Unit 1 Exam Review KEY
Graphs/Charts/Application:
1. Interpret production possibilities curves – What do points on, inside, and outside the curve mean? How can we
move from one point to another? What will cause the curve to shift?
2. Identify opportunity cost on a PPC graph
3. Interpret scenarios that cause supply and demand to shift – What factors will cause shifts (list provided in notes)?
How does the supply and demand respond?
4. Recognize the impacts of supply and demand shifts on complements and substitutes
5. Interpret impact of shifting supply and demand (single and simultaneous shifts) – How will price and quantity
respond to a shift in supply? In demand? How about a shift in both?
6. Identify impacts of government price and quantity controls and the removal of these
7. Identify comparative and absolute advantage by comparing PPC graphs for two countries
8. Interpret charts depicting opportunity cost and absolute/comparative advantage
Practice Questions to Help You Prepare for Unit 1 Exam
1. In what type of economic analysis do questions have a “right” or “wrong” answer? Positive In what type of economic
analysis do questions not necessarily have a “right” answer? Normative On what type of economic analysis is there
the greatest disagreement? Normative
2. What are the four “factors of production” (categories of resources)? Land, Labor, Capital (physical and human),
entrepreneurship
3. What are the five principal factors that shift the demand curve? Market Size (Number of Consumers), Expectations,
Related Prices (Substitutes, Compliments), Income, Tastes
4. What are the five principal factors that shift the supply curve? Technology, Related Prices (Substitutes in Production,
Compliments in production), Input prices, Competition (Number of Producers), Expectations
5. Ceteris paribus, a decrease in the price of product x would have what effect on the demand for its complement,
product y? increase What effect would it have on the product’s substitute, product z? decrease
6. What effect does an increase in income have on the demand for most (normal) products? Increase What effect does
this increase have on the demand for inferior products? Decrease
7. What shifts will cause the market price of a good to rise? D↑ or S↓
8. Product x is linked to a public health scare. What will be the effect of this on supply, demand, equilibrium quantity
and price? D↓ (change in tastes) and Qs↓, therefore, P↓ and Q↓
9. The technology needed to produce product y has become significantly more expensive. What will be the effect of
this on supply, demand, equilibrium quantity and price? S↓ (changes input prices) and Qd↓, therefore, P↑ and Q↓
10. Which “dual shift” scenario results in a rise in equilibrium price with the effect on equilibrium quantity ambiguous
(may increase, decrease or stay the same)? When D↑ and S↓ simultaneously, P↑ and Q is ambiguous.
11. Which “dual shift” scenario results in a fall in equilibrium price with the effect on equilibrium quantity ambiguous
(may increase, decrease or stay the same)? When D↓ and S↑ simultaneously, P↓ and Q is ambiguous.
12. Which “dual shift” scenario results in a rise in equilibrium quantity with equilibrium price ambiguous (may increase,
decrease or stay the same)? When D↑ and S↑ simultaneously, Q↑ and P is ambiguous.
13. Which “dual shift” scenario results in a fall in equilibrium quantity with equilibrium price ambiguous (may increase,
decrease or stay the same)? When D↓ and S↓ simultaneously, Q↓ and P is ambiguous.
14. To be effective, a price ceiling must be set below_ the equilibrium price.
15. To be effective, a price floor must be set
above_ the equilibrium price.
16. What is the result of price ceilings? shortage
17. What is the result of price floors? surplus
18. With so many negative results, why do government price controls exist? Can help some producers, or consumers
CAPITAL GOODS
Questions 19-26 refer to the graph below.
CONSUMER GOODS
19. Does this graph exhibit increasing opportunity costs? Yes How do you know? Concave shape (slope increases)
20. Which points on the graph represent efficiency in production? B, C, D, F
21. For this economy, an increase in the quantity of capital goods produced without a significant decrease in the
quantity of consumer goods produced is best represented by movement from point F to point D.
