💶AP Macroeconomics
1. Assume that the countries of Highland and Lowland produce two goods, grain and steel, using equal amounts of resources.
The table below shows the maximum production of grain and steel for each country if they use all their resources efficiently.
Assume that the opportunity costs are constant.
Table 1: Maximum Output Per Day
Country | Grain (tons) | Steel (tons) |
|---|---|---|
Highland | 100 | 50 |
Lowland | 40 | 40 |
Draw a correctly labeled graph of the production possibilities curve (PPC) for Highland (Figure 1), with grain on the horizontal axis and steel on the vertical axis. Plot the numerical values of the intercepts. Label a point A that represents full employment and efficient production. Label a point B that represents inefficient production.
Using the data in Table 1, answer the following questions.
Calculate the opportunity cost of producing one ton of steel in Highland. Show your work.
Calculate the opportunity cost of producing one ton of steel in Lowland. Show your work.
Which country has the comparative advantage in producing steel? Explain.
Identify one specific numerical value for the terms of trade (in terms of grain) that would be beneficial for both countries to exchange one ton of steel.
Draw a correctly labeled graph of the domestic market for grain in Highland (Figure 2). Label the equilibrium price as and the equilibrium quantity as .
On your graph in part D (Figure 2), show the effect of the increase in incomes on the market for grain. Label the new equilibrium price as and the new equilibrium quantity as . Assume that grain is a normal good and consumer incomes in Highland increase.
Assume the government of Highland imposes a binding price ceiling on the market for grain.
On your graph in part D (Figure 2), draw a line representing the binding price ceiling and label it .
Does the price ceiling result in a surplus, a shortage, or neither? Explain.
Required Graph Drawings
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