2016 AP Macroeconomics Exam FRQ #3
It is very nice of the College Board to have set the problem up in this helpful way.
(A) Who has the absolute advantage in producing donuts? Explain.If we look at the chart above we see that John can produce 200 donuts and Erica can produce 150. Therefore John has an absolute advantage in the production of donuts.
From the Cheat Sheet
Draw a Graph
We can clearly see that John has an absolute advantage in production of donuts and cupcakes.
(B) Who has the comparative advantage in producing donuts? Explain.
John can either produce 200 donuts or 100 cupcakes. If he makes 200 donuts he gives up 100 cupcakes (100/200 = .5 or 1/2). Said in a different way, for every donut John makes he gives up 1/2 of a cupcake or for every cupcake he makes he gives up 2 donuts. (200/100 = 2)
Erica, on the other hand, can either make 150 donuts or 50 cupcakes. If she makes 150 donuts she gives up 50 cupcakes (50/150 = .333... or 1/3). Said in a different way, for every donut Erica makes she gives up a 1/3 of a cupcake or for every cupcake she makes she gives up 3 donuts. (150/50 = 3)
As Erica's opportunity cost of producing 1 donut is 1/3 of a cupcake, which is less than John's opportunity cost which is 1/2 of a cupcake for every donut he makes.
Erica gives up less cupcakes by producing donuts than John does. She is more efficient.
Remember that comparative advantage is about who gives up less than the other person, as lower opportunity cost is the key.
(C) Assume that John and Erica decide to specialise according to their comparative advantages and that one cupcake is exchanged for four donuts.
If John and Erica specialise then Erica would make the donuts and John would make cupcakes.
(i) Indicate wether or not specialisation and trade would be beneficial to John.
Before specialisation John could make a cupcake or two donuts, said another way, if John makes two donuts he gives up a cupcake. After trade and specialisation John can trade a cupcake for 4 donuts. He would be better off.
(ii) Indicate wether or not specialisation and trade would be beneficial to Erica.
Before specialisation Erica could make a donut and give up 1/3 of a cupcake. Said another way, Erica could make a cupcake and give up 3 donuts. After trade and specialisation Erica would have to give up 4 donuts for 1 cupcake. This would not be beneficial for Erica.
(D) Assume that Erica discovers a new cupcake production technique that will increase her daily production of cupcakes only. Using donuts on the horizontal axis, draw a correctly labeled production possibility curve for Erica, before and after the technology change in cupcake production.
Understand, that Erica's production of donuts will not increase but her ability to produce more cupcakes with the same resources will increase.