Graded Assignment

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HST520: AP Macroeconomics | Unit 2 | 2.2 Practice

Date:

Graded Assignment
Assignment: Apply Concepts of Production and Trade
1. The advantage of trade is a very important concept in economics. In examining trade between two individuals
or two countries, you usually see at least one side specializing in the production of one good.
A. What concept is most important in determining which good a person or nation will specialize in
the production of? How can you tell which good a person or country will specialize in? (4 points)
Specialization is all about what that entity is good at. Often, it is what is placed in the environment. Its all
about comparative advantage. The Middle East specializes in oil because there is a lot of it.
B. It's said that trade creates wealth. If wealth is determined by the total value of goods and services
(including environmental goods and leisure time) people have, explain why allowing people to
specialize and trade will make them wealthier. (4 points) Take Bill Gates for example. He specialized in
computers. That time, 100% of it was sent towards technology, to making software, researching
competitors in his industry. He wasnt an FC Barcelona soccer legend. Thats Neymar. Neymar spent his
time on practicing his skills. If youre skill is wanted by a lot of people- you get tons of money.
2. Generally, sunk costs dont affect decisions made by either consumers or firms, although sometimes it might
seem that they do. For example, suppose half way through a clinical trial to develop a drug for depression, the
firm decides to reconsider the viability of continuing the clinical trial.
A. Are the costs incurred up to that point considered as sunk costs? (3 points) No.
B. Suppose that the costs of continuing the trial cause the firm to stop the development of the drug.
Are the costs of continuing the trial considered sunk costs? (3 points) No.
3. Economic Growth
A. If an economy is experiencing economic growth, what happens to its PPF? Show your answer on
a graph, using the nation of Recyclaria, where the people produce bottles and paper. (3 points)

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Graded Assignment

HST520: AP Macroeconomics | Unit 2 | 2.2 Practice

B. Give three examples of things that would cause economic growth. (6 points) More businesses,
higher employment, less taxes.
4. When we draw a production possibilities frontier (PPF), were basically limited to two goods. This isnt terribly
realistic, but occasionally it lets us make some very important points. Consider that goods and services can
be broadly defined as either consumption goods and services, such as hamburgers, televisions, and
manicures, or production goods and services, such as machinery, mainframe computers, and education.
A. Draw a PPF graph with consumption goods and production goods on the two axes. Mark a point
on the PPF where there are a lot of consumption goods and few production goods, and label it A.
Mark a point on the PPF where there are few consumption goods and a lot of production goods,
and label it B. (3 points)

P
R
O
D
U
C
T
I
O
N

Consumption

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Graded Assignment

HST520: AP Macroeconomics | Unit 2 | 2.2 Practice

B. Consumption goods give us enjoyment today, but production goods allow us to increase the
amount we can produce in the future. On two separate graphs, draw PPFs that represent the
production possibilities this year. On the first graph, show how the PPF will shift from this year to
next year if most of the goods and services produced this year are consumption goods and
services. On the second graph, show how the PPF will shift from this year to the next if most of
the goods and services produced this year are production goods and services. (6 points)
P
R
O
D
U
C
T
I
O
N

Consumption

P
R
O
D
U
C
T
I
O
N

Consumption

5. Understanding the difference between absolute and comparative advantage isn't easy. Define
absolute advantage and comparative advantage in words. (8 points) Absolute advantage is when there
are less resources being used. Comparative is by fewer opportunity costs.
6. Table 2.1 shows how many trucks and game consoles that can be produced in a country with a fixed amount
of input.
Table 2.1: Production of Trucks and Game Consoles in
Country X
Trucks (millions)
Game Consoles (millions)

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Graded Assignment

HST520: AP Macroeconomics | Unit 2 | 2.2 Practice

50
48
46
43
40
35
10
0

0
10
20
30
40
50
60
70

A. What is the opportunity cost in trucks if Country X produces 50 game consoles instead of 40?
What is the opportunity cost in trucks if Country X produces 60 game consoles instead of 50? (2
points) X will have to produce only 35 trucks. X will then have to produce only 10 trucks.
B. Is the opportunity cost of producing more amounts of trucks increasing, decreasing, or remaining
the same? (2 points) Decreasing
C. What is the economic justification for the answer in part B, above? (2 points) To make 70 game
consoles, you cant make any more trucks.
D. What would the graphical display of this production possibilities curve look like? (5 points)
E))
70

G
A
M
E
C
O
N
S
O
L
E

G
A
M
E
C
O
N
S
O
L
E

50

TRUCK
S

G
A
M
E
C
O
N
S
O
L
E

700

500

TRUCK
S

G
A
M
E
C
O
N
S
O
L
E

700

50

TRUCK
S

70

500

TRUCK
S

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Graded Assignment

HST520: AP Macroeconomics | Unit 2 | 2.2 Practice

E. What would happen to the production possibilities curve if country X developed a new technology
that is more efficient to produce both game consoles and trucks? Only game consoles? Only
trucks? (9 points)

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