AP Macroeconomics Unit 1 Review Session
Production Possibilities Curve, Absolute and Comparative Advantage, Opportunity Cost, and Marginal Analysis
1.
Draw a PPC with linear opportunity cost.
2.
Draw a PPC that illustrates the law of increasing opportunity cost.
Use the figure below to answer Questions 3-6.
3.
What is the opportunity cost of 1 unit of textiles in the US? In Portugal?
4.
What is the opportunity cost of 1 unit of wine in the US? In Portugal?
5.
Assume the two countries have identical resources.
a. In which product does the US have an absolute advantage? In which product does Portugal have an absolute
advantage?
b. In which product does the US have a comparative advantage? In which product does Portugal have a comparative
advantage?
Fill in the table. Assume that with trade, each country specializes and exports ½ of its production.
Without Trade
With Trade (Production)
With Trade (Consumption)
Wine
Textiles
Wine
Textiles
Wine
Textiles
Portugal
United States
Total
6.
What happens to total world output when countries specialize and trade? What is this called?
7.
For each of the following scenarios, describe the opportunity cost of each decision.
a. Sarah considers two options for Saturday night: she can attend a concert that costs $10 per ticket or she can see a
free movie. She attends the concert.
b. A new firm debates paying $20,000 for the prime location versus $10,000 for another location. The firm estimates
that it will eventually serve the same number of customers in either location, but that it will take six months before
the suboptimal location provides the same outcome as the prime location. The firm purchases the $10,000
property.
c. Jamie can either be an unpaid intern at a company or he can earn $2,000 working as a camp counselor. He takes
the internship.
8.
The following table presents the possible combinations of study time available to Roberto this week as he prepares for his
two midterms: economics and chemistry. Assume Roberto has 20 hours to study and that he will use all 20 hours studying
economics and chemistry. Roberto currently plans to study 10 hours for economics and 10 hours for chemistry.
Hours of study time
Hours of study time
Grade in economics
spent on economics
spent on chemistry
0
20
60
5
15
70
10
10
80
15
5
86
20
0
90
a. If he alters his plan and studies 15 hours for economics, what is his opportunity cost?
b. If he alters his plan and studies 15 hours for chemistry, what is his opportunity cost?
c. If he alters his plan and studies 20 hours for economics, what is his opportunity cost?
9.
Grade in chemistry
90
85
75
73
70
The country of Utopia produces two goods from its available resources and technology. The only resource that Utopia has is
labor. It takes 3 hours to produce 2 widgets and 4 hours of labor to produce 1 gadget. Assume a linear PPC.
a. Sketch the PPC for the country of Utopia. (Use 24 hours as your labor constraint and sketch your PPC based on this
amount of time and labor. Measure widgets on the y axis.)
b.
c.
d.
What is the slope of your PPC?
What is the opportunity cost of producing an additional widget in Utopia?
What is the opportunity cost of producing an additional gadget in Utopia?
10. The country of Jonesville produces two goods from its available resources and technology. The only resource that Jonesville
has is labor. It takes 2 hours of labor to produce a gadget and 5 hours of labor to produce a widget. For this question,
assume that the PPC for Jonesville is linear.
a. Sketch the PPC for Jonesville assuming that it has 120 hours of labor available.
b.
c.
d.
What is the opportunity cost of producing an additional gadget?
What is the opportunity cost of producing an additional widget?
Suppose that Jonesville has 240 hours of labor available instead of 120 hours of labor. Does this affect the
opportunity costs? Explain.
11. The following table provides six possible production combinations that Smithtown can produce from its available resources
and technology during this year. Assume that Smithtown produces only bicycles and tents from its available resources.
Combination
Bicycles
Tents
A
100
0
B
90
10
C
70
25
D
40
36
E
10
42
F
0
45
a. Sketch Smithtown’s PPC. (Measure bicycles on the x axis for this example.)
b. Suppose Smithtown is currently producing as combination C. If Smithtown chooses to produce at combination B,
what is the opportunity cost of moving from combination C to B?
c. Suppose Smithtown is currently producing at combination C. If Smithtown choses to produce at combination D,
what is the opportunity cost of moving from combination C to D?
d. Is Smithtown’s PPC linear? Explain.
