Solution Manual for Macroeconomics Private and Public Choice 16th Edition Gwartney

Solution Manual for Macroeconomics: Private and Public Choice, 16th Edition, James D.

Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson, ISBN-10:

1305506758, ISBN-13: 9781305506756

Table of Contents

Part I: THE ECONOMIC WAY OF THINKING.

1. The Economic Approach.

2. Some Tools of the Economist.

Part II: MARKETS AND GOVERNMENT.

3. Demand, Supply, and the Market Process.

4. Supply and Demand: Applications and Extensions.

5. Difficult Cases for the Market, and the Role of Government.

6. The Economics of Political Action.

Part III: CORE MACROECONOMICS.

7. Taking the Nation’s Economic Pulse.

8. Economic Fluctuations, Unemployment, and Inflation.

9. An Introduction to Basic Macroeconomic Markets.

10. Dynamic Change, Economic Fluctuations, and the AD--AS Model.

11. Fiscal Policy: The Keynesian View and the Historical Development of Macroeconomics.

12. Fiscal Policy: Incentives, and Secondary Effects.

13. Money and the Banking System.

14. Modern Macroeconomics and Monetary Policy.

15. Stabilization Policy, Output, and Employment.

16. Creating an Environment for Growth and Prosperity.

17. Institutions, Policies, and Cross-Country Differences in Income and Growth.

Part IV: INTERNATIONAL ECONOMICS.

18. Gaining from International Trade.

19. International Finance and the Foreign Exchange Market.

Part V: APPLYING THE BASICS: SPECIAL TOPICS IN ECONOMICS.

Special Topic 1. Government Spending and Taxation.

Special Topic 2. The Economics of Social Security.

Special Topic 3. The Stock Market: Its Function, Performance, and Potential as an Investment

Opportunity.

Special Topic 4. Great Debates in Economics: Keynes versus Hayek.

Special Topic 5. The Crisis of 2008: Causes and Lessons for the Future.

Special Topic 6. Lessons from the Great Depression.

Special Topic 7. The Federal Budget and the National Debt.

Appendix A:. General Business and Economics Indicators for the United States.

Appendix B: Answers to Selected Critical Analysis Questions.

Part 1

Introduction

This section has two parts. First, a summary of the supplements and packages available for

instructors is included. Second, a discussion of the main features of PowerPoint and how to use it

in the classroom is provided.

SUPPLEMENTS A full set of supplements accompanies the text. They include the following:

Aplia

Aplia™ is an online interactive learning solution that improves comprehension and outcomes by

increasing student effort and engagement. Founded by a professor to enhance his own courses, Aplia

provides automatically graded assignments that were written to make the most of the Web medium

and contain detailed, immediate explanations on every question. Aplia is available in more than 15

disciplines and has been used by more than 2 million students at more than 1800 institutions. Visit

http://www.aplia.com/economics/ for more details.

MindTap

MindTap is a fully online, highly personalized learning experience built on Cengage Learning

content. MindTap combines student learning tools--readings, multimedia, activities, and

assessments--into a singular Learning Path that guides students through their course. Instructors

personalize the experience by customizing authoritative Cengage Learning content and learning

tools, including the ability to add their own content in the Learning Path via apps that integrate

into the MindTap framework seamlessly with Learning Management Systems.

Write Experience

Write Experience is a technology product that allows you to assess written communication skills

without adding to your workload. Instructors in all areas have told us it's important that students

can write effectively in order to communicate and think critically. Through an exclusive

partnership with a technology company, Cengage Learning's Write Experience allows you to do

just that! This new product utilizes artificial intelligence to not only score student writing instantly

and accurately but also provide students with detailed revision goals and feedback on their writing

to help them improve. Write Experience is the first product designed and created specifically for

the higher education market through an exclusive agreement with McCann Associates, and

powered by e-Write IntelliMetric Within™. IntelliMetric is the gold standard for automated

scoring of writing and is used to score the Graduate Management Admissions Test® (GMAT®)

analytical writing assessment. Better Writing. Better Outcomes. Write Experience. Visit

http://www.cengage.com/writeexperience to learn more.

Student Engagement Analytics in Progress App via MindTap

How do you know students have read the material or viewed the resources you’ve assigned? How

can you tell if students are struggling with a concept? Engagement Tracker assesses student

preparation and engagement. Use the tracking tools to see progress for the class as a whole or for

individual students. Identify students at risk early in the course. Uncover those concepts that are

most difficult for your class. Monitor time on task. Keep students engaged.

Interactive eBook

In addition to interactive teaching and learning tools, Economic MindTap includes an interactive

eBook. Students can take notes, highlight, search, and interact with embedded media specific to

their book. Use it as a supplement to the printed text or as a substitute—with MindTap, the choice

is up to your students.

Test Banks

The test banks for the 16th edition were prepared by the author team with the assistance of Joe

Calhoun. The authors have worked hard to update and improve the test banks for this edition. The

three test banks contain approximately 7,000 questions—multiple choice and short answer. Within

each chapter, the questions correspond to the major subheadings of the text. The first ten questions

of each chapter are suitable for use as a comprehensive quiz covering the material of the chapter.

Instructors who want to motivate their students to study will find online practice quizzes on

MindTap that can easily be incorporated into their quizzes and exams. The cloud-based test banks

for this edition have been enhanced significantly. Cognero contains all of the questions in the test

bank so that you can create and customize tests in minutes. You can easily edit and import your

own questions and graphics and edit and maneuver existing questions.

PowerPoint

We believe our PowerPoint presentation, prepared by Joseph Connors of Florida Southern

University, is the best you will find in the principles market. The presentation includes chapter-

by-chapter lecture notes with fully animated, hyperlinked slides of the textbook’s exhibits. Its

dynamic graphs and accompanying captions make it easy for instructors to present (and students

to follow) sequential changes. The graphs are also used to highlight various relationships among

economic variables. To facilitate classroom discussion and interaction, questions are strategically

interspersed throughout the PowerPoint slides to help students develop the economic way of

thinking. Instructions explaining how professors can easily add, delete, and modify slides in order

to tailor the presentation to their liking are included. If instructors want to make the PowerPoint

presentation available to students, they can place it on their Web site (or the site for their course).

Instructor Resource Center (www.login.cengage.com)

This password-protected Web site includes instructor’s manuals and test banks and the

PowerPoint lecture and exhibit slides. To download these supplements, register online at

www.login.cengage.com.

POWERPOINT A set of presentations has been developed to accompany the text. The presentations were prepared with Microsoft PowerPoint. For more information on PowerPoint, see an excellent web site created by Susan Brooks and Bill Byles called Internet4Classrooms: http://www.internet4classrooms.com/on-line_powerpoint.htm. Susan Brooks (sbrooks@internet4classrooms.com) and Bill Byles (bylesb@internet 4classrooms.com) are willing to answer questions from users of their site about PowerPoint.

Using the Internet4Classrooms web site, the next sections describe how to use some of the main features of PowerPoint within the Windows environment for Office XP. The site also provides information about using PowerPoint in the Office 2007 and Office 97 environments as well. To create a new slide and choose a template:

http://www.internet4classrooms.com/template_ppxp.htm. Adding text to a slide, moving the text, and changing text style or color http://www.internet4classrooms.com/text_ppxp.htm Inserting an image into a slide: http://www.internet4classrooms.com/image_ppxp.htm Using different slide views: http://www.internet4classrooms.com/views_ppxp.htm Animating text: http://www.internet4classrooms.com/building_ppxp.htm Creating transitions between slides: http://www.internet4classrooms.com/transitions_ppxp.htm Keyboard shortcuts to use with your slideshow: http://www.internet4classrooms.com/shortcuts_ppxp.htm Slideshow options: http://www.internet4classrooms.com/showing_ppxp.htm

Frequently Asked Questions Can I customize my presentation? Yes. The slides can be customized in a variety of ways. For example, clip art can be added; slides added or deleted; hyperlinks inserted; and sounds added. For details on how to do some of these changes, see the discussion on the previous pages. At what point in my lecture do I show the presentation? At anytime during the lecture. One may use the presentation for the entire lecture or only part of the lecture depending on your preferences. How long does each presentation take to show? It will vary depending on how many additional examples one introduces; how many questions arise from students in the class; and etc. Are there any potential problems with using the presentations? One has to be careful not to make the course too “canned” when using the PowerPoint presentations. In order to keep this from happening, the presentations have integrated some thought-provoking questions designed to get student to think about the material that is being covered. Two or three questions of this variety--most out of the text--are inserted about half way through each chapter and at the end of each chapter. This will make the PowerPoint presentations more useful.

Part 2

Text Overview

This section, which is organized by chapter, has several features. First, an outline of the text is provided. Second, a brief summary of the important points of each chapter and tips on how best to use the text and supplementary materials is included. Third, possible answers (or approaches) to many of the Critical Analysis questions that are not answered in Appendix B of the text are included. Lastly, fun illustrations and games that have been successfully used to communicate economic concepts to students are provided.

Chapter 1

The Economic Approach

OUTLINE I. What Is Economics About?

A. Scarcity Means Having to Make Choices

1. Scarcity and choice are the two essential ingredients of an economic topic.

2. Goods are scarce because desire for them far outstrips their availability in nature.

a. Scarce goods are called economic goods.

3. Scarcity forces us to choose among available alternatives.

B. Scarcity and Poverty Are Not the Same

1. Scarcity and poverty are not the same thing.

a. Absence of poverty implies some basic level of need has been met.

b. An absence of scarcity would imply that all of our desires for goods are fully satisfied.

2. We may someday eliminate poverty, but scarcity will always be with us.

C. Scarcity Necessitates Rationing

1. Every society must have a method to ration the scarce resources among competing uses.

a. Various factors can be used to ration (first-come, first-served).

b. In a market setting, price is used to ration goods and resources.

c. When price is used, the good or resource is allocated to those willing to give up “other things” in order to obtain ownership rights.

D. Scarcity Leads to Competitive Behavior

1. Competition is a natural outgrowth of the need to ration scarce goods.

2. Changing the rationing method used will change the form of competition, but it will not eliminate competitive tactics.

II. The Economic Way of Thinking

A. Guideposts to Economic Thinking

1. The use of scarce resources is costly, so tradeoffs must be made.

a. Someone must give up something if we are to have more scarce goods.

(1) The highest-valued alternative that must be sacrificed is the opportunity cost of the choice.

2. Individuals choose purposefully; therefore they will economize.

a. Economizing: gaining a specific benefit at the least-possible cost.

3. Incentives Matter

a. As personal benefits (costs) from choosing an option increase, other things constant, a person will be more (less) likely to choose that option.

4. Economic reasoning focuses on the impact of marginal changes.

a. Decisions will be based on marginal costs and marginal benefits (utility).

5. Since information is scarce, uncertainty is a fact or life.

6. In addition to their initial impact, economic events often generate secondary events that may be felt only with the passage of time.

7. The value of a good is subjective and varies with individual preferences.

8. The test of an economic theory is its ability to predict and explain events in the real world.

III. Positive and Normative Economics

A. Positive Economics

1. Positive Economics: The scientific study of “what is” among economic relationships.

a. Positive economic statements can be proved either true or false.

(1) Ex: The inflation rate rises when the money supply is increased

B. Normative Economics

1. Normative Economics: Judgments about “what ought to be” in economic matters.

a. Normative statements cannot be proved true or false.

(1) Ex: The inflation rate should be lower.

IV. Pitfalls to Avoid in Economic Thinking

A. Pitfalls

1. Violation of the ceteris paribus condition.

a. Ceteris paribus is a Latin term meaning “other things constant.”

b. Used when the effect of one change is being described, recognizing that if other things changed, they also could affect the result.

2. Good Intentions Do Not Guarantee Desirable Outcomes

a. Policies formed with good intentions may have unintended adverse secondary effects.

