elasticity and Total Revenue

NovaStream, a digital video service, currently charges $12 per month and has 5 million subscribers. The company's analysts estimate that the price elasticity of demand for NovaStream in the mass-market consumer segment is -0.6, while the elasticity in the student segment (verified with a school email) is -2.1.

Firm Entry and Long-Run Equilibrium

The market for artisan soap is perfectly competitive. The current market price is $8 per bar. Soapworks is a representative firm with average total cost (ATC) of $6 at its profit-maximizing quantity and marginal cost (MC) equal to $8 at that quantity. Draw separate graphs for the market and the firm as needed.

Budget Deficits and Crowding Out

The economy of Westland is operating at full employment. The federal government announces a large, deficit-financed increase in infrastructure spending that it will fund by selling new government bonds.

Interest Rates and Currency Appreciation

The Federal Reserve raises the federal funds rate, causing U.S. real interest rates to rise relative to those in the Eurozone. Consider the market for U.S. dollars in the foreign exchange market (euros per dollar) and the effect on U.S. net exports.

Short-Run and Long-Run Phillips Curves

The economy of Centralia is currently at its natural rate of unemployment with an inflation rate of 2 percent. Policymakers are considering an expansionary monetary policy that they believe will reduce unemployment below the natural rate in the short run.

Minimum Wage in a Competitive Labor Market

The market for fast-food workers in the city of Rivertown is perfectly competitive. The equilibrium wage is currently $10 per hour and equilibrium employment is 20,000 workers. The city council is considering raising the minimum wage to $14 per hour.

Short-Run Production and Marginal Cost

A furniture company uses a fixed amount of capital (factory, machinery) and can vary only the number of workers it employs. When the company hires its third worker, total output rises from 20 chairs to 32 chairs per day. The firm pays each worker $120 per day.

Prisoner's Dilemma in an Oligopoly

Two rival airlines, Azure Air and Breeze Air, compete on a popular route. Each must simultaneously choose whether to keep its price HIGH or drop to LOW. The payoff matrix below shows daily profits (in thousands of dollars, Azure first): Breeze: High Breeze: Low Azure: High ($80, $80) ($20, $100) Azure: Low ($100, $20) ($40, $40)

Calculating GDP and Real vs. Nominal

Consider a small economy with the following data for 2024: Consumption spending: $600 billion Business investment: $150 billion Government purchases: $200 billion Exports: $80 billion Imports: $100 billion Transfer payments: $150 billion Used-car sales: $20 billion

Business Cycle Indicators and Policy

An economy is currently experiencing: (1) rising unemployment, (2) falling consumer spending, (3) declining business investment, and (4) real GDP below potential GDP.