๐ถAP Macroeconomics
๐ถAP Macroeconomics
FRQ 1 โ Long
Unit 1: Basic Economic Concepts
Practice FRQ 1 of 201/20
1. Assume that the countries of Alpland and Betaland produce only two goods: wheat and cloth. The table below shows the maximum annual output for each country using equal amounts of resources. Assume that both countries have constant opportunity costs.
- Wheat is a normal good in Alpland.
- The currency of Alpland is the Alp.
Table 1. Maximum Annual Output
| Country | Wheat (tons) | Cloth (bolts) |
|---|---|---|
| Alpland | 100 | 50 |
| Betaland | 40 | 40 |
A. Draw a correctly labeled graph of the production possibilities curve (PPC) for Alpland, with wheat on the horizontal axis and cloth on the vertical axis. Plot the relevant numerical values for the intercepts. Label a point A that represents full employment and efficient production, and label a point B that represents inefficient production.
B.
Use the data in Table 1 to answer the following.
i. Calculate the opportunity cost of producing one bolt of cloth in Alpland. Show your work.
ii. Which country has the comparative advantage in the production of cloth? Explain.
C. Identify a specific numerical value for the terms of trade (in terms of wheat) for one bolt of cloth that would be beneficial for both Alpland and Betaland.
D. Draw a correctly labeled graph of the market for wheat in Alpland (see Figure 2). Label the equilibrium price as and the equilibrium quantity as .
Assume that consumer incomes in Alpland increase.
E. On your graph in part D, show the effect of the increase in incomes on the market for wheat. Label the new equilibrium price as and the new equilibrium quantity as .
F. Assume the government of Alpland imposes a binding price ceiling in the market for wheat. Will this policy result in a surplus, a shortage, or equilibrium in the market for wheat? Explain.
