💶AP Macroeconomics
1. Assume that the nations of Florin and Guilder use equal amounts of resources to produce wheat and cloth.
Both countries have constant opportunity costs of production.
The table below shows the maximum daily production of each good for both countries using all available resources.
Table 1
Country | Wheat (bushels) | Cloth (yards) |
|---|---|---|
Florin | 100 | 50 |
Guilder | 40 | 80 |
Using the data in Table 1, draw a correctly labeled graph of the production possibilities curve (PPC) for Florin (Figure 1), with wheat on the horizontal axis and cloth on the vertical axis. Plot the numerical values of the intercepts. Label a point A that represents full employment and efficient production, and a point B that represents inefficient production.
Use the data in Table 1 to answer the following.
Calculate the opportunity cost of producing one bushel of wheat in Florin. Show your work.
Which country has the comparative advantage in the production of cloth? Explain.
Identify one specific numerical value for the terms of trade in terms of cloth that would be beneficial for both countries to exchange one bushel of wheat.
Draw a correctly labeled graph of the supply and demand for wheat in Florin (Figure 2). Label the equilibrium price Pe and the equilibrium quantity Qe. Assume that the market for wheat in Florin is in equilibrium.
On your graph in part D (Figure 2), show the effect of the increase in income on the market for wheat. Label the new equilibrium price P2 and the new equilibrium quantity Q2. Assume that wheat is a normal good and income in Florin increases.
Assume the government of Florin imposes a binding price ceiling on the market for wheat. Will this policy result in a surplus, a shortage, or neither in the market for wheat? Explain.
Required Graph Drawings
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