3. Association is not causation.

a. Statistical association alone cannot establish causation.

4. Fallacy of composition

a. The fallacy of composition is the erroneous view that what is true for the individual (or the part) will also be true for the group (or the whole).

b. Microeconomics focuses on narrowly defined units, while macroeconomics focuses on highly aggregated units.

(1) One must beware of the fallacy of composition when shifting from micro to macro units.

OBJECTIVES The purpose of this chapter is to introduce the student to the economic way of thinking. Unless students understand the concept of scarcity, the importance of personal incentives, and subject their thinking to the scientific method, they will do poorly in economics. Generally, teachers overestimate their students. While many of your students will easily grasp the basics of the economic way of thinking, others will need additional examples and illustrations before they understand the essentials. The concepts of scarcity, economizing behavior, and incentives are so important, they are worth an entire lecture. Use several illustrations to highlight the impact on human behavior of changes in personal benefits or costs. Introductory students tend to associate economics with business decision making. We must illustrate to them that the basic principles of economics and personal incentives influence all of human decision making, including choices in the political and social spheres. You may also want to contrast the methodology of economics with that of other social sciences and the physical sciences. Discuss both the similarities and differences.

IMPORTANT POINTS AND TEACHING SUGGESTIONS 1. Be sure to distinguish clearly between scarcity and poverty (and shortages, once supply and

demand have been covered). Anything that we would like to have more of at no cost is scarce. Thus, almost everything from clean air to leisure time to the ingenuity necessary to make other resources useful is scarce. Poverty is defined as failure to attain some minimum level of income. Poverty can conceivably be eliminated, whereas scarcity persists since goods are scarce for both the rich and the poor. A shortage is present when purchasers would like to buy more than is available at the current price.

2. Introducing the subject of incentives, one can readily emphasize the importance and

generality of this basic principle of economics. When an activity is made more costly, people will be less likely to choose it. Similarly, when the benefits derived from an event increase, people will be more likely to undertake it. Numerous examples can illustrate this concept. How does hot weather influence one’s decision to do without air-conditioning (or a swimming pool)? How does rewarding class attendance with higher grades influence one’s decision to go to class? How does the grading policy of the instructor influence a student’s incentive to study?

3. Discuss the meaning of “the margin” with students. Use non-economic examples to help

clarify the idea. For example, ask students how an additional outstanding running back will influence the quality of a football team. (This is a marginal change.) If the running back position was previously a team weakness, the new player may make a substantial difference. On the other hand, if the team was already strong at this position, the new player may exert little influence on the overall performance of the team. Indicate clearly the difference between (a) the overall performance of the team (a total concept) and (b) the change that results from the addition of the new player (a marginal concept).

4. A good way of illustrating the search for information is to ask students how long they would search for a $50 bill. If your time had an opportunity cost of $10, you would look as long as you thought the probability of finding the bill in the next hour was at least 1/5. (The answer is not five hours in this case, because time already spent searching is then a sunk cost. A person could look well more or less than five hours.)

5. Give examples of actions that have secondary effects. What are the secondary effects of

overeating? Lack of adequate sleep? Restricting trade with Japan? Fixing the price of wheat at $6 per bushel?

6. Emphasize both the theory and empirical parts of economics. Many professional economists

are engaged in the continual testing of various aspects of economic theory. Discuss how economic theory is tested. Indicate real-world events that have convinced economists to modify their theories. Two examples of the latter are: a. the impact of the Great Depression on the theory that wage and price flexibility quickly

restores full employment. b. the economic events of the 1970s on the theory that moderate inflation enables us to

permanently attain low levels of unemployment. 7. Discuss the distinctions between positive and normative economics. Point out that positive

economic statements are testable, whereas normative statements are not. Give several illustrations of both positive and normative economic statements. The following are examples of positive economic statements:

a. “If the price of wheat rose, buyers would purchase less of it.”

b. “Nations that import substantial amounts of crude oil will experience inflation when

crude oil prices rise.” (Although this may or may not be true, it is nonetheless a positive

statement.)

c. “An increase in government borrowing will cause interest rates to rise.”

The following are examples of normative statements: a. “The price of wheat is too high.” b. “The United States should impose price controls on domestic oil producers if the price of

foreign oil rises.” c. “It is wrong for lenders to charge higher interest rates to poor people than they charge the

low-credit-risk customers.”

8. It is important to emphasize that association is not the same thing as causation. Discuss the following points with regard to this point. a. Skirt lengths tend to rise during prosperous times (1920s and 1960s, for example) and fall

during bad times (1930s). Therefore, prosperity is caused by short skirts, whereas hard times result from low hemlines.

b. High crude oil prices caused the inflation experienced by the United States during the

1970s. c. The post-World War II baby boom caused the prosperity of the period from 1946 to 1965. d. War causes inflation.

9. Provide examples that illustrate the fallacy of composition, such as the following statements:

a. “Total output remains virtually unchanged whether I work or not; thus output is largely unaffected by whether or not people work.”

b. “I am no more likely to have an accident by driving ten miles over the speed limit than by

obeying the limit. Thus, even if everyone drove 10 miles over the speed limit, the number of automobile accidents would not change.”

c. “Jones, a Kansas wheat farmer, doubled her income this year when she doubled her

production of wheat. If all wheat farmers doubled their production of wheat, they could double their annual income.”

10. The addendum is remedial material and should be assigned, along with Chapter 1, to students

who have difficulty perceiving graphical relationships. 11. The Critical Analysis questions at the end of each chapter are very useful in getting students

to think more clearly about issues and events in the real world. Frequently, they can be used to also stimulate classroom discussion. Our experience suggests that only by using the economic way of thinking can most students really learn it.

12. A bird-watching analogy can help students see the usefulness of the economic way of

thinking. Just as training and experience direct birdwatchers “where to look” to spot various birds, the economic way of thinking directs students to look at decision makers’ incentives to “see” the predictable consequences of actions and policies. This is why those trained in economics can often find predictable policy consequences that others are unable to grasp very easily

13. Another analogy that can help students see the power of the economic way of thinking is the

framing of a building. Just as buildings will not be structurally sound if the framing is not done correctly, economic analyses will be faulty unless it is built on the framework of the set of incentives faced by the relevant decision makers. This is why economists spend so much effort trying to properly specify the incentives facing the actors involved, because predictions that are inconsistent with actors’ incentives are likely to be incorrect.

14. In talking about choices and costs, one helpful illustration is to show that sometimes it is cheaper to make some mistakes than to be right all of the time. This is true whenever the costs associated with being wrong a certain fraction of the time are expected to be low compared to the costs of avoiding such mistakes (although these expectations themselves may prove incorrect). Examples run the gamut from dating (“you’ve got to kiss a lot of frogs before you find your prince”), to exams (you don’t generally want to incur the costs to get every problem on an exam correct because you can miss some and still get an A), to buying “off brands” when shopping (where you trade off lower prices for greater risks of unsatisfactory product performance).

HINTS FOR ANSWERING CRITICAL ANALYSIS QUESTIONS 2. Production of scarce goods always involves a cost; there are no free lunches. When the

government provides goods without charge to consumers, other citizens (taxpayers) will bear the cost of their provision. Thus, provision by the government affects how the costs will be covered, not whether they are incurred.

6. Self-interest implies neither selfishness nor greed. Neither does it imply that people are only

interested in their own welfare. Self-interest and selfishness do not have the same meaning. Webster defines self-interest as “concern for one’s own well-being.” There is no implication that a self-interested person is either desirous of the possessions of others or seeking to gain at the expense of others. In contrast, Webster defines selfishness and greed as “pursuit of one’s own welfare without regard for the welfare of others.” A selfish person willingly pursues gain at the expense of others.

11. Statements (a) and (c) are normative and statements (b) and (d) are positive.

Chapter 2

Some Tools of the Economist

OUTLINE I. What Shall We Give Up?

A. Opportunity Cost

1. Opportunity cost

a. The highest-valued activity sacrificed in making a choice.

b. Opportunity costs are subjective and vary across individuals.

2. The opportunity cost of college.

a. Monetary cost: tuition, books.

b. Non-monetary cost: forgone earnings.

1. If the opportunity cost of college rises (e.g. tuition rises), then one will be less likely to attend college.

II. Trade Creates Value

A. Voluntary Exchange

1. When individuals engage in voluntary exchange, both parties are made better off.

2. By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by society’s resources.

B. Transactions Costs

1. Transactions costs: the time, effort, and other resources needed to search out, negotiate, and consummate an exchange.

a. Transactions costs reduce our ability to produce gains from potential trades.

C. Middleman

1. Middleman: a person who buys and sells, or who arranges trades.

A middleman reduces transactions costs.

The Internet lowered transactions costs.

III. The Importance of Property Rights

A. Private Property Rights

1. Property rights: the right to use, control, and obtain benefits from a good or service.

2. Several features of private property rights.

a. They provide the right to exclusive use.

b. They provide legal protection against invaders.

c. They provide the right to transfer to another.

B. Private Property Rights Incentives

1. Private owners can gain by employing their resources in ways that are beneficial to others and they bear the opportunity cost of ignoring the wishes of others

2. Private owners have a strong incentive to care for and properly manage what they own.

3. Private owners have an incentive to conserve for the future—particularly if the

property is expected to increase in value.

4. Private owners have an incentive to lower the chance that their property will cause damage to the property of others.

a. Private ownership links responsibility with the right of control.

C. Private Property and Markets

1. When private property rights are protected and enforced, permission of the owner is required for use of a resource.

a. If you want to use a good or resource, you must either buy or lease it from the owner.

b. Individuals and firms are faced with the cost of using scarce resources. 2. Market prices provide a strong incentive for private owners to consider the desires

of others and to use and develop resources that are highly valued by others.

IV. Production Possibilities Curve

A. Shifting the Production Possibilities Curve Outward

1. An increase in the economy’s resource base would expand our ability to produce goods and services.

2. Advancements in technology can expand the economy’s production possibilities.

3. An improvement in the rules under which the economy functions can increase output.

4. By working harder and giving up current leisure, we could increase our production of goods and services.

V. Trade, Output, and Living Standards

A. Division of Labor

1. Division of labor: breaks down the production of a commodity into a series of specific tasks, each performed by a different worker.

2. Division of labor increases output for three reasons:

a. Specialization permits individuals to take advantage of their existing skills.

b. Specialized workers become more skilled with time.

c. Permits adoption of mass-production technology.

B. Law of Comparative Advantage

1. Law of comparative advantage: total output is greatest when individuals specialize in the production of goods that they produce at a low opportunity cost, and trade those goods for goods that they are a high-opportunity-cost producer.

a. The principle of comparative advantage is universal as it applies across individuals, firms, regions and countries.

VI. Human Ingenuity and the Creation of Wealth

A. Economic Pie

1. Economic goods are the result of human ingenuity and action; thus the size of the economic pie is variable.

a. At any point in time, our ability to produce goods and services is constrained by the availability of resources, technology, institutions and human effort.

b. With the passage of time, however, output can be expanded through investment and the discovery of better ways of doing things.

VII. Economic Organization

A. Methods of Economic Organization

1. Market organization: A method or organization that allows unregulated prices and the decentralized decisions of private property owners to resolve the basic economic problems.

a. Sometimes market organization is called capitalism.

2. Collective decision making is the method of organization that relies on public-sector decision making to resolve basic issues.

a An economic system in which the government owns the income-producing assets and directly determines what goods they produce is called socialism.

b In a democratic process, decision-makers have to consider how their actions will influence their election prospects. Otherwise, their tenure will be short.

