๐ถAP Macroeconomics
๐ถAP Macroeconomics
FRQ 1 โ Long
Unit 1: Basic Economic Concepts
Practice FRQ 1 of 201/20
1. Assume that the nations of Novania and Optima produce only two goods: Solar Panels and Electric Vehicles. Both nations have constant opportunity costs of production and use equal amounts of resources.
- The resources in both countries are adaptable for the production of either good.
- Novania and Optima are considering engaging in mutually beneficial trade.
Table 1: Maximum Daily Production Output
| Country | Solar Panels (units per day) | Electric Vehicles (units per day) |
|---|---|---|
| Novania | 40 | 10 |
| Optima | 60 | 30 |
A. Using the data in Table 1, draw a correctly labeled graph of the production possibilities curve (PPC) for Novania, with Electric Vehicles on the horizontal axis and Solar Panels on the vertical axis. Plot the numerical values of the intercepts. Label a point A representing full employment and a point B representing unemployment.
B.
i. Calculate the opportunity cost of producing one Electric Vehicle in Novania. Show your work.
ii. Which country has the comparative advantage in the production of Solar Panels? Explain.
C. Identify one specific numerical value for the terms of trade (in terms of Solar Panels) for one Electric Vehicle that would be beneficial for both Novania and Optima.
D. Draw a correctly labeled graph of the market for Solar Panels in Novania, and label the equilibrium price Pe and the equilibrium quantity Qe (see Figure 2).
E.
i. On your graph in part D, show the effect of the new assembly process on the market for Solar Panels. Label the new equilibrium price P2 and the new equilibrium quantity Q2.
ii. Based on the change shown in your graph, what will happen to the consumer surplus in the market for Solar Panels? Explain.
F. Assume the government of Novania imposes a binding price ceiling on the market for Solar Panels. Will this policy result in a shortage, a surplus, or equilibrium in the market? Explain.
