Practice free-response questions with self-grading rubrics. Write your answer, then check it against the AP-style rubric.
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.