OBJECTIVES In this chapter, we introduce the student to some basic economic tools—opportunity cost, the production possibilities curve, the law of comparative advantage, property rights, and the theory of exchange. The basic description of these concepts, without applications, are often boring to the student. Accordingly, it is vitally important that, as instructors, we present interesting and creative examples to help the student to visualize and retain these concepts. Two alternative institutional arrangements—market and government planning—are available to deal with economic issues. In this chapter, basic tools are introduced and the stage is set for the following three chapters.

IMPORTANT POINTS AND TEACHING SUGGESTIONS 1. Clearly, opportunity cost is the most vital and widely applicable concept in economics. From

the beginning, students should be taught to think of “costs” as “the highest-valued alternative given up when a choice is made.” Use of examples with which students can readily identify will help to reinforce the concept. What does the student give up when he studies economics for an hour? When she works ten hours per week? When he owns a car and drives 50 miles a week? In each case the answer is the highest-valued alternative that could have been chosen (consumed) had the choice not been made. Assignment of Critical Analysis question three will help the student understand this important concept.

2. The fact that trade creates value, the role of transactions costs, and the middleman’s reduction

of transactions costs are introduced. Later in the chapter, the myth that trade is a zero sum game is dispelled. Students might gain from a discussion of why it might be considered “socially irresponsible” to sell a used car too cheaply, rather than waiting until a buyer comes along who puts a higher value on the car, and is willing to pay more. Of course, the resale market is a potential antidote to the problem.

3. The section on property rights is important. Students need to understand how privately held

rights hold owners accountable, in an opportunity cost sense, for opportunities missed, and for potential options turned down. Additional examples of how local businesses or landowners might lose by overlooking new ways to meet consumer desires will help drive this point home. Discussion of Critical Analysis questions eight and nine will help students better understand the economic function of private property.

4. The concept of production possibilities provides the foundation for the constraints on

aggregate supply that will be discussed later. Resources can be used to produce alternative commodities. However, when resources are being utilized efficiently, production of more of one good will necessitate less of something else being produced. There are no free lunches when resources are utilized efficiently. Be careful not to give students the impression that an economy confronts either an automatic or an immovable production possibilities curve. Institutional arrangements, work effort, the past investment rate, and economic efficiency are important determinants of an economy’s production possibilities.

5. The law of comparative advantage is introduced here since it ties in nicely with both

opportunity cost and attainment of maximum output from one’s resource base. The concept is general and applies to specialization and trade between individuals, regions, and nations. It explains why specialization and trade can (and do) increase wealth. In our judgment, it is a mistake to relegate it to a chapter on international trade.

6. The myth dispelled in this chapter is the dangerous and increasingly popular misconception

that when one person gains from a transaction another must lose. The myth can be used as a focus for a lively class discussion on exchange and economic nonsense.

7. It is difficult to overemphasize the importance of incentives and the broadness of this basic

principle of economics. Critical Analysis question 14 should be an interesting starting point for a classroom discussion on this topic.

8. The conclusion of Chapter two would be an excellent time to give a short quiz. Ample

questions, designed to test both understanding and application of the basic tools presented in these introductory chapters, can be found in the Microeconomic and Macroeconomic Test Banks.

9. Teachers are always looking for new examples illustrating the gains from specialization and

trade. I have used one involving a “mythical” couple named Nancy and Ronnie to supplement the text presentation. Each must chop one cord of wood and decorate one room each day. Nancy can do either in one hour; Ronnie can chop a cord of wood in two hours and decorate a room in 1-1/2 hours. Starting from this basic data, the normal conclusions can be drawn about absolute advantage and comparative advantage, how comparative advantage is just another term for lower opportunity costs, gains from trade, and the limitations imposed by transactions costs (how long they haggle about the terms of trade must be weighed against the time savings from specialization).

10. Since this chapter is the main one dealing with the concept of opportunity cost, it needs to be

emphasized that costs are attached to choices, not goods. One effective way to do this in class is to ask “What’s the cost of a car?” and then lead the students to see that their answers do not make sense without a verb describing what action involving a car is being contemplated. One can speak of the cost of verbing a car (buying, owning, driving, insuring, borrowing, selling, etc.), but not sensibly of the cost of a car.

11. A way to integrate student understanding of how value is created and the crucial role of

entrepreneurship in the process is to show students that all forms of creating value involve one or more of the following: resources are being moved from less- to more-valuable forms (what we typically think of as production does not create atoms; it simply rearranges them), from less- to more-valuable locations (the value created by transportation), from less- to

more-valuable time periods (the value created through speculation), or from lower valuing to higher valuing uses and/or users (the value created through exchange). In each case, there is large dose of entrepreneurship in trying to discover higher-valued forms, locations, times, and higher-valuing users than others have discovered.

12. There are many illustrations that can be used to supplement the text’s discussion on the

importance of property rights under differing incentive structures that are faced by different parties. Examples include why your athletic team’s coach wants you in better shape than you do, why your mother wants you to get better grades than you do, why draftees and jurors tend to be used inefficiently, and why damage deposits arise as a way to make renters act more like they were owners.

13. Games one to five described in the next section will help reinforce the material in chapter

two. 14. The “Applications in Economics” feature on endangered species is the first of several in the

book, designed to show that economics can be fruitfully applied to contemporary problems in the real world—in this case, how private property rights can help solve problem of protecting endangered species.

15. This chapter includes three “Keys to Economic Prosperity” which highlights the main sources

of economic prosperity. In all, 12 of the most important factors that underlie modern economic

prosperity are included at appropriate places throughout the text. These “keys to prosperity”

are also listed in the front cover end papers.

16. The addendum to the chapter gives a detailed numerical example of comparative advantage

and the gains from trade. Going over a similar example in class helps reinforce the concepts of

comparative advantage and gains from trade with students.

GAMES

1. Getting Dressed in the Global Economy Type: In-Class Assignment Topics: Specialization, interdependence, self-interest, consumer choice,

international linkages Textbook: Chapter 1 The Economic Approach Chapter 2 Some Tools of the Economist Materials Needed: none Time: 20 minutes Class limitations: works in any size class Purpose The advantages of specialization and division of labor are very clear in this example. The worldwide links of the modern economy are also illustrated. We depend on thousands of people we don’t know, won’t see, and don’t think of, in order to get dressed in the morning. Self-interest follows naturally from interdependence. Wages, profits, and rents give people the incentive to

perform these varied tasks. We depend on them to clothe us, and they depend on our purchases for their income.

Instructions Ask the class to answer the following questions. Give them time to write an answer to a question, then discuss their answers before moving to the next question. The first question can be answered with a brief phrase. The second question is the core of the assignment and takes several minutes. Ask them to list as many categories of workers as possible. (Offering a dollar to the first student to list 20 categories adds a competitive element.) Question three introduces demand concepts; most of the determinants of demand can be introduced during its discussion. For the fourth question, ask the class to look at the country-of-origin tags sewn in their garments.

1. Where did your clothes come from? 2. Who worked to produce your clothes? 3. What things do you consider when buying a garment? 4. Where were your clothes produced (what countries)?

Common answers and points for discussion 1. Where did your clothes come from? There are many possible ways to answer, but a majority of students say “the mall”, “K-Mart”, or another retail outlet. Some say “a factory”, “a sweatshop”, or “a foreign country.” Mention the importance of markets here; (this can be emphasized by asking “Is anyone wearing something made by a friend or relative?) discuss distribution versus production. 2. Who worked to produce your clothes? There is no end to the possible answers; garment and textile workers are obvious but most students will also list raw materials, transportation, management, design, or machinery. Some think more broadly to inventors, road crews, bankers, oil refiners, engineers, and accountants. Three important points are specialization, interdependence, and self-interest. 3. What things do you consider when buying a garment? Most answers focus on preferences (fit, style, quality, color). Price is cited less frequently. Ask about the importance of price until someone volunteers that income is important and the prices of substitute goods are important. Expectations of price change (e.g. “clearance sales”) can also be discussed. Few students mention complementary goods and most reject the idea of choosing a sweater to match a particular outfit. More convincing sets of complements involve activities and garments: skiing and insulated overalls; surfing and wetsuits; aerobics and spandex. 4. Where were your clothes produced (what countries)? A large number of countries will be represented, even in small classes. Students are usually surprised to find how many garments are domestically produced. Asia is always well represented.

Latin American and European goods appear in smaller numbers. African products are conspicuously absent. This pattern shows the limits of simple explanations such as “cheap labor”. Briefly discuss the importance of comparative advantage, specialization, exchange rates, tariffs and quotas.

2. Screwdrivers and Bloody Marys Type: In-Class demonstration Topics: graphing, opportunity cost, choice Textbook: Chapter 2 Some Tools of the Economist Materials Needed: none Time: 10 minutes Class limitations: works in any size class Purpose This activity leads students from a simple graphing exercise to the concepts of scarcity, opportunity cost and choice. Instructions Draw a graph with Bloody Marys on the horizontal axis and Screwdrivers on the vertical axis. A Bloody Mary contains tomato juice and one shot of vodka. A Screwdriver contains orange juice and one shot of vodka. Assume we have plenty of orange juice and tomato juice, but only one small bottle of vodka, containing six shots. How many Bloody Marys could we make, if we only made Bloody Marys? How many Screwdrivers could we make if we only made Screwdrivers? Could we make six of both drinks? Why not? On your graph, show all the possible combinations of Bloody Marys and Screwdrivers that could be made, given a small bottle of vodka. Points for discussion The combinations will make a continuous line, since we could pour half drinks, or quarter drinks, or any fraction of either drink. Several basic graphing techniques can be demonstrated: inverse relation, negative slope, linear relation, etc. The economic points are more interesting. We can produce any combination, on or inside the line. If we produce inside the line, say two screwdrivers and two Bloody Marys, we are not fully using our resources. This is inefficient.

If we do use all of our scarce resources, increasing production of one drink requires sacrificing production of the other. This lost production is opportunity cost. Scarcity, or limited resources, requires choice. Producing a Bloody Mary means we can not use those resources to produce a screwdriver. Opportunity costs exist whenever we make choices.

3. Realism and Models: An Analogy

Type: In-Class demonstration Topics: models Textbook: Chapter two Some Tools of the Economist Materials Needed: airplane kit, sheet of paper, whirl-a-gig wing toy (Note: the whirl-a-gig

wing toy is a helicopter wing on a stick; it is often sold in museum gift shops, as well as toy stores.)

Time: 5 minutes Class limitations: works in any size class Purpose Students frequently complain about the lack of realism in economic models. This demonstration uses airplane toys to illustrate that simplicity can be an asset in modeling. Instructions and points for discussion Ask the class if a realistic model is better than an unrealistic model. Realism, of course, will be favored. Show them the airplane model kit. Describe some of the details included in the model (rivets, canopy, struts, etc). Shake the box to rattle the large number of parts. This a fairly realistic model, although obviously not a real airplane. Its complexity adds realism, but at a cost; assembling the model is very time consuming. Drop the box on the floor. Tell the class, “this model (even when completed) can’t fly.” Take the sheet of paper and fold it into a paper airplane. Show the class this new model. Its virtues include simplicity and ease of assembly, but it is less realistic than the hobby shop airplane: no rivets, no seats, no windows. Then throw the paper airplane and explain, “while less-detailed, this model can glide through the air.” Show them the whirl-a-gig wing toy. This model looks nothing like an airplane—no body, no tail just a T-shaped piece of wood. Yet this model does something, the other two models can’t do: it actually generates lift. This toy displays the same aerodynamic principles as a real airplane wing; it truly flies. Twirl the stick between your palms and the whirl-a-gig toy will fly over your head. Economic models are like the whirl-a-gig model. They are much less complex than the real world, but they can show how markets actually work.