22. An increase in unemployment could be represented by a movement from point B, C, D, or F to point A.
23. What scenarios might allow this economy to move from point C to point E? Short term, overextension of resources
24. Ceteris paribus, producing at which point today will result in the largest outward shift of the PPC in the future? C
Why? Allocating production towards more capital goods allows for the possibility to produce more of both capital
and consumer goods in the future.
25. Which shifts might result from this country going to war? Outward shift due to a higher production of capital goods
26. What is the most likely result of a recession in this economy? A movement from a point on the curve to point A.
27. What is the difference between input and output problems for comparative advantage? Outputs are the final
product being sold to the consumer. Inputs are goods or services used in the production of a final product—the
inputs create the output. Inputs can be the number of workers, time, acres, etc. to create something. How do you
solve them differently? To solve for comparative advantage, outputs use the “other goes over” method; inputs use
the “other goes under” method. Those who have an absolute advantage for a product either can make the greatest
number of outputs or require the fewest number of inputs.
Questions 28-32 refer to the chart below.
number of workers necessary
Country A
Country B
Bushels of wheat
15 workers (1W = 60/15 = 4T)
10 workers (1W = 60/10 = 6T)
Units of textiles
60 workers (1T = 15/60 = 1/4W) 60 workers (1T = 10/60 = 1/6W)
28. What is the opportunity cost of producing a bushel of wheat for each country? Country A = 4 units of textiles,
Country B = 6 units of textiles
29. What is the opportunity cost of producing a unit of textiles for each country? Country A = ¼ a bushel of wheat,
Country B = 1/6 a bushel of wheat
30. Which country has the absolute advantage in wheat? Country A Which country has the absolute advantage in
textiles? Neither (both can produce the same amount.)
31. Which country has the comparative advantage in wheat? Country A Which country has the comparative advantage
in textiles? Country B
32. What are acceptable terms of trade for both Country A and B? 1 Wheat for 5 Textiles
Questions 33-40 refer to the graphs below.
Utopia
Transylvania
Books
40 (1B = 80/40 = 2C)
20 (1B = 10/20 =
1/2C)
Coats
80 (1C = 40/80 = 1/2B)
10 (1C = 20/10 = 2B)
*It’s helpful to transfer this info in to a chart in order to
solve for comparative advantage.
33. Which country has the absolute advantage in books? Utopia
34. Which country has the absolute advantage in coats? Utopia
35. For Utopia, the opportunity cost of producing books is 2 coats. The opportunity cost of producing coats in Utopia is
½ a book.
36. For Transylvania, the opportunity cost of producing books is ½ a coat. The opportunity cost of producing coats in
Transylvania is 2 books.
37. Which country has the comparative advantage in books? Transylvania
38. Which country has the comparative advantage in coats? Utopia
39. If the two countries specialize and trade, what should Utopia export? Coats What should Transylvania export? Books
40. What are acceptable terms of trade for both Utopia and Transylvania? 1 Book for 1 Coat (Utopia will only trade
books if they can get less than 2 coats, which is a better deal on books than what they can make themselves.
Transylvania will only trade if they can make more than ½ a coat, or else there is no point in them going into the
trouble of trading with another country. Therefore, you look for a number between their two opportunity cost, >2
but <1/2 is 1! Any number between these two is also acceptable, however, 1 is the only whole number that works.)
Questions 41-44 refer to the figure below.
Market for Blue Jeans
41. Suppose the government believes blue jeans are too expensive and it wants to make sure blue jeans are affordable
to more citizens. What type of price control would this be called? Price Ceiling
42. Suppose the government believes blue jeans are not expensive enough and it wants to make sure blue jeans are
profitable for the clothing industry. What type of price control would this be called? Price Floor
43. If a price ceiling at $55 exists in the market for jeans, the market outcome would be a shortage of 17 jeans.
44. If a price floor at $100 exists in the market for jeans, the market outcome would be a surplus of 25 jeans.