Long free-response question

A strawberry farm in a slump

Units 2 and 3
10 points
About 25 minutes

You can use a calculator on this question, just like on exam day.

A long question with several lettered parts built around one scenario, often a firm in a particular market structure, and it can pull in other units such as a labor market or a payoff matrix. You identify outcomes, explain them, do a calculation, and describe a correctly labeled graph that shows the situation and how a change affects it. On the exam: Question 1 of 3 in Section II (60 minutes including a 10-minute reading period; 33.35% of the exam score); 10 points, half of the section score. About 25 minutes suggested. Four-function calculator allowed.

The question and its sources

The market for strawberries is perfectly competitive and is a constant-cost industry. Lakeview Farm is a typical firm in this market, and it is currently maximizing profit. The market is not in long-run equilibrium.

Table 1. Lakeview Farm, current short run

Measure	Value
Market price	$6 per crate
Lakeview's profit-maximizing output	400 crates per week
Lakeview's average total cost at 400 crates	$7.50
Lakeview's average variable cost at 400 crates	$5.00
Minimum of Lakeview's average total cost	$7.00

Source: Hypothetical data

Suggested time: 25 minutes

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Part (a)

3 points

Describe correctly labeled side-by-side graphs of the strawberry market and of Lakeview Farm. Show each of the following: (i) the market price of $6 and the market quantity; (ii) Lakeview's marginal revenue curve, labeled MR; (iii) Lakeview's profit-maximizing output, labeled q; (iv) Lakeview's average total cost and average variable cost curves; and (v) the area of Lakeview's profit or loss.

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Part (b)

1 point

Calculate Lakeview's economic profit or loss per week. Show your work.

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Part (c)

1 point

Should Lakeview continue to produce in the short run or shut down? Explain.

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Part (d)

1 point

Identify what will happen to the number of firms in the strawberry market in the long run. Explain.

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Part (e)

1 point

Identify the market price of strawberries in the new long-run equilibrium. Explain.

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Part (f)

1 point

In the new long-run equilibrium, is Lakeview productively efficient? Explain.

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Part (g)

1 point

In the new long-run equilibrium, is the strawberry market allocatively efficient? Explain.

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Part (h)

1 point

Return to the original short-run situation. Suppose a widely reported study finds that strawberries have major health benefits. Identify the effect on Lakeview's profit-maximizing output in the short run. Explain.

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