4. A Short Trip with Many Contributors

Type: In-Class Assignment Topics: Specialization, interdependence, self-interest, international

linkages, role of government Textbook: Chapter 2 Some Tools of the Economist Materials Needed: none Time: 20 minutes Class limitations: works in any size class Purpose This assignment shows the advantages of specialization and division of labor, and global links. It also introduces concepts of public and private financing. Instructions Ask the class to answer the following questions. Give them time to write an answer to a question, then discuss their answers before moving to the next question.

1. Think of a recent trip you have taken. The distance traveled is unimportant, just choose a specific trip. Where did this trip start and finish? 2. Who produced the goods and services that made your trip possible? (List as many types of workers as possible.) 3. How were the different elements of your trip financed? (e.g. the vehicle, the road network, or the airport).

Common answers and points for discussion Who produced the goods and services that made your trip possible? The specific answers will vary depending on the mode of travel. The discussion below focuses on automobiles but the ideas easily extend to airplanes, busses, trains, or boats. Most students will include autoworkers, gas station attendants and, if they traveled through snow, road maintenance crews. These answers touch on three important elements—the vehicle, the fuel, and the transportation network—but the details are much more complex. Any single element represents the work of a vast interlinking network of firms and individuals. Look, for example, at a car produced in Michigan. This car is made up of thousands of components, including tires produced in Ohio. These tires are made of many materials including rubber, produced from petroleum. The petroleum, perhaps, was refined in New Jersey from oil pumped from the North Sea. Extracting this oil required a multitude of resources including warm clothing for the drill workers. One essential garment could be a warm parka filled with goose down. The down comes from geese raised in southern China.

This can be repeated in a million directions for any individual component—miners to extract ores, cooks to feed the miners, farmers to supply the cooks. Of course a crowd of others are needed: accountants, designers, managers, inventors, engineers, janitors, secretaries, computer operators, communications technicians, chemists, and so on. And this is only for the automobile itself. The roads have been constructed through a similar web of work, from the cement mixers to workers who produce the tiny glass beads that make highway paint reflect light. Similarly the fuel has passed through a chain of retailers, jobbers, refiners, shippers, and oil field workers. One important point is the complexity and connectedness of the modern economy. Change in one part of the world can affect many other countries. A second point is people work to earn money. The Chinese goose farmer isn’t motivated by concern for an automobile produced 7000 miles away, or even for the individuals wearing the goose down parka. He works to better his own economic well-being. Wages, profits, and rents coordinate this complex network. How were the different elements of your trip financed? Public and private financing are both involved in transportation. The students (or their parents) typically pay for gasoline, automobiles, airfare, or bus tickets, often using some form of credit. Highways, roads, and airports are usually publicly financed through bonds and taxes. This can be a good place to introduce credit markets, their regulation, and the role of government.

5. Lawless Transactions Type: In-Class Demonstration Topics: the legal system and property rights Textbook: Chapter 2: Some Tools of the Economist Materials Needed: a volunteer, a paper sack Time: 15 minutes Class limitations: works in any size class Purpose This example shows the importance of the legal system as part of the institutional framework of a market system. It illustrates that even simple market transactions rely on an established body of law. Four required elements for a legal system can be demonstrated. A legal system needs to: 1) enforce contracts 2) define and protect property 3) prevent fraud 4) define and enforce liability. Instructions Explain that the transactions in this example are only hypothetical; no money or goods will actually be exchanged. Ask the volunteer how much he or she would be willing to pay for a backpack. Agree to the offered price. This represents a typical market transaction, a good in exchange for a payment. While this transaction seems very straightforward it won’t work without a legal system.

Ask the volunteer, “What if you paid me, but I didn’t give you anything in exchange? Would you be happy?” Markets won’t work if agreements are not honored. A legal system can eliminate this problem by enforcing contracts. Now take a backpack from another student. Give it to the volunteer. In this case, both the buyer and seller are satisfied. The volunteer gets a backpack, the professor gets paid. Ask the class if anyone is unhappy? The problem here is one of property rights. The professor has appropriated another student’s backpack. This causes several problems for market transactions. If property is not protected, the volunteer has little incentive to buy the backpack since he or she could steal it and pay nothing. Further, the volunteer has little incentive to pay for something that could immediately be stolen by someone else. The legal system needs to define and protect property rights to allow market transactions to work. Return the backpack to its owner. Now give the volunteer a paper sack. Tell the volunteer you have a legally binding contract and you expect full payment. The problem here is misrepresentation. Legal systems can prevent this problem by stopping fraudulent contracts. Finally tell the volunteer that you have a new backpack made of a high-tech material developed in the Chemistry department. It’s very strong, very light and very fashionable. You make the transaction and everyone is happy. A couple of weeks pass, and the volunteer is studying in the library when the backpack bursts into flames and explodes. The new backpack material was internally unstable. The entire library burns down. Who should pay? Is the student responsible for the damages? Should the professor pay? Or should the Chemistry department be responsible? Determining liability is another important role for the legal system. Points for discussion The transitional economies of Eastern Europe provide daily examples of the problems of markets without established legal systems. Markets can be a very effective tool for allocation and distribution, but they only work within a social framework. Definition of property rights may be trivial for personal property like a backpack, but more generally it’s very important. Changes in property rules can cause big gains and losses. Environmental regulations (particularly those regarding wetlands or endangered species) and intellectual property rights have been recent controversies over property definition. Defining liability continues to be an important public issue.

HINTS FOR ANSWERING CRITICAL ANALYSIS QUESTIONS 1. False. Jones must value the car more than $5,000 and Smith less than $5,000 or otherwise the

exchange would not take place. 4. The statement reflects the view that “exchange is a zero sum game.” This view is false. No

private business can force customers to buy. Consumers purchase various goods and services

from businesses because they gain by doing so. If they did not gain, they would not continue

to purchase items from a business. Similarly, the business firms also gain from their

production and sale activities. Mutual gain provides the foundation for voluntary exchange,

including that between business firms and their customers.

5. The major function of the middleman is to increase the value of resources by reducing

transaction costs and thereby facilitating the movement of goods and services into higher-valued uses. The people would be worse off without middlemen since transaction costs would be higher and less trade would occur.

11. If consumer demand for beef fell, the profitability of cattle herding would fall as well. Many

cattle farmers would let their cattle herds dwindle and quit keeping cattle altogether. The result would be a smaller population of cattle, not a larger one. Because cattle are privately owned, an increase in their value in human consumption results in more cattle being kept, whereas a decrease would result in fewer cattle. To “save the cows,” you should eat more beef!

Part 3

AP Microeconomics

This section has six parts. Each of the first five parts corresponds to a unit on the AP

Microeconomics exam. Each unit part provides a syllabus outline for teaching the unit,

information regarding the concepts covered in the unit and corresponding text material, practice

multiple choice and free response questions. The last part provides a 60 question practice exam.

Syllabus Outline for the teaching of

AP*

*AP, Pre-AP, Advanced Placement, and Advanced Placement Program are registered trademarks of The College

Entrance Examination Board, which was not involved in the production of, and does not endorse, this product.

32

Micro Economics With

James D. Gwartney; Richard L. Stroup; Russell S. Sobel; and David MacPherson.

Economics Private and Public Choice, 15th

Edition. Thomson, Southwestern, 2015

The AP* Micro Economics Instructional Manual is constructed with five instructional teaching

units. Each unit of instruction is correlated with the AP* topical outline. Each proposed unit of

instruction includes the following parts:

1. Plan: The plan includes:

Identification of the teacher materials to teach each unit of instruction

Identification of the key instructional objectives for each unit of instruction

Identification of the computational and graphical skills for each unit of instruction

Identification of formative signals, indicating weaknesses, of past student

performance.

2. Teach: A recommended approach to teaching the economic concepts and skills

Recommended sequence of instruction

Key conceptual questions that lead to an understanding of the economic concepts

and demonstration of economic skills.

Practice activities that challenge students to apply understanding of the economic

concepts.

3. Assess: Recommendations and test links to assess student understanding of the content

and skills

An index of past objective content questions

An index of past free response content questions

The conclusion of each unit of instruction includes a sample of similar and parallel AP* objective

test questions and free response questions.

Teaching Unit I: The Economic Problem. The first unit of instruction entails the content area of

Basic Economic Concepts as detailed in the AP* Economics Course Description1 (Content Area I,

A-F)

I. Plan

Teaching Materials

Instructors Manual Text readings

The Economic Approach, Chapter 1

Chapter 1, The Economic Approach

Some Tools of the Economist

Chapter 2

Chapter 2, Some Tools of the Economist

Gaining from International Trade,

Chapter 18 (16)

Chapter 18 (16) , Gaining from International

Trade

Key instructional objectives: Students do the following

1. define scarcity, choice and cost

2. define and compute opportunity cost

3. list and define the axioms of economic reasoning

4. distinguish between positive and normative statements

5. list and define the economic questions facing all nations

6. construct and interpret production possibility schedules and graphs.

7. list and define the assumptions of production possibility schedules and graphs.

8. define how production possibility schedules and graphs illustrate the issues of scarcity,

choice, and cost.

9. define and calculate absolute and comparative advantages for production and exchange.

10. explain and show the affects of trade on a production possibility model.

11. define allocation, efficiency, and equity

12. define ways in which societies determine allocation, efficiency, and equity.

13. explain and distinguish between absolute advantage and comparative advantage

14. calculate the opportunity cost of production

15. given production possibilities information, identify countries or individuals that possess

comparative advantages and the gains from trade

16. using terms of trade, explain the advantages of trade

17. using comparative advantage concepts and terms of trade, predict the effects of policies

that restrict trade

Computational & graphing skills: Students must complete these tasks

1. Graph a production possibility model

2. Explain the shapes of the production possibility curves.

1 The College Board: “Economics: Micro Economics, Macro Economics: Course Description”

http://apcentral.collegeboard.com/apc/public/repository/ap08_economics_coursedesc.pdf. Last Accessed Wednesday,

March 20, 2019

3. Explain how the production possibilities model shows scarcity, choice, and cost.

4. Interpret selected points on the production possibility model.

5. Explain and graph economic growth on the production possibility model

6. Explain and graph the effects of trade on a production possibility model.

7. Calculate opportunity cost

8. Calculate terms of trade and gains from trade

Formative Signals: The following content and skill areas have been identified as areas of

weakness for students based upon past objective and free response examinations.

Objective Formative Signals: Based upon

the released objective AP* Micro Economics

examinations, less than 50% of the students

have been able to correctly answer questions

related to the following

Free response Formative Signals: Past

students have found these to be problematic

areas

recognize and interpret absolute advantage

and comparative advantages (and terms of

trade) given novel data (output is constant;

resources vary)

calculate opportunity cost given novel data

understands and interpret the distinctions

between a constant cost and increasing cost

production possibility frontier (ppf)

solve comparative advantage problems

using inputs constant with outputs varying

AND with outputs constant and inputs

varying.

understand and calculate terms of trade –

who sells to whom (exports) and for the

amount such that marginal benefits >=

marginal cost.

apply the concepts of marginal analysis --

‘thinking like an economist’

recognize the determinants of economic

growth and how growth can be depicted on

the production possibility graph.

II. Teach

Recommended sequence of instruction: Teach introductory concepts in this sequence

Chapter 1

The Economic Approach

1. WHAT IS ECONOMICS ABOUT?

The Economic Problem

Scarcity, choice, cost

Free lunches vs. trade-offs

2. THE ECONOMIC WAY OF THINKING

Use the production possibilities frontier to illustrate the economic problem.

Rational decision-making = marginal decision making

3. POSITIVE AND NORMATIVE ECONOMICS,

4. PITFALLS TO AVOID IN ECONOMIC THINKING

Define distinctions between positive and normative economics

Chapter 2

Some Tools of the Economist

1. WHAT SHALL WE GIVE UP?

Opportunity cost

Production Possibility model

Increasing vs. constant costs

2. TRADE CREATES VALUE

3. THE IMPORTANCE OF PROPERTY RIGHTS

Explain the necessary assumptions for trade to occur.

