2008 Macro FRQ #3

2008 Macro FRQ #3

Watch me answer it here

https://youtu.be/N8tiU6iyMYo

(A) Calculate the opportunity cost of a bicycle in Artland.

Artland can produce 600 Hats or 300 Bikes.

The opportunity cost is what is given up, foregone, or sacrificed. Art land only makes two things so to produce more of one thing (hats) he must give up another thing (bikes).

600/300 = 2

   2 / 1

Hats/bikes = 2 hats to 1 bike

If Artland produces 1 bike he gives up 2 hats

If they had asked for the opportunity cost of a hat. Reverse it.

300/600 = .5

Bikes/Hats = .5 bike to 1 hat

If Artland produces 1 hat it gives up .5 bikes

(B) If the two countries specialise and trade, which country will import bicycles? Explain.

We have to compare both sides in the making of hats and bikes. 

Ray only gives up .25 of a bike to make 1 hat - most efficient - comparative advantage in hat making.

So Ray will make hats and import bikes.

Art only gives up 2 hats to make 1 bike - most efficient - comparative advantage in bikes.

Art will make bikes and import hats.

(C) If the term of trade are 5 hats for 1 bike, would trade be advantageous for each of the following?

(i) Artland

(ii) Rayland

Look at the chart again,

Ray can trade 4 hats for 1 bike - 5 hats for 1 bike is a worse deal - Not Good

Art can trade 2 hats for 1 bike - 5 hats for 1 bike is a better deal - Good

(D) If production in Artland triples, which country has the comparative advantage in hats?

So production triples, not just in hats but in bicycles also. Art land would now have the absolute advantage but the comparative advantage wouldn't have changed.

Art = 600/300 equalised = 1 to .5

Art = 1800/900 equalised = 1 to .5

 

PPC 2

Production Possibility Curve

Ok, last post we talked about the PPC and what some of the points mean. Lets look at the curve again and add some new points.

2008 AP Microeconomic Exam

Here we have question 1 from the 2008 AP Central released study test. It shows a bowed-out PPC curve with points on the curve, inside the curve, and outside the curve.

Lets take answer (E), It states that the economy is not producing at its potential, since it is not producing at point D.

• Points outside the curve - Answer Choice (E)/ Point D , (yes I know it's confusing but I didn't design the test) are unattainable because they are beyond what is presently possible given the country's scarce resources.  - Think of potential as potential output which is a level of output that can be achieved using existing levels of technology, resources and with full employment,, in essence,, when you read potential, think on the curve. -- The answer can't be E as points outside the curve are unattainable.
• Points inside the curve - Answer Choice (D)/ Point E, points inside the curve are attainable but inefficient as scarce resources are not being used. (Usually points inside the curve are representations of unemployment.) The answer can not be D because the country can produce at point E.
• Points on the curve - Answer Choice (C)/ Point A,B & C, Points on the curve are attainable and efficient combinations as there is no waste of scarce resources. Think full employment, all machines and equipment are being utilized, all resources are being used along with the most innovative technologies. The answer can not be C as at point C there is no butter being made, just machines. (tricky bastards)
• Answer Choice (B) - The opportunity cost of producing more machines is constant. Due to the fact that the PPC curve is bowed-out lets us know that the opportunity cost is not constant. In this case we know that as we move toward the ends of the curve we give up more and more of the other good,,, opportunity costs increase as we move to the edges of the curve.
• Answer Choice (A) It is true that if our society has chosen to produce at point C on the curve then all resources are being used efficiently and since it is on the curve we know that it is attainable.

Shifting of the PPC Curve 

• Outward shifts of the Curve

An outward shift of the PPC reflects growth as combinations of output previously unattainable now become attainable. 

1995 AP Microeconomics Exam

Answer - Economic growth on the PPC is depicted by a rightward shift of the curve (A).

How can this happen?

The discovery of new natural resources such as shale gas or oil.

Immigration or an increasing of the workforce

Introduction of new technology or advances in the techniques of production or an increase in the quality of labour.

Trade

Example 1 - New stock of resources are found -  OIL is Found in North Dakota 

Example 2 - New Stock of resources such as an increase in the Labor Force

1995 Ap Microeconomic Exam

Answer - An outward shift in the PPC can be caused by (B) the labor force.

