Long free-response question

Rice, cloth, and a tariff

Units 1 and 2
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

Avalon and Brindle each produce rice and cloth, using only labor. Table 1 shows how much one worker in each country can produce in a day. Table 2 shows domestic demand and supply in Avalon's market for cloth, which is perfectly competitive. Avalon's domestic demand and supply curves for cloth are straight lines.

Table 1. Output of one worker per day

Country	Rice (bushels)	Cloth (bolts)
Avalon	12	4
Brindle	6	3

Source: Hypothetical data

Table 2. Avalon's domestic market for cloth

Price per bolt	Quantity demanded (bolts per day)	Quantity supplied (bolts per day)
$20	700	300
$25	600	400
$30	500	500
$35	400	600

Source: Hypothetical data

Suggested time: 25 minutes

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Part (a)

1 point

Using Table 1, identify which country has the absolute advantage in producing cloth. Explain.

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Part (b)

1 point

Calculate Avalon's opportunity cost of producing one bolt of cloth. Show your work.

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Part (c)

1 point

Identify which country has the comparative advantage in producing cloth. Explain.

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Part (d)

1 point

Suppose the two countries specialize and trade 1 bolt of cloth for 2.5 bushels of rice. Explain why both countries gain from trading at this rate.

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Part (e)

1 point

Now look at Avalon's cloth market in Table 2. Avalon opens its cloth market to free trade, and the world price of cloth is $20 per bolt. Calculate the quantity of cloth Avalon imports. Show your work.

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Part (f)

2 points

Describe a correctly labeled graph of Avalon's domestic cloth market. Show (i) the equilibrium price and quantity before trade, labeled PA and QA; (ii) the world price, labeled PW; and (iii) the quantity imported at PW.

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Part (g)

2 points

Compared with the market before trade, identify the effect of free trade at PW on (i) consumer surplus in Avalon's cloth market and (ii) producer surplus in Avalon's cloth market.

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Part (h)

1 point

Suppose Avalon then places a tariff of $5 per bolt on imported cloth, so the price of cloth in Avalon rises to $25. Calculate the new quantity of imports, and identify whether Avalon's domestic producers sell more or less cloth than they did under free trade.

Your answer to part (h)

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