4. PRODUCTION POSSIBILITIES CURVE

Technical or productive efficiency

Allocative efficiency

Gains in production/consumption

Explain how technological change and increases in capital and human capital expand

production possibilities.

5. TRADE, OUTPUT, AND LIVING STANDARDS

6. GAINS FROM SPECIALIZATION AND TRADE

Explain how people gain from specialization and trade.

Absolute vs. comparative advantage

Gains from trade

6. HUMAN INGENUITY AND THE CREATION OF WEALTH

7. ECONOMIC ORGANIZATION

Make distinctions among the different kinds of economic organization

Capitalism

Command

Mixed economy

Key conceptual questions: Students demonstrate their understanding of the material by

answering the following key conceptual questions

1. What are the economic goals of any society?

2. What are the different methods used to resolve issues related to economic goals?

3. How does a production possibility model illustrate the economic problems of scarcity, choice,

and cost?

4. What are the guideposts to economic thinking?

5. Why do people trade?

(NOTE: It is highly unlikely that alcohol, tobacco, or drugs will be used in questions and

problems)

III. Assess: Suggestions for determining what and how much students have learned.

Past Objective AP* Test: Based upon released objective examinations, the students have been

required to demonstrate the following content related to this unit of instruction.

Tasks related to what economists study:

understand the study of economics

knows basic assumptions of how markets allocate resources

Tasks related to scarcity, choice, and cost

recognize a novel example of opportunity cost

distinguish between opportunity cost and fixed cost

calculate opportunity cost given novel data

recognize an event or condition of opportunity cost.

recognize opportunity cost (implicit and explicit cost)

understand conditions under which an economy operates on a production possibility frontier;

or inside the production possibility frontier

Tasks related to the production possibility model (graph).

understand the trade-offs of moving from one point to another on a production possibility

curve

illustrate production possibility graph showing movements from one point to another point

understand conditions under which an economy operates on a production possibility frontier;

or inside the production possibility frontier

understand why an economy cannot operate beyond the production possibility frontier

explain increasing costs(bow out) of production possibility frontier

calculate opportunity costs given novel data

understands reason for increase/decrease in the production possibility frontier

read and interpret a production possibility graph (cost)

understand and interpret the distinctions between a constant cost and increasing cost

production possibility frontier.

identify/calculate opportunity costs of moving from one point to another on the production

possibility frontier.

Tasks related to the logic of trade and economic growth

recognize how growth is illustrated with a production possibilities curve

recognize impact of comparative advantage on current production possibilities curve

recognize absolute advantage and comparative advantage (and terms of trade) given novel

data (output is constant; resources vary)

understand concept of comparative advantage (knows definition)

compute and interpret comparative and absolute advantage data

Past Free Response AP* Questions: Based upon released free response questions, the students

have been required to demonstrate the following content related to this unit of instruction.

1999, 2003, 2008- interpret production possibility diagram and distinguish between

absolute and comparative advantages; explain benefits of trade

2000, 2007B, 1998 apply production possibility model to long-run economic growth

including changes in long-run net investment.

2000-graph and explain how an increase/decrease in the long run aggregate supply model

is illustrated on a production possibility model.

2001-graph and explain, using production possibility graph, the long- run impact of

changes in fiscal/monetary policy

2003, 2008- calculate terms of trade; explain effects on comparative advantage given

productivity changes; explain benefits of trade

Sample Multiple-Choice Questions for Micro Unit I

1. The central economic problem faced by all economies of the world is

(A) balancing the budget of the government.

(B) avoiding periods of inflation while maintaining high employment.

(C) regulating big business and big labor.

(D) unlimited wants with limited resources.

(E) balancing the goals of economic growth and environmental protection.

Use this graph when answering the next two questions.

Figure 1

2. The graph in Figure 1 demonstrates

(A) increasing opportunity cost.

(B) constant opportunity cost.

(C) decreasing opportunity cost.

(D) the law of comparative advantage.

(E) the law of absolute advantage.

3. The opportunity cost of moving from point A to point B in Figure 1 is

(A) the loss of some clothing.

(B) the loss of some food.

(C) the gain of some clothing.

(D) the gain of some food.

(E) There is no opportunity cost attached to a movement from point A to point B.

Use the production possibilities data below for Econville and Jimonia to answer the following

questions.

Oranges Apples Econville 0 16 1 12 2 8 3 4 4 0

Oranges Apples Jimonia 0 8 1 6 2 4 3 2 4 0

4. Which of the following is correct?

(A) Econville has the comparative advantage in both goods.

(B) Jimonia has the comparative advantage in oranges.

(C) Econville has the comparative advantage in oranges.

(D) Jimonia has a comparative advantage in both goods.

(E) It would be impossible for Econville and Jimonia to gain from trade.

5. Which of the following would be a mutually agreeable rate of exchange?

(A) Jimonia trades one orange to Econville for every one apple.

(B) Jimonia trades one orange to Econville for every two apples.

(C) Jimonia trades one orange to Econville for every three apples.

(D) Jimonia trades one orange to Econville for every four apples.

(E) Jimonia trades four oranges to Econville for every sixteen apples.

6. According to the law of comparative advantage, both Econville and Jimonia could gain if

(A) Econville produced all of the apples and oranges and Jimonia did not produce anything.

(B) Econville specialized in producing apples, Jimonia specialized in producing oranges, and

they traded.

(C) Econville specialized in producing oranges, Jimonia specialized in producing apples, and

they traded.

(D) Jimonia produced all of the apples and oranges and Econville did not produce anything.

(E) Jimonia and Econville were both were self-sufficient and did not trade.

7. Use the table below to choose the correct answer. The table outlines the production

possibilities currently facing an economy.

Good Y Good X 1 5 2 4 3 3 4 2 5 1

The opportunity cost of increasing the production of good X from 2 units to 3 units is

(A) 12 units of good Y and constant.

(B) 9 units of good Y and constant.

(C) 1 unit of good Y and constant.

(D) 12 units of good Y and increasing.

(E) 9 units of good Y and increasing.

8. Because of a late night out with friends, Francis decided to sleep in rather than attend his 8

a.m. economics class. According to economic analysis, his choice was

(A) irrational, because economic analysis suggests you should always attend classes for

which you have already paid.

(B) irrational, because oversleeping is not in Francis’s self-interest.

(C) rational only if Francis has not missed any other classes.

(D) rational if Francis values sleep more highly than the benefit he expects to receive from

attending the class.

(E) rational if Francis likes his economics class better than the rest of his classes.

Use this graph when answering the next question.

Figure 2

9. Points A and B in the figure shown above indicate consumption and investment for two

economies. Other things constant, which of the economies is likely to grow more rapidly in

the future?

(A) economy A

(B) economy B

(C) They can be expected to grow at the same rate.

(D) This is uncertain since growth is not influenced by the factors indicated in this example.

(E) Neither economy will experience growth as they are not maximizing their current

investment.

10. When economists say a good is scarce, they mean

(A) there are only a limited number of consumers who would be interested in purchasing the

good.

(B) the human desire for the good exceeds the amount freely available from nature.

(C) most people in poorer countries do not have enough of the good.

(D) the production of the good has no opportunity cost for society.

(E) there are some things on which it is impossible to put a price, such as human life.

Answers to Multiple-Choice Sample

Questions for Micro Unit I 1. D

2. A

3. E

4. B

5. C

6. B

7. C

8. D

9. B

10. B

Sample Free-Response Question for Micro Unit I

1. Using a correctly labeled graph, draw a production possibility curve for food and clothing that

demonstrates increasing opportunity cost.

(A) How would you use the graph you drew to demonstrate unemployment?

(B) On your graph demonstrate the effect of a technological breakthrough that increases the

productivity of workers.

(C) On your graph demonstrate the effect of an increase in consumer demand for clothing.

(D) On your graph demonstrate a combination of clothing and food production that is not

possible to produce simultaneously, but is able to be produced separately.

Answers to Free-Response Sample Question

for Micro Unit I This question would be graded using a 6-point rubric.

1. One point for a correctly labeled PPC graph with clothing and food on the axis. One point for

a curve bowed concave to the origin.

(A) One point for a point under the curve (like point A).

(B) One point for a shift of the curve outward and to the right.

(C) One point for stating there would be no change in the location of the PPC.

(D) One point for a point outside the curve (like point C).

Teaching Unit II : The Market The second unit of instruction entails the content areas of The

Nature and Functions of Product Markets as detailed in the AP* Economics Course Description3

(Content Area II, A-B) and includes topics of Market Failure and the Role of Government

(Content Area IV, A-B)

I. Plan (NOTE: Chapters and pages in (parenthesis) denote reference for the slit text in Micro

Economics

Teaching Materials

Instructors Manual Text readings

Supply, Demand and the Market

Process,

Chapter 3

Chapter 3, Supply, Demand and the

Market Process

Supply and Demand: Applications

and Extensions,

Chapter 4

Chapter 4, Supply and Demand:

Applications and Extensions

The Economic Role of Government

Chapter 5

Chapter 5, Difficult Cases for the

Market and the Role of Government

Gaining from International Trade,

Chapter 18 (16)

Chapter, 18 (16), Gaining from

International Trade

Consumer Choice and Elasticity

Chapter 20 (7)

Chapter 20 (7), Consumer Choice

and Elasticity

Key instructional objectives: Students do the following

Objectives related to the law of demand

1. define and illustrate demand through schedules and graphs.

2. distinguish between change(s) in demand and change(s) in quantity demanded.

3. explain the inverse relationship between price and quantity demanded.

4. identify and explain the variables which cause a change in demand.

5. illustrate and explain the changes in quantity demanded given a price change.

Objectives related to the law of supply

1. define and illustrate supply through schedules and graphs.

2. distinguish between change(s) in supply and change(s) in quantity supplied.

3. explain the direct relationship between price and quantity supplied.

4. identify and explain the variables that cause a change in supply.

5. illustrate and explain the changes in quantity supplied given a price change.

3 The College Board: “Economics: Micro Economics, Macro Economics: Course Description”

http://apcentral.collegeboard.com/apc/public/repository/ap08_economics_coursedesc.pdf.

Objectives related to the laws of supply and demand

1. explain the role of price in a market economy.

2. define and illustrate equilibrium.

3. define and illustrate surpluses and shortages.

4. define effects of surpluses and shortages on prices and quantities.

5. predict the changes in price and quantities given changes in demand and/or supply.

6. interpret and/or compute equilibrium price and quantities from graphs, mathematical

equations, and/or data.

7. interpret market conditions given novel data.

Objectives related to elasticity

1. define, explain, calculate, and interpret the price elasticity of demand.

2. identify, and interpret the relationship between price elasticity of demand and the effect of a

price change on total revenue

3. define, calculate and interpret cross elasticity and income elasticity of demand.

4. list and explain the determinants of price elasticity of demand.

5. define and compute total revenue.

6. define and differentiate between normal and inferior goods.

7. calculate and explain the price elasticity of supply.

Objectives related to the applications to supply and demand

1. define and explain the effects of price ceilings and price supports.

2. identify areas and potential areas of market failure.

3. illustrate and explain the effects of a given government policy.

4. analyze the effects of taxation and subsidies in an individual market

5. identify and calculate tax revenues, deadweight loss.

Objectives related to taxation/subsidies

1. define tax incidence

2. explain the burden of taxation given elasticity information.

3. identify who benefits from the imposition of a subsidy.

Objectives related to international supply and demand

1. identify and explain the international equilibrium price and quantity

2. derive an excess demand schedule/graph

3. derive an excess supply schedule/graph

4. analyze the effects of tariffs and import quotas on international markets and domestic markets

Objectives related to the government’s role in the market economy

1. define and describe the effects of negative and positive externalities.