Example 3 - Resources Found - Water in Africa

http://www.bbc.com/news/science-environment-24049800

Example 4 - Trade between Korea and Canada

http://www.theglobeandmail.com/news/politics/with-south-korean-deal-canada-securesfree-trade-foothold-in-asia/article17422168/

2000 AP Microeconomics Exam

Answer - A country can consume beyond its PPC when it (A) trades with other countries thus taking advantage of differing opportunity costs.

Podcast - Paul Romer, Stanford University professor and Hoover Institution Senior Fellow talks with EconTalk host Russ Roberts about growth, China, innovation, and the role of human capital. Also discussed are ideas in creating growth, the idea that ideas allow for increasing returns, and intellectual property and how it should be treated. This 75 minute podcast is a wonderful introduction to thinking about what creates and sustains our standard of living in the modern world.
http://www.econtalk.org/archives/2007/08/romer_on_growth.html

PPC 1

Production Possibility Curve, Production Possibility Frontier or (PPC/PPF),

Definition - shows the the maximum amount of good Y an economy is able to produce for each amount of X it chooses to produce if it fully and efficiently employs all of its scarce resources with its given level of technology.

Assumptions or ground rules of the PPC/PPF

• two goods or services only - clothing/food, butter/guns, capital goods/consumer goods
• Full employment - If your on the line there is full employment (B & C) below.
• Constant technology/resources/population/work force

What does it look like,

This represents a society that only produces two goods clothing and food. Obviously if they only produce food they will have no resources to produce clothing (bit awkward). If they only produce clothing they will starve. Society therefore must chose (make a trade-off) to produce some combination of the two goods. 

If society is producing at point B (above) it's referred to as being attainable and efficient. 

• Attainable - because by using all resources available and with full employment society can produce this amount of goods.
• Efficient - because it is impossible (with this combination of goods) to produce more of one good without decreasing the production of the other. 

If society is producing at point C (above) it's also referred to as being attainable and efficient. Yet something has changed,, in moving from B to C we have given up a bit of clothing and produced a bit more food.

Example - 1995 AP Microeconomic Exam

In moving from point B to point C we have produced less of (units of good Y) and more of (units of good X) The question above asks,, what is the opportunity cost of moving from B to C. 

• Opportunity Cost - The value of the next best alternative sacrificed. (what is given up)

Answer - In question 17, when moving from point B to point C, what is given up, is the amount of good Y from H to G of good Y. So (B) HG units of good Y is the answer.

Example 2 - 2000 AP Microeconomics Exam

OK, here we are using a table but the question is the same. What is the opportunity cost (what is given up) if society increases production of good Y from 0 to 200.

Answer - To produce 200 units of good Y  we can only produce  980 units of good X,, so to move from 0 to 200 of good Y we must produce less of good X. We simply look across the table from 200 of good Y to the matching number of 980 units of good X. In increasing our production of good Y by 200 we have decreased our production of good X by 20, (1,000 - 980 = 20). So (D) 20 units of X is the final answer.

Example 3 - 2005 AP Microeconomics Exam

Again, the question is asking what is being given up (opportunity cost). If we are producing at point X of Capital Goods (50) then we are also producing 3 Consumer goods. 

Answer - To move from producing 3 (point X) Consumer goods to 4 Consumer goods means that we must give up some Capital goods. It shows (dotted line) that at 4 Consumer goods we can only produce 30 Capital goods. So in moving from 3 units of Consumer goods to 4 Units of Consumer goods we move from 50 units to 30 units of Capital goods, we have given up 20 Capital goods. 

Good video's to watch

Mjmfoodie - 

https://www.youtube.com/watch?v=JCEWQ_cafUs&list=PLF2A3693D8481F442

https://www.youtube.com/watch?v=PSU-_n81QT0&list=PLF2A3693D8481F442&index=8

https://www.youtube.com/watch?v=ApWWs_sZQQg&list=PLF2A3693D8481F442&index=9

pajholden - 

https://www.youtube.com/watch?v=a5rxIY46J7s

welker - 

https://www.youtube.com/watch?v=kmjzgB_tUJ8

More tomorrow,

Waugh