12. There are two islands in the middle of the ocean, and these two islands produce fish and baskets. Big Island can produce
either 100 fish per day and 0 baskets per day or 0 fish per day and 200 baskets per day. Big Island can also produce any
combination of goods that lies on its linear PPC. Small Island can produce either 80 fish per day and 0 baskets per day or 0
fish per day and 80 baskets per day. Like Big Island, Small Island has a linear PPC. (Measure fish on the y axis.)
a. Sketch the PPCs for Big Island and Small Island.
b. What is the slope of Big Island’s PPC? Of Small Island’s PPC?
c. What is the opportunity cost of producing an additional basket on Big Island? On Small Island? Which island can
produce baskets at a lower opportunity cost?
d. What is the opportunity cost of producing an additional fish on Big Island? On Small Island? Which island can
produce fish at a lower opportunity cost?
e. What good should Big Island specialize in producing? What good should Small Island specialize in producing?
Positive and Normative Economics
13. Decide whether each of the statements is a normative statement or a positive statement.
a. The gasoline tax is projected to yield $10 million in tax revenue next year.
b. If the gasoline tax were raised by 10 cents per gallon, tax revenue would increase by 4%.
c. The state should raise the gasoline tax for the coming year. An increase will reduce congestion and smog, which is
more important than the cost to commuters.
d. Mandatory school enhances the work skills of students.
e. The age of mandatory school attendance should be extended.
f. An extension of mandatory school attendance will increase government education costs by $2 million for the state.
14. Define positive economics and normative economics. Why does normative economics cause greater disagreement among
economists?
Supply and Demand
15. Graph supply and demand curves, indicating equilibrium price and quantity on the axes.
16. Draw a correctly labeled graph showing the effect on equilibrium price and quantity in the market for oranges when, ceteris
paribus, each of the following changes occurs.
a. There is a freeze in Florida that kills many of the orange groves.
b.
The wages of orange workers decrease.
c.
Research finds oranges have additional health benefits.
d.
The price of tangerines decreases.
17. The following chart shows the quantity demanded in the competitive market for bicycles.
Price per bicycle
Quantity of bicycles
demanded per week
$100
0
80
100
60
200
40
500
20
800
0
1,000
a. Suppose the price is initially $40. If price rises by $20, what happens to the quantity demanded?
b. Suppose the price is initially $40. If price falls by $40, what happens to quantity demanded?
18. For each of the following scenarios (in the table below), fill in the missing information. Does that scenario cause a shift of or
movement along the demand curve? If a shift occurs, does the demand curve shift to the right or left?
Scenario
Specified market
People’s income increases
People’s incomes decreases.
Market for exotic vacations
Market for goods sold in secondhand
shops
Market for bicycles
Market for tennis racquets
Popcorn at movie theater
Market for music-playing devices
Price of bicycles increases.
Price of tennis balls increases.
Price of movie tickets decreases.
Popularity of music playing device
increases.
Popularity of name-brand clothing
items decreases.
Winter clothing is expected to go on
sale next month.
Number of urban residents increases.
Movement (M)
or shift (S)
Demand shift
right (->) or left (<-)
Market for band-name designer
clothing
Market for winter clothing
Market for apartments in urban areas
19. The following graph represents the supply curve for the production of widgets in Town Center.
a.
b.
c.
d.
e.
f.
g.
h.
At a price of $20, how many widgets are producers willing to supply?
At a price of $40, how many widgets are producers willing to supply?
Suppose there are ten widget producers in Town Center and the price of widgets is $50. If each producer produces
the same number of widgets, how many widgets will each produce?
Suppose price is initially $30 but then falls to $20. What is the change in quantity supplied?
Suppose price is initially $30 but then rises to $50. What is the change in quantity supplied?
What price must suppliers receive in order to be willing to supply 80 widgets?
What price must suppliers receive in order to be willing to supply 40 widgets?
How does the slope of a supply curve reflect the relationship between price and quantity supplied?
20. For each of the following scenarios (in the table below), fill in the missing information. Does that scenario cause a shift of or
movement along the supply curve? If a shift occurs, does the supply curve shift to the right or left?
Scenario
Specified market
Labor costs for air travel and cruise
ships increase.
Prices of office equipment and phone
service rise by 40%
Price of bicycles increases.
Price of leather boots increases.
Price of leather boots increases.
New technology for music players
revealed.
Price of brand-name designer clothing
increases.
Number of coffee shop owners in the
metro area increases.
