💶AP Macroeconomics
1. Assume that the nations of Arcadia and Bataviland have equal amounts of resources and produce only two goods: grain and steel. The table below shows the maximum annual output for each nation if they use all their resources efficiently.
Both nations have constant opportunity costs in the production of grain and steel.
The nations are considering engaging in trade based on comparative advantage.
Assume the market for grain in Arcadia is perfectly competitive.
Table 1: Annual Production Possibilities
Nation | Grain (tons) | Steel (tons) |
|---|---|---|
Arcadia | 100 | 50 |
Bataviland | 40 | 40 |
Draw a correctly labeled graph of the production possibilities curve (PPC) for Arcadia, with grain on the horizontal axis and steel on the vertical axis. Plot the numerical values of the intercepts. On your graph, label a point X that represents an efficient level of production and a point Y that represents an inefficient level of production.
Use the data in Table 1 to answer the following.
Calculate the opportunity cost of producing one ton of steel in Arcadia. Show your work.
Which nation has the comparative advantage in the production of steel? Explain.
Identify one specific numerical value for the terms of trade for one ton of steel (in terms of grain) that would be beneficial for both Arcadia and Bataviland.
Draw a correctly labeled graph of the market for grain in Arcadia, and label the equilibrium price as Pe and the equilibrium quantity as Qe (see Figure 2). Now assume that Arcadia produces grain for its domestic market.
Assume that the price of fuel, an input used in the production of grain, increases significantly.
On your graph in part D, show the effect of the increase in the price of fuel on the market for grain, labeling the new equilibrium price as P2 and the new equilibrium quantity as Q2.
As a result of the change in equilibrium shown in part E(i), will the total revenue of grain producers increase, decrease, or remain the same if the demand for grain is price inelastic? Explain.
Suppose the government of Arcadia sets a price floor on grain at a price below the new equilibrium price P2. Will this price floor cause a surplus, a shortage, or have no effect on the market quantity? Explain.
Required Graph Drawings
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