AP Macroeconomics Unit 1 Review Session

[Pages:8]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? US: 1T = 1W Portugal: 1T = 1/3W

4. What is the opportunity cost of 1 unit of wine in the US? In Portugal? US: 1W = 1T Portugal: 1W = 3T

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? US: wine and textiles (both) Portugal: neither b. In which product does the US have a comparative advantage? In which product does Portugal have a comparative advantage? US: wine Portugal: textiles

Fill in the table. Assume that with trade, each country specializes and exports ? of its production.

Without Trade

With Trade (Production)

With Trade (Consumption)

Wine

Textiles

Wine

Textiles

Wine

Textiles

Portugal

20

30

0

90

50

45

United States

50

50

100

0

50

45

Total

70

80

100

90

100

90

6. What happens to total world output when countries specialize and trade? Total output increases. What is this called? Comparative advantage

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. Loses out on seeing the movie; gives up whatever she could have bought with the $10 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. Firm gives up the additional businesses it would have gotten at the prime location during the first 6 months 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. Jamie incurs an opportunity cost of $2,000 because he is giving up his income to work as an intern.

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. *Remember: Opportunity cost measures what is given up!

Hours of study time

Hours of study time

Grade in economics

Grade in chemistry

spent on economics

spent on chemistry

0

20

60

90

5

15

70

85

10

10

80

75

15

5

86

73

20

0

90

70

a. If he alters his plan and studies 15 hours for economics, what is his opportunity cost? 2 points on chem exam

b. If he alters his plan and studies 15 hours for chemistry, what is his opportunity cost? 10 points on econ exam

c. If he alters his plan and studies 20 hours for economics, what is his opportunity cost? 5 points on chem exam

9. 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 120 hours as your labor constraint and sketch your PPC based on this amount of time and labor. Measure widgets on the y axis.) Y-intercept is at 80 widgets. X-intercept is at 30 gadgets. b. What is the slope of your PPC? ? 8/3 c. What is the opportunity cost of producing an additional widget in Utopia? 3/8 gadget d. What is the opportunity cost of producing an additional gadget in Utopia? 8/3 widget

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. (slope = --2/5 or --.4))

b. What is the opportunity cost of producing an additional gadget? 2/5 widget

c. What is the opportunity cost of producing an additional widget? 5/2 gadget d. Suppose that Jonesville has 240 hours of labor available instead of 120 hours of labor. Does this affect the

opportunity costs? Explain. No, this will shift out the PPC from the origin, but the slope (opp. cost) will stay the same.

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? 15 tents

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? 30 bicycles

d. Is Smithtown's PPC linear? Explain. No, convex. Smithtown's resources are not equally well suited to producing bikes and tents. Say Smithtown devotes all resources to bikes, not all of those resources are particularly useful to bikes. Smithtown can move some resources away from bikes to tents without significantly decreasing bike production. However, the more tents Smithtown chooses to produce, the more resources better suited for bikes will be used less productively. This specialization of resources results in a PPC that is bowed out from the origin.

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? ?1/2 Of Small Island's PPC? ?1

c. What is the opportunity cost of producing an additional basket on Big Island? ? fish On Small Island? 1 fish Which island can produce baskets at a lower opportunity cost? Big Island

d. What is the opportunity cost of producing an additional fish on Big Island? 2 baskets On Small Island? 1 fish Which island can produce fish at a lower opportunity cost? Small Island

e. What good should Big Island specialize in producing? Baskets What good should Small Island specialize in producing? Fish

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. Positive b. If the gasoline tax were raised by 10 cents per gallon, tax revenue would increase by 4%. Positive 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. Normative d. Mandatory school enhances the work skills of students. Normative e. The age of mandatory school attendance should be extended. Normative f. An extension of mandatory school attendance will increase government education costs by $2 million for the state. Positive

14. Define positive economics and normative economics. Why does normative economics cause greater disagreement among economists? Positive: descriptive; objective; how world works. Negative: prescriptive; subjective; how world should work Economists may not share the same values and will reach different conclusions about how the world should work.

Supply and Demand

15. Graph supply and demand curves, indicating equilibrium price and quantity on the axes. 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. Top left b. The wages of orange workers decrease. Top right c. Research finds oranges have additional health benefits. Bottom left d. The price of tangerines decreases. Bottom right

16. 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? Decreases by 300

b. Suppose the price is initially $40. If price falls by $40, what happens to quantity demanded? Doubles (increases by

500)

17. 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

People's income increases People's incomes decreases.

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.

Specified market

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

Market for band-name designer clothing Market for winter clothing

Market for apartments in urban areas

Movement (M) or shift (S)

S S

Demand shift right (->) or left () or left ( ................
................

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