October 30, 2012 1
AP Macroeconomics – Practice Problem Set
Directions: Using prior knowledge, answer the following questions.
1. Consider the following information for a country:
 Number of employed individuals outside the labor force: 500,000
Calculate the following & show how you derived the figures:
a. The size of the labor force
b. The unemployment rate
c. The labor force participation rate
2. In the past decades, the price of coffee in the United States rose significantly as a
result of bad weather in coffee-producing regions.
a. Use the concepts of the income effect and the substitution effect to explain why the
quantity of coffee demanded in the United States significantly decreased.
b. Generate a graph demonstrating the original scenario and the consequence of
“part a” (above).
a) Explain what happens to price, QS, & QD.
3. Assume that the market for roses is in equilibrium, and that carnations are a close
substitute. One day, a disease strikes the carnations, thought the roses remain
unharmed.
a. Using two well-labeled graphs, once for carnations and one for roses, indicate the
market equilibrium prior to the effects of the disease.
b. Determine what will happen to the price and quantity in the carnation market as a
result of the disease. Illustrate on your graph.
c. Determine what will happen to the price and quantity in the rose market as a
result of the disease. Illustrate on your graph.
d. Now, suppose that a fertilizer is developed that will improve the productivity in
the rose market, using a new graph for the rose market:
a) Determine what will happen to price and quantity in the rose market
b) Illustrate on your graph.
e. Show how the introduction of the fertilizer will impact producer surplus in the
rose market.
4. If the price of Buster sneakers drops from $50 to $40 a pair, the number of
sneakers that that Buster company sells increase from 10,000 pairs to 11,000 pairs.
a. Is demand for Buster sneakers elastic or inelastic?
b. Show how to determine the elasticity, without reference to total revenue or
expenditures.
c. Show how to determine elasticity using the total revenue approach
(4 Cont’d)…
2
AP Macroeconomics – Practice Problem Set
Now assume that Brown Company sneakers are the only close substitute for Buster
sneakers, and that the Brown Company manufacturing capacity and all its
inventory is destroyed.
d. What will happen to the price and quantity sold of Buster sneakers? Why?
Illustrate your answer with a well-label supply & demand graph.
e. What will happen to the relative elasticity of demand for Buster sneakers?
Illustrate this change on the graph.
5. In one hour, Japan can produce 12 units of steel or 6 units of televisions. In one
hour, S. Korea can produce 8 units of steel and 2 units of televisions.
a. Calculate each country’s opportunity cost for each product.
b. Which country has the comparative advantage for each product?
6. Classify each of the following items as a final good or service, an intermediate good
or service, or neither. Explain which scenarios contribute to GDP. Justify your
answers.
a. The fertilizer purchased by a Florida tomato grower.
b. The Wall Street Journal you purchased this morning.
c. The used PlayStation II you bought on EBay.
d. The jet fuel purchased by US Airways.
e. A college education.
f. The service fee you pay to list your items for sale on EBay.
7. In the market for SUVs, several events occur one at a time. Explain the influence of
each event on the QS of SUVs and the supply of SUVs. Illustrate the impacts of each
event by either a movement along the supply curve or a shift in the supply curve of
SUVs. Explain which event(s) illustrates the law of supply in action:
a. The price of a truck rises
b. The price of an SUV falls.
c. The price of an SUV is expected to fall next year.
d. An SUV engine defect requires a huge and costly manufacturer’s recall to replace
the defective engines.
e. A new robot technology lowers the cost of producing SUVs.
f. The price of crude oil is expected to rapidly increase over the next year.
Now, illustrate how each event will impact QD and the demand for SUVs. Graph
these on the same event graphs you created above.