Market for exotic vacations
Movement (M)
or shift (S)
Supply shift
right (->) or left (<-)
Market for call center services
Market for bicycles
Market for beef products
Market for leather belts
Market for music-playing devices
Market for brand-name designer
clothing
Market for coffee in the metro area
21. The demand and supply schedules for Healthy Snacks, Inc., is provided in the table below.
a.
b.
c.
Price
Quantity demanded
Quantity supplied
$0
1,000
0
10
800
125
20
600
275
30
400
400
40
200
550
50
0
675
Sketch the demand and supply curves for Healthy Snacks, Inc. Don’t worry about being precise. Focus on drawing
the relationships.
Indicate equilibrium price and quantity.
Fill in the following table based on the data given. (Hint: If there is excess in supply, there is no excess demand –
and vice versa.)
Price
$0
10
20
30
40
50
Excess demand
Excess supply
Shortage or Surplus?
22. For each of the following scenarios, draw a correctly labeled graph showing the effect on equilibrium price and quantity
when, ceteris paribus, each of the following changes occurs. Indicate initial market demand (D 1), supply (S1), equilibrium
price (P1), and equilibrium quantity (Q1) – as well as any changes to the market demand (D2), and/or supply (S2) curves, and
indicate the new equilibrium price (P2) and quantity ( Q2).
a. The price of gasoline increases by 40 percent. What happens in the market for bicycles?
b. The price of gasoline increases by 40 percent. What happens in the market for fuel-inefficient SUVs?
c. New technology for music-playing is developed? What happens in the market for these devices?
d. The price of labor decreases. What happens in the market for fast-food restaurants?
e. Income increases and good X is a normal good. What happens in the market for good X?
f. Income increases and good X is an inferior good. What happens in the market for good X?
Price Floors and Price Ceilings
23. Consider the market for housing in Metropolitan City, where all housing units are exactly the same. Currently, the
equilibrium price of housing is $2,000 a month and local residents consume 1,500 units of housing. The local residents
argue that housing is too expensive and an effective price ceiling is implemented. When the price ceiling is implemented by
the local government council, only 1,200 units of housing are supplied. Is this an efficient level of housing for Metropolitan
City? Explain and use a graph to show equilibrium quantity and price, as well as the price ceiling and the quantity supplied
and quantity demanded after the price ceiling is implemented.
24. Use the graph below to answer the following questions.
a.
b.
c.
d.
e.
f.
g.
h.
i.
What is the equilibrium price? Equilibrium quantity?
Suppose a price floor of P3 is implemented by the government in this market. What will happen to the price and
quantity once this price floor is implemented?
Suppose a price floor of P2 is implemented by the government in this market. What will happen to the price and
quantity once this price floor is implemented?
You are told that an effective price floor has been implemented in this market and the resultant surplus is greater
than Q4-Q1. What do you know about the level of this price floor?
Where must be true for a price floor to be effective?
Suppose a price ceiling of P2 is implemented by the government in this market. What will happen to the price and
quantity once this price ceiling is implemented?
Suppose a price ceiling of P3 is implemented by the government in this market. What will happen to the price and
quantity once this price ceiling is implemented?
You are told that an effective price ceiling has been implemented in this market and the resultant shortage is less
than Q5-Q2. What do you know about the level of this price ceiling?
Where must be true for a price ceiling to be effective?
25. The market for taxi rides in Metropolitan City is described in the following table. Assume all taxi rides are the same.
Price of taxi rides
Quantity of taxi rides
Quantity of taxi rides
demanded per week
supplied per week
$1
200
40
2
180
60
3
160
80
4
140
100
5
120
120
6
100
140
7
80
160
8
60
180
9
40
200
10
20
220
a. What is the equilibrium price and quantity of taxi rides in Metropolitan City per week?
b. Suppose the government institutes a medallion system that limits the number of taxi rides available in
Metropolitan City to 80 per week. At what price will consumers want to purchase 80 taxi rides per week? At what
price will suppliers be willing to supply 80 taxi rides per week?
c. What price will a taxi medallion rent for in this market? Explain.
d. Graph the taxi ride market in Metropolitan City. On this graph, indicate the equilibrium price and quantity, the
quota limit, the demand price, the supply price, and the medallion’s rental price.
e. What is total value of the taxi medallions per week in Metropolitan City?