2. identify methods to solve the problem of externalities, including private and government

solutions.

3. use supply and demand analysis to show effects of externalities and to solve externality

problems.

4. define and give examples of public goods

5. define and give examples of goods that are excludable and/or rival

6. identify and explain solutions to issues of public goods

Computational & graphing skills: Students must complete these tasks

1. Graph demand and supply showing equilibrium price and quantities

2. Given novel changes in demand and /or supply, graph the changes and show the changes in

equilibrium price and quantities.

3. Graph effects of a price ceiling and price floor

4. Graphically illustrate changes in demand and supply with those of changes in quantity

demanded and quantity supplied.

5. Calculate shortages/surpluses from novel data

6. Graph and illustrate the tax burden given an elastic and inelastic demand.

7. Calculate shortages/surpluses form novel data

8. Identify and calculate consumer and producer surplus

9. Calculate price, income, and cross elasticity, given novel data

10. Interpret elasticity coefficients

11. Graph and differentiate an inelastic from elastic demand curve and the affects on total

revenues

12. Given various elasticities of demand and a change in supply, graph and explain the effects on

price and quantity

Formative Signals: The following content and skill areas have been identified as areas of

weakness for students based upon past objective and free response examinations.

Objective Formative Signals: Based upon

the released objective AP* Micro Economics

examinations, less than 50% of the students

have been able to correctly answer questions to

following

Free response Formative Signals: Past

students have found these to be problematic

areas

characteristics of positive externalities;

optimal price and output

consequences of producing with negative

externalities

reasons for shifting of the demand curve

for a factor of production

understand consumer surplus; identify

surplus with a graph

results of a price ceiling given novel graph

of supply and demand

effects of price ceilings and floors

externalities in the market.

simultaneous changes in supply and

demand

impact of secondary effects and

externalities in the market in terms of

social benefit/social cost

impose an effective (binding) price ceiling

and interpret graphs with ceilings/floors

understand difference between supply and

quantity supplied

understand consumer surplus and identify

graphical area of consumer surplus.

explain relationship between price and total

revenues (expenditures)

distinguish between elastic and inelastic

demand and supply

calculate tax revenues using supply and

demand models

calculate consumer and producer surplus

and deadweight loss using supply and

demand graphs.

conditions under which an industry will

produce the socially efficient level of

output.

II. Teach

Recommended sequence of instruction: Teach market concepts in this sequence

Part 4

AP Macroeconomics

This section has six parts. Each of the first five parts corresponds to a unit on the AP

Macroeconomics exam. Each unit part provides a syllabus outline for teaching the unit,

information regarding the concepts covered in the unit and corresponding text material, practice

multiple choice and free response questions. The last part provides a 60 question practice exam.

49

Teaching Unit I : Introduction to the Economic Problem. Unit I entails the content area of Basic

Economic Concepts as detailed in the AP* Economics Course Description1 (Content Area I, A-E).

This unit duplicates portions of the instruction in Units I and II in this AP* Instructional Manual

for AP* Micro Economics

NOTE: Teachers who have completed the AP* Micro course may elect to proceed to Unit II,

Measuring the Economic Performance.

I. Plan

Teaching Materials

Instructors Manual Text readings The Economic Approach, Chapter 1

Chapter 1, The Economic Approach

Some Tools of the Economist Chapter 2

Chapter 2, Some Tools of the Economist

Supply, Demand and the Market Process, Chapter 3

Chapter 3, Supply, Demand and the Market Process

Supply and Demand: Applications and

Extensions, Chapter 4

Chapter 4, Supply and Demand: Applications and

Extensions

Key instructional objectives: Students do the following

Objectives related to the economic problem

1. define scarcity, choice and cost

2. define and compute opportunity cost

3. list and define the axioms of economic reasoning

4. distinguish between positive and normative statements

5. list and define the economic questions facing all nations

Objectives related to analyzing the economic problem

1. construct and interpret production possibility schedules and graphs.

2. list and define the assumptions of production possibility schedules and graphs.

3. define how production possibility schedules and graphs illustrate the issues of scarcity,

choice, and cost.

4. define and calculate absolute and comparative advantages for production and exchange.

5. explain and show the affects of trade on a production possibility model.

6. define allocation, efficiency, and equity

1 The College Board: “Economics: Micro Economics, Macro Economics: Course Description”

http://apcentral.collegeboard.com/apc/public/repository/ap08_economics_coursedesc.pdf. Last accessed Wednesday,

March 20, 2019

7. define ways in which societies determine allocation, efficiency, and equity.

8. explain and distinguish between absolute advantage and comparative advantage

9. calculate the opportunity cost of production

10. given production possibilities information, identify countries or individuals that possess

comparative advantages and the gains from trade

11. explain the advantages of free trade

12. predict effects of policies that restrict free trade

Objectives related to the law of demand

6. define and illustrate demand through schedules and graphs.

7. distinguish between change(s) in demand and change(s) in quantity demanded.

8. explain the inverse relationship between price and quantity demanded.

9. identify and explain the variable which causes a change in demand.

10. illustrate and explain the changes in quantity demanded given a price change.

Objectives related to the law of supply

6. define and illustrate supply through schedules and graphs.

7. distinguish between change(s) in supply and change(s) in quantity supplied.

8. explain the direct relationship between price and quantity supplied.

9. identify and explain the variables that cause a change in supply.

10. illustrate and explain the changes in quantity supplied given a price change.

Objectives related to the laws of supply and demand

8. explain the role of price in a market economy.

9. define and illustrate equilibrium.

10. define and illustrate surpluses and shortages.

11. define effects of surpluses and shortages on prices and quantities.

12. predict the changes in price and quantities given changes in demand and/or supply.

13. interpret and/or compute equilibrium price and quantities from graphs, mathematical

equations, and/or data.

14. interpret market conditions given novel data.

Objectives related to the applications to supply and demand

6. define and explain the effects of price ceilings and price supports.

7. identify areas and potential areas of market failure.

8. illustrate and explain the effects of a given government policy.

9. analyze the effects of taxation and subsidies in an individual market

10. identify and calculate tax revenues, deadweight loss.

Objectives related to taxation/subsidies

4. define tax incidence

5. explain the burden of taxation given elasticity information.

6. identify who benefits from the imposition of a subsidy.

7.

Computational & graphing skills: Students must complete these tasks

Model the following mathematical/graphical skills

13. Graph a production possibility model

14. Explain the shapes of the production possibility curves.

15. Explain how the production possibilities model shows scarcity, choice, and cost.

16. Interpret selected points on the production possibility model.

17. Explain and show economic growth on the production possibility models

18. Explain and show the affects of trade on a production possibility model.

19. Calculate opportunity cost

20. Calculate terms of trade and gains from trade

21. Graph demand and supply showing equilibrium price and quantities

22. Given novel changes in demand and /or supply, graph the changes and show the changes in

equilibrium price and quantities.

23. Graph effects of a price ceiling and price floor

24. Graphically illustrate changes in demand and supply with those of changes in quantity

demanded and quantity supplied.

25. Calculate shortages/surpluses from novel data

26. Graph and illustrate the tax burden

27. Identify and calculate consumer and producer surplus

Formative Signals: The following content and skill areas have been identified as areas of

weakness for students based upon past objective and free response examinations.

Objective Formative Signals: Based upon the

released objective AP* Micro Economics

examinations, less than 50% of the students have

been able to correctly answer questions to

following

Free response Formative Signals: Past

students have found these to be problematic

areas

recognize and interpret absolute advantage and

comparative advantages (and terms of trade)

given novel data (output is constant; resources

vary)

calculate opportunity cost given novel data

understands and interpret the distinctions

between a constant cost and increasing cost

production possibility frontier (ppf)

understand consumer surplus; identify surplus

with a graph

results of a price ceiling given novel graph of

supply and demand

effects of price ceilings and floors

simultaneous changes in supply and demand

solve comparative advantage problems

using inputs constant with outputs varying

AND with outputs constant and inputs

varying.

understand and calculate terms of trade –

who sells to whom (exports) and for the

amount such that marginal benefits >=

marginal cost

apply the concepts of marginal analysis --

‘thinking like an economist’

recognize the determinants of economic

growth and how growth can be depicted on

the production possibility graph.

know how to impose an effective (binding)

price ceiling and how to interpret graphs

Objective Formative Signals: Based upon the

released objective AP* Micro Economics

examinations, less than 50% of the students have

been able to correctly answer questions to

following

Free response Formative Signals: Past

students have found these to be problematic

areas

with ceilings/floors

understand difference between supply and

quantity supplied

understand consumer surplus and identify

graphical area of consumer surplus.

explain relationship between price and total

revenues (expenditures)

distinguish between elastic and inelastic

demand and supply

calculate tax revenues using supply and

demand models

calculate consumer and producer surplus

and deadweight loss using supply and

demand graphs.

II. Teach

Recommended sequence of instruction: Teach market concepts in this sequence

Chapter 1

The Economic Approach

3. WHAT IS ECONOMICS ABOUT?

The Economic Problem

Scarcity, choice, cost

Free lunches vs. trade-offs

4. THE ECONOMIC WAY OF THINKING

Use the production possibilities frontier to illustrate the economic problem.

Rational decision-making = marginal decision making

Chapter 2

Some Tools of the Economist

1. WHAT SHALL WE GIVE UP?

Opportunity cost

Production Possibility model

Increasing vs. constant costs

2. TRADE CREATES VALUE

3. THE IMPORTANCE OF PROPERTY RIGHTS

Explain the necessary assumptions for trade to occur.

4. PRODUCTION POSSIBILITIES CURVE

Technical or productive efficiency

Allocative efficiency

Gains in production/consumption

Explain how technological change and increases in capital and human capital expand

production possibilities.

5. TRADE, OUTPUT, AND LIVING STANDARDS

6. GAINS FROM SPECIALIZATION AND TRADE

Explain how people gain from specialization and trade.

Absolute vs. comparative advantage

Gains from trade

6. HUMAN INGENUITY AND THE CREATION OF WEALTH

7. ECONOMIC ORGANIZATION

Make distinctions among the different kinds of economic organization

Capitalism

Command

Mixed economy Chapter 3

Supply, Demand, and the Market Process

1. CONSUMER CHOICE AND THE LAW OF DEMAND

2. RESPONSIVENESS OF QUANTITY DEMANDED TO PRICE CHANGES

3. CHANGES IN DEMAND VERSUS CHANGES IN QUANTITY DEMANDED

(a) Distinguish between quantity demanded and demand and explain what determines demand.

Law of demand

Changes in demand

(b) Distinguish between value and price and define consumer surplus.

Marginal benefit

(This concept will be reinforced and enhanced in succeeding units of instruction)

5. PRODUCER CHOICE AND THE LAW OF SUPPLY

6. RESPONSIVENESS OF QUANTITY SUPPLIED TO PRICE CHANGES

7. CHANGES IN SUPPLY VERSUS CHANGES IN QUANTITY SUPPLIED

Distinguish between quantity supplied and supply and explain what determines supply.

Law of supply

Changes in supply

(b) Distinguish between cost and price and define producer surplus.

Cost versus price

(This concept will be reinforced and enhanced in succeeding units of instruction)

7. HOW MARKET PRICES ARE DETERMINED; SUPPLY AND DEMAND INTERACT

8. HOW MARKETS RESPOND TO CHANGES IN DEMAND AND SUPPLY

Explain how demand and supply determine price and quantity in a market and explain the effects

of changes in demand and supply

Law of market forces

Law of supply and demand

Shortages vs. surpluses

Effects of changes in supply/demand

Chapter 4

Supply and Demand: Applications and Extensions

1. THE ECONOMICS OF PRICE CONTROLS

2. BLACK MARKETS AND THE IMPORTANCE OF THE LEGAL STRUCTURE

Explain how price ceilings create a shortage, and inefficiency

Price ceiling

Explain how the minimum wage creates unemployment and inefficiency

Price floor

3. THE IMPACT OF A TAX

4. TAX RATES, TAX REVENUES AND THE LAFFER CURVE

Describe the effects of sales taxes and excise taxes, determine who pays these taxes, and explain why taxes create inefficiencies, (deadweight loss).

