principles of macroeconomics
exam 1
1. (5 points) Using a typical production possibilities curve (ppc) involving goods A and B,
label on the graph the following combinations: 1. a combination involving less than
maximum production, 2. a combination involving an unattainable level of production.
possible
Q of B
unattainable
production
combination
less than maximum
production
combination
possible
Q of A
2. (5 points) Using the market model, show graphically a surplus situation: show and label
the exchange when in a surplus, and show and label the adjustment of price and
quantity to the equilibrium level.
P
S
surplus
exchange
P
P*
D
Q
Q
Q*
3. (5 points) Using the market model, show graphically a shortage situation: show and
label the exchange when in a shortage, and show and label the adjustment of price
and quantity to the equilibrium level.
P
S
shortage
exchange
P*
P
D
Q*
Q
Q
4. Using the market model, show graphically the effect on the equilibrium price and
quantity of a good if the following occur (use a different graph for each example, 5
points for each example):
a. a decrease in the price of a substitute good
P
S
P*
D
Q
Q*
b. a decrease in the sales tax applied to the good
P
S
P*
D
Q
Q*
c. an increase in income, and the good is an inferior good
P
S
P*
D
Q*
Q