2 Microeconomics. Sample Short Free-Response Questions

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Elijah Carpenter
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1 2 Microeconomics ample hort Free-Response uestions HORT FREE-REONE AMLE UETION 1. Evaluate this statement: An increase in demand increases price. The higher price increases supply. The higher supply decreases price, and price settles down to the original level. The statement is a mixture of accurate economics resulting in nonsense. The first sentence refers to an increase in demand or to a shift in the demand curve to the right. The second sentence says that the higher price will increase the quantity supplied (a movement along the supply curve). The third sentence refers to an increase in supply or a rightward shift in the supply curve. 2. If foreigners demand more American wheat, what will happen to the price and quantity supplied in the momentary situation? In the short run? In the long run? Why? In the momentary situation, price would rise and quantity supplied would not change. In the short run, more wheat would come out of storage, and price would fall below momentary equilibrium but above the original equilibrium. In the long run, farmers would plant more wheat, and price would fall more. In a constant-cost industry, price would return to its original level but quantity would increase. In an increasing-cost industry, price would not return to its original level but be higher. 3. I sit in the back row of the barbers union where they are discussing a proposal to raise the price of haircuts from $18 to $20. The argument gets nowhere, and someone suggests asking me, as an economist, whether it is a good idea or not. I reply, Many studies have shown that the demand for haircuts is elastic. What are they to make of this? Why? Be as brief as possible in making the major point that the barbers ought to see in this situation. If the demand for haircuts is elastic, total revenue would fall if the price were raised. 114 Advanced lacement Economics Teacher Resource Manual National Council on Economic Education, New York, N.Y.

2 HORT FREE-REONE AMLE UETION 4. True, false or uncertain, and explain why? Other things being the same, the surplus of workers associated with a price floor will be greater the greater the elasticity of both supply and demand. iscuss this statement. Use graphs to illustrate your explanation. The more elastic the supply and demand curves, the greater the surplus. Inelastic emand Elastic emand urplus urplus $ ,000 OF TICKET *5. An arena holds a maximum of 40,000 people, as indicated in the graph above. Each year the circus holds eight performances, all of which are sold out. (A) Analyze the effect on each of the following of the addition of a fantastic new death-defying trapeze act that increases the demand for tickets. (i) The price of tickets (ii) The quantity of tickets sold The trapeze act will cause an increase in demand (shift right in the demand curve) increasing the price, but the quantity will remain the same because the quantity is fixed at 40,000 seats. Grading Rubric: art (A) = 2 points rice increases as a result of the demand increases (1 point) uantity remains the same (1 point) * Actual free-response question from a past A test. Reprinted by permission of the College Entrance Examination Board, the copyright owner. For limited use by NCEE. Advanced lacement Economics Teacher Resource Manual National Council on Economic Education, New York, N.Y. 115

3 HORT FREE-REONE AMLE UETION (B) The city of Toledo institutes an effective price ceiling on tickets. Explain where the price ceiling would be set. Explain the impact of the ceiling on each of the following: (i) The quantity of tickets demanded (ii) The quantity of tickets supplied The price ceiling must be set below the equilibrium price with the new trapeze act (1 point). The quantity demanded will increase (1/ 2 point), however the quantity supplied will remain the same (fixed at 40,000) (1/ 2 point). Grading Rubric: art (B) = 2 points etting the price ceiling below the equilibrium price (1 point) uantity demand increases (1/ 2 point) uantity supplied unchanged (1/ 2 point) (C) Will everyone who attends the circus pay the ceiling price set by the city of Toledo? Why or why not? No, a secondary market or reselling of tickets or scalping of tickets will have some circus goers paying more than the ceiling price (1 point). Grading Rubric: art (C) = 1 point (some version of the above) (Note: Radio give-aways, coupons and employees do not change with the existence of a price ceiling; therefore that type of answer is incorrect.) 6. A newspaper headline says, The Coldest Winter in 20 Years Brings Record rices for Heating Oil. (A) Using a graph of home heating oil, show and explain how price changed. The record cold increases the demand for heating oil to run heaters, so the demand increases, raising the price and quantity sold. 1 1 (B) What other factors could cause the price of heating oil to increase? Any factor that increased demand could increase price and quantity. Any factor that decreased supply could increase price and decrease quantity. 116 Advanced lacement Economics Teacher Resource Manual National Council on Economic Education, New York, N.Y.

4 HORT FREE-REONE AMLE UETION 7. In a recent year, the price of wheat fell. For each of the following, draw a supply and demand graph showing a decrease in prices with the stated impact on quantity. (A) The quantity of wheat decreasing 1 (B) The quantity of wheat increasing 1 (C) The quantity of wheat staying the same 1 1 OR 1 OR 1 Advanced lacement Economics Teacher Resource Manual National Council on Economic Education, New York, N.Y. 117

5 HORT FREE-REONE AMLE UETION 8. The market for many commodities is seasonal in nature. Their sales (equilibrium quantity) increase dramatically during certain times of the year. Christmas cards and fresh strawberries, at least in the North, are two examples. Christmas-card sales increase during the last three months of the year, and the sales of fresh strawberries in the North increase during the summer months. But the (equilibrium) price movement of these two commodities is quite different during their peak sales season: Christmas cards increase in price during the last three months of the year, whereas strawberries decrease in price during the summer. (A) how on the graph below how there can be an increase in the equilibrium quantity and an increase in the equilibrium price of Christmas cards during the last three months of the year, and briefly explain what has happened. Christmas Card Market 1 1 With other things constant, there is an increase in the demand for Christmas cards in the last three months of the year. This causes a rightward shift of demand and causes the price and quantity sold to increase. (B) Change the graph for fresh strawberries in the North to show how there can be an increase in the equilibrium quantity and a decrease in the equilibrium price of strawberries in the summer, and briefly explain what has happened. trawberry Market in the North 1 1 Other things constant, there is an increase in the supply of fresh strawberries in the northern areas of the United tates in the warmer months when the berries are harvested in the northern areas. This causes a rightward shift in the supply curve and causes the price to fall and the quantity sold to increase. 118 Advanced lacement Economics Teacher Resource Manual National Council on Economic Education, New York, N.Y.

1 Macroeconomics SAMPLE QUESTIONS

1 Macroeconomics SAMPLE QUESTIONS Sample Long Free-Response Questions 1. Every society has the fundamental problem of scarcity. (A) What is scarcity? (B) What three questions must every society answer because of scarcity? (C) What are