Tax incidence

Elasticity of demand

Deadweight loss

5. THE IMPACT OF A SUBSIDY

Describe the effects of a subsidy and determine the potential benefits to seller and buyers

Elasticity of demand

Key conceptual questions: Students demonstrate their understanding of the material by

answering the following key conceptual questions

6. What are the economic goals of any society?

7. What are the different methods used to resolve issues related to economic goals?

8. How does a production possibility model illustrate the economic problems of scarcity, choice,

and cost?

9. What are the guideposts to economic thinking?

10. Why do people trade?

Key conceptual questions: Students demonstrate their understanding of the material by

answering the following key conceptual questions

1. What factors affect quantity demanded (Demand)?

2. What factors affect quantity supplied (Supply)?

3. Why is equilibrium important in a market economy?

4. What is the price elasticity of demand and what factors determine elasticity?

5. How is total revenue related to the price elasticity of demand?

6. What is income elasticity? What are normal goods? What are inferior goods?

7. What is the price elasticity of supply?

8. How do government price ceilings, price floors, taxation, and subsidies change equilibrium

price and quantity?

III. Assess: Suggestions for determining what and how much students have learned.

Past Objective AP* Test: Based upon released objective examinations, the students have been

required to demonstrate the following content related to this unit of instruction. (NOTE: These

question types may duplicate those questions in AP* Micro Economics)

Tasks related to the study of economics

understand the study of economics

know basic assumptions of how markets allocate resources

Tasks related to scarcity, choice, and cost

recognize a novel example of opportunity cost; distinguish between opportunity cost and fixed

cost

calculate opportunity cost, given novel data

recognize an event or condition of opportunity cost.

recognize (implicit and explicit cost) opportunity cost

understand conditions under which an economy operates on or inside a production possibility

frontier

Tasks related to the production possibility model (graph)

understand the trade-offs of moving from one point to another on a production possibility

curve

graph production possibility curve (constant and increasing cost) showing movements from

one point to another point

understand conditions under which an economy operates on or inside a production possibility

frontier

understand why an economy can not operate beyond the production possibility frontier

explain increasing cost (bow out) of production possibility frontier

calculate opportunity cost, given novel data

understands reason for increase/decrease in the production possibility frontier

read and interpret a production possibility graph (cost)

understand and interpret the distinctions between a constant cost and an increasing cost

production possibility frontier.

identify/calculate opportunity cost of moving from one point to another on the production

possibility frontier.

Task to the logic of trade and economic growth

recognize how growth is illustrated with a production possibility curve

recognize impact of comparative advantage on current production possibility curve

recognize absolute advantage and comparative advantages (and terms of trade) given novel

data (output is constant; resources vary)

understand concept of comparative advantage

compute and interpret comparative and absolute advantage data

Tasks related to the changes in demand and supply

identify examples of the law of demand (inverse relationship between price and quantity

demanded)

recognize events or conditions that would cause a change in the demand for a product

know characteristics of cross elasticity (complements, substitutes)

understand the reasons for downward sloping demand curve

recognize reasons for a shift in supply curve given a novel example

identify results of a decrease in production cost (a decrease in supply)

understand factors causing increase/decrease of supply

understand concepts of substitutes and complements and what happens to their demand when

a change in another product increases/decreases

recognize from novel examples what will cause demand to shift to the right/left

understands complements and how price increases in one good affects the production and

price of the complement

Tasks related to reading and interpreting supply and demand graphs to find equilibrium

price and equilibrium quantities.

recognize what shifts in supply/demand will cause a decrease/increase in the equilibrium price

and quantities

know what causes a fall in the price of a product (shifts in both supply and demand)

recognize novel combinations causing changes in supply and demand that cause an increase

in the price of a good with a decrease in equilibrium quantities

recognized novel situations in which the equilibrium price may increase/decrease but the

changes in equilibrium quantities are ambiguous or indeterminate

recognize novel situations in which the change in the equilibrium price is ambiguous or

indeterminate, but equilibrium quantities increase/decrease

explain what happens to price and output given changes in prices of substitutes and or

complements

understand what will change the supply curve given a novel product.

read and interpret supply and demand graphs

understand effects of price and quantity change in supply and demand and recognize shifts (or

changes) for a specified effect(s)

understand impact on equilibrium price and quantity given multiple changes in demand and

supply factors

understand impact on equilibrium price and quantity, given multiple changes in demand and

supply factors ( with graph).

Past Free Response AP* Questions: Based upon released free response questions, the students

have been required to demonstrate the following content related to this unit of instruction.

(NOTE: The following types of free response questions may also appear on the AP* Micro

Economics free response examination)

Past questions related to the economic problem

1999, 2003, 2008- interpret production possibility diagram and distinguish between

absolute and comparative advantages; explain benefits of trade

2000, 2007B, 1998 apply production possibility model to long-run economic growth

including changes in long-run net investment.

2000-graph and explain how an increase/decrease in the long run aggregate supply model

is illustrated on a production possibility model.

2001-graph and explain, using production possibility graph, the long- run impact of

changes in fiscal/monetary policy

2003, 2008- calculate terms of trade; explain effects on comparative advantage given

productivity changes; explain benefits of trade

Past questions related to supply and demand analysis

1989, show and explain an effective (binding) price ceiling

1990, explain the effects on price and output, given a change in demand in competitive

industry

1992, explain and graph how a price ceiling affects quantity demanded and quantity

supplied

1993, explain and graph how a cost change affects an industry supply and demand

1993, explain how a complement's price affects in terms of price and quantities another

good

1994, explain what happens to price and tax revenues when an inelastic product becomes

more elastic;

1994, explain and graph how a per- unit tax affects price and quantity

1995, explain and show how technology affects price and quantities of a good and its

substitute

1996, analyze supply and demand graph with inelastic supply curve; explain the impact of

a change in demand; explain effects of a price ceiling on markets.

1999, differentiate between changes in supply and changes in quantity supplied; explain

change in supply given tariff imposition.; explain how changes in wage rates affect

demand and supply of product

2003B, read and interpret supply and demand graphs with a tariff imposed; interpret and

explain distinctions between domestic production and domestic consumption

2003B explain how tariffs may change consumer and producer surplus; read, interpret, a

supply and demand market with a world price below equilibrium; determine differences in

domestic and world price and output; determine consumer and producer surplus before and

after international trade.

20004B Analyze per- unit sales tax on supply in an industry;

2005 identify price and output prior to taxation and after taxation; use consumer and

producer surplus to analyze the effects of tax and revenue collected.

2005B, explain effects of government subsidies on a specific good; explain how the price

changes of good effects changes in a complements

2006, identify maximum consumer and producer surplus; and explains the relationship

between elasticity and increases/decreases of total revenue; show impact of an increase on

income in a novel market; explain the secondary impact of a subsidy; identify negative

externalities; identify and evaluate the socially optimum output.

2006B identify consumer and producer surplus; evaluates the consumer and producer

surplus given an imposition of a price ceiling; show impact of an increase in demand with

an effective price ceiling in place and effects on consumer and producer surplus

2008, draws graph showing impact of an effective price ceiling on price and quantity

versus the socially efficient output.

2009, analysis of tax on supply and demand model, calculating impact on producer

surplus; evaluation of socially optimum output given tax

Sample Multiple-Choice Questions for Macro Unit I

1. The central economic problem faced by all economies of the world is

(A) balancing the budget of the government.

(B) avoiding periods of inflation while maintaining high employment.

(C) regulating big business and big labor.

(D) unlimited wants with limited resources.

(E) balancing the goals of economic growth and environmental protection.

2. The graph in Figure 1 demonstrates

(A) increasing opportunity cost.

(B) constant opportunity cost.

(C) decreasing opportunity cost.

(D) the law of comparative advantage.

(E) the law of absolute advantage.

Figure 1

3. The opportunity cost of moving from point A to point B in Figure 1 is

(A) the loss of some clothing.

(B) the loss of some food.

(C) the gain of some clothing.

(D) the gain of some food.

(E) There is no opportunity cost attached to a movement from point A to point B.

Use the production possibilities data below for Econville and Jimonia to answer the following

questions.

Oranges Apples Econville 0 16 1 12 2 8 3 4 4 0

Oranges Apples Jimonia 0 8 1 6 2 4 3 2 4 0

4. Which of the following is correct?

(A) Econville has the comparative advantage in both goods.

(B) Jimonia has the comparative advantage in oranges.

(C) Econville has the comparative advantage in oranges.

(D) Jimonia has a comparative advantage in both goods.

(E) It would be impossible for Econville and Jimonia to gain from trade.

5. Which of the following would be a mutually agreeable rate of exchange?

(A) Jimonia trades one orange to Econville for every one apple.

(B) Jimonia trades one orange to Econville for every two apples.

(C) Jimonia trades one orange to Econville for every three apples.

(D) Jimonia trades one orange to Econville for every four apples.

(E) Jimonia trades four oranges to Econville for every sixteen apples.

6. According to the law of comparative advantage, both Econville and Jimonia could gain if

(A) Econville produced all of the apples and oranges, and Jimonia did not produce anything.

(B) Econville specialized in producing apples, Jimonia specialized in producing oranges, and

they traded.

(C) Econville specialized in producing oranges, Jimonia specialized in producing apples, and

they traded.

(D) Jimonia produced all of the apples and oranges, and Econville did not produce anything.

(E) Jimonia and Econville were both were self-sufficient and did not trade.

7. Use the table below to choose the correct answer. The table outlines the production

possibilities currently facing an economy.

Good Y Good X 1 5 2 4 3 3 4 2 5 1

The opportunity cost of increasing the production of good X from 2 units to 3 units is

(A) 12 units of good Y and constant.

(B) 9 units of good Y and constant.

(C) 1 unit of good Y and constant.

(D) 12 units of good Y and increasing.

(E) 9 units of good Y and increasing.

8. Because of a late night out with friends, Francis decided to sleep in rather than attend his

8 a.m. economics class. According to economic analysis, his choice was

(A) irrational, because economic analysis suggests you should always attend classes that you

have already paid for.

(B) irrational, because oversleeping is not in Francis’s self-interest.

(C) rational only if Francis has not missed any other classes.

(D) rational if Francis values sleep more highly than the benefit he expects to receive from

attending the class.

(E) rational if Francis likes his economics class better than the rest of his classes.

Figure 2

9. Points A and B in the figure shown indicate consumption and investment for two economies.

Other things constant, which of the economies is likely to grow more rapidly in the future?

(A) economy A

(B) economy B

(C) They can be expected to grow at the same rate.

(D) This is uncertain since growth is not influenced by the factors indicated in this example.

(E) Neither economy will experience growth as they are not maximizing their current

investment.

10. When economists say a good is scarce, they mean

(A) there are only a limited number of consumers who would be interested in purchasing the

good.

(B) the human desire for the good exceeds the amount freely available from nature.

(C) most people in poorer countries do not have enough of the good.

(D) the production of the good has no opportunity cost for society.

(E) there are some things on which it is impossible to put a price, such as human life.

11. Which of the following is true in competitive markets?

(A) Price reflects the marginal value consumers place on the last unit purchased.

(B) Price reflects the average value consumers derive from the consumption of all units of the

good.

(C) Price reflects the total value consumers derive from the consumption of all units of the

good.

(D) The total area under the demand curve, but above the price, indicates the surplus

producers derive from the production and sale of the good.

(E) The total area above the supply curve, but below the price, indicates the surplus

consumers derive from the consumption of the good.

12. In a supply and demand graph, the triangular area that represents the difference between the

market price consumers pay and the height of the demand curve is called

(A) consumer surplus.

(B) producer surplus.

(C) total surplus.

(D) triangular arbitrage.

(E) deadweight loss.

Figure 3

13. The graph in Figure 3 shows conditions in the market for beef. A reduction in the price of the

grain used to feed cattle and an increase in the price of catsup (a complement for beef) will

result in which of the following?

Supply Demand Equilibrium Price Equilibrium Quantity

(A) increase increase increase increase

(B) increase decrease indeterminate increase

(C) increase decrease increase indeterminate

(D) increase decrease decrease indeterminate

(E) decrease increase increase indeterminate

Figure 4

14. The graph in Figure 4 shows the initial demand for margarine at D1. An increase in the price of

butter (which is a substitute for margarine) would tend to cause which of the following

changes in the market for margarine?

(A) a shift in the demand curve from D1 to D2

(B) a shift in the demand curve from D2 to D1

(C) a movement along demand curve D1 from a to b

(D) a movement along demand curve D1 from b to a

(E) a shift in the curve coupled with a movement along the new curve

Figure 5

15. Given the demand (D) and supply (S) for gasoline in Figure 5, if the price of gasoline were $1

per gallon,

(A) a shortage of 40 gallons would exist.

(B) a shortage of 30 gallons would exist.

(C) a shortage of 20 gallons would exist.

(D) a surplus of 30 gallons would exist.

(E) a surplus of 20 gallons would exist.

16. As a result of the events of September 11, 2001, passengers became more reluctant to fly and

there was a substantial increase in air travel security. How did the increased fear of flying and

the higher cost of providing air travel security affect the market for air travel?

(A) Demand increased and supply decreased, causing the price of air travel to rise.

(B) Demand decreased and supply increased, causing a reduction in the price of air travel.

(C) Demand decrease and supply decreased, causing the price of air travel to fall.

(D) Demand increased, supply decreased, and therefore the net impact on the price of air

travel was uncertain.

(E) Demand decreased, supply decreased, and therefore the net impact on the price of air

travel was uncertain.

17. A technological advance that reduces the cost of producing DVD players would

(A) increase the supply of DVD players and increase the total revenue of DVD producers if

the demand for DVD players is inelastic.

(B) increase the supply of DVD players and decrease the total revenue of DVD producers if

the demand for DVD players is inelastic.

(C) decrease the supply of DVD players and increase the total revenue of DVD producers if

the demand for DVD players is elastic.

(D) decrease the supply of DVD players and decrease the total revenue of DVD producers if

the demand for DVD players is elastic.

(E) decrease the demand for DVD players and decrease the total revenue of DVD producers

whether the demand for DVD players is elastic or inelastic.

Use Figure 6 illustrating the impact of an excise tax to answer the following questions.

Figure 6

18. The amount of the excise tax is

(A) $.50.

(B) $1.00.

(C) $1.50.

(D) $1.75.

(E) $2.00.

19. The amount of the actual tax burden paid by consumers and producers is

(A) $1.00 for consumers and $.50 for producers.

(B) $1.00 for consumers and $1.00 for producers.

(C) $.25 for consumers and $.75 for producers.

(D) $.75 for consumers and $.25 for producers.

(E) $.50 for consumers and $.50 for producers.

20. The deadweight loss of the tax illustrated is given by the area

(A) ABEH.

(B) DFE.

(C) EKG.

(D) EFG.

(E) BEKM.

21. The revenue generated by the tax illustrated is given by the area

(A) ACLH.

(B) BEKM.

(C) ACFG.

(D) MCLK.

(E) EKG.

22. The fact that a gallon of bottled water commands a higher market price than a gallon of

gasoline indicates that

(A) bottled water is an inferior good and gasoline is a normal good.

(B) the marginal utility of bottled water is greater than the marginal utility of a gallon of

gasoline.

(C ) the average utility of a gallon of bottled water is greater than the average utility of a

gallon of gasoline.

(D) the total utility of bottled water exceeds the total utility of gasoline.

(E) gasoline is an inferior good and bottled water is a normal good.

23. If the demand for a product increases as the result of a decline in income, it can be concluded

that the

(A) product is an inferior good.

(B) product is a superior good.

(C) demand for the product is inelastic.

(D) price elasticity of demand for the product equals unity.

(E) demand for the product is elastic.

24. All things equal, the price elasticity of supply

(A) will be greater in the short run than the long run.

(B) will be greater in the long run than the short run.

(C) is the same for the short run and the long run.

(D) approaches zero in the long run.

(E) is perfectly inelastic in the long run.

Figure 7

25. The graph in Figure 7 above depicts a demand curve with a price elasticity that is

(A) perfectly elastic, implying that consumers will purchase as much as can be supplied at the

market price.

(B) relatively inelastic, implying that a percent increase in price results in a smaller percent

reduction in sales.

(C) relatively elastic, implying that a percentage increase in price results in a larger

percentage reduction in sales.

(D) unitary, implying that a percent change in price leads to an equal percent change in

quantity demanded.

(E) perfectly inelastic, implying that the same amount will be purchased regardless of the

price of the good.

26. (I) Private markets will tend to produce too little of a good that generates external costs from

the standpoint of economic efficiency.

(II) The market supply curve for a good that generates external costs will understate the true

social opportunity cost of production.

(III) Private markets will tend to produce too much of a good that generates external benefits

from the standpoint of economic efficiency.

(A) (I) is true; (II) is false; (III) is true.

(B) (I) is false; (II) is true; (III) is false.

(C) (I) is false; II is false; (III) is true.

(D) (I), (II), and (III) are true.

(E) (I), (II), and (III) are false.

27. What are the two distinguishing characteristics of a public good?

(A) non-rivalry in consumption and non-excludability

(B) indivisibility in production and excludability of nonpaying customers

(C) provision by government and funding through taxation

(D) mass production and comparative advantage

(E) public good exceeds public cost

Figure 8

28. Figure 8 illustrates the market for a product that generates an externality. S1 is the private

market supply curve, while S2 is the supply curve including the externality. Which of the

following is true?

(A) Point a illustrates the competitive private market outcome while point b illustrates the

outcome consistent with economic efficiency for a negative externality.

(B) Point a illustrates the competitive private market outcome while point b illustrates the

outcome consistent with economic efficiency for a positive externality.

(C) Point b illustrates the competitive private market outcome while point a illustrates the

outcome consistent with economic efficiency for a negative externality.

(D) The competitive private market outcome is consistent with the conditions for economic

efficiency.

(E) The good will tend to be undersupplied relative to the conditions for economic efficiency.

29. When the consumption of a good generates an external benefit, then

(A) the private benefit consumers receive from the good will be higher than the true social

benefit.

(B) too much of the good will tend to be produced from the viewpoint of economic

efficiency.

(C) the community generally suffers an exactly offsetting external cost from the production

of the good.

(D) the market demand curve will understate the total benefits derived from consumption of

the good and as a result too little of it will be produced and consumed.

(E) the market demand curve will overstate the total benefits derived from consumption of

the good and as a result too much of it will be produced and consumed.

30. Which of the following is the best example of a public good?

(A) long-distance telephone service

(B) national defense

(C) an amusement park

(D) the electric service of a public utility

(E) taking this test

Answers to Multiple-Choice Sample

Questions for Macro Unit I 1. D

2. A

3. E

4. B

5. C

6. B

7. C

8. D

9. B

10. B

11. A

12. A

13. D

14. A

15. C

16. E

17. B

18. B

19. E

20. C

21. B

22. B

23. A

24. B

25. D

26. B

27. A

28. A

29. D

30. B

Sample Free-Response Question for Macro Unit I

1. Using a correctly labeled graph of the supply of and the demand for ice cream demonstrate

each of the following:

(A) the equilibrium price of ice cream.

(B) the equilibrium quantity of ice cream.

(C) the imposition of an effective price ceiling on ice cream by the government.

(D) the effect of a decrease in the cost of producing cream (an ingredient in ice cream).

(E) the effect of a decrease in the price of cookies (a complimentary good for ice cream).

Answers to Free-Response Sample Question

for Macro Unit I This question would be graded using an 8 point rubric.

1. One point for a correctly labeled supply and demand graph with price on the vertical axis and

quantity on the horizontal axis. One point for an upward-sloping supply curve. One point for a

downward-sloping demand curve

(A) One point identifying the price at the intersection of supply and demand on the vertical

axis (no point awarded for a point only at the intersection of supply and demand)

(B) One point identifying the quantity at the intersection of supply and demand on the

horizontal axis (no point awarded for a point only at the intersection of supply and

demand)

(C) One point for identifying any price below the equilibrium price

(D) One point for showing a shift in the supply curve to the right (S1 to S2)

(E) One point for showing a shift in the demand curve to the right (D1 to D2)

Teaching Unit II: Measuring Economic Performance. The second unit of instruction entails the

content area of Measurement of Economic Performance as detailed in the AP* Economics Course

Description5 (Content Area II, A-C)

I. Plan

Teaching Materials

Instructors Manual Coursebook Text readings

Taking the Nation's Economic

Pulse,

Chapter 7,

Coursebook, Chapter 7 Taking the Nation's Economic

Pulse,

Chapter 7

Economic Fluctuations,

Unemployment, and Inflation,

Chapter 8,

Coursebook, Chapter 8 Economic Fluctuations,

Unemployment, and Inflation,

Chapter 8

Key instructional objectives: Students do the following

1. define gross domestic product (GDP), what it does and does not measure.

2. explain double counting and how it can be avoided.

3. explain how inflation affects GDP.

4. explain GDP as a measure of national standard of living.

5. analyze and explain the accounting identify between expenditures and income

6. calculate and explain personal income, disposable income, and personal savings.

7. explain how GDP measures the nation's standard of living.

8. explain distinction between GDP and gross national product (GNP)

9. calculate and define real GDP.

10. calculate and explain a price index.

11. explain base year and how it is used to construct price index

12. differentiate among different kinds of price indexes.

13. define business cycles and the problems associated with each cycle.

14. define and differentiate between recessions and depressions

15. define unemployment and differentiate among cyclical, frictional and structural

unemployment.

16. analyze the concept of full employment: definition, empirical data, and economists' point of

view.

17. define inflation and explain how it affects consumers, producers, and financial intermediaries.

18. differentiate between potential GDP and actual GDP.

19. define and explain the different kinds of unemployment that may exist in the economy.

Computational and graphing skills:

5 The College Board: “Economics: Micro Economics, Macro Economics: Course Description”

http://apcentral.collegeboard.com/apc/public/repository/ap08_economics_coursedesc.pdf.

Compute GDP and NNP given novel data

Compute and interpret price indexes (CPI and GDP deflators)

Convert nominal data to real data

Calculate unemployment rates from labor force participation rates

Calculate rate of inflation between years

Draw and identify phases of a business cycle

Formative Signals: The following content and skill areas have been identified as areas of

weakness for students based upon past objective and free response examinations.

Objective Formative Signals: Based upon

the released objective AP* Micro Economics

examinations, less than 50% of the students

have been able to correctly answer questions to

following

Free response Formative Signals: Past

students have found these to be problematic

areas

predicting results of an increase in the

labor force participation rate

recognizing conditions that explain a

decline in GDP

knowing how to define GDP using

expenditure and income approach

computing and interpreting data for

changes in CPI

understand link between expenditures

and income (circular flow model)

calculate, interpret, and distinguish

between real values from nominal

values

II. Teach

Recommended sequence of instruction: Teach market concepts in this sequence