Macro Unit 1 Practice Sheet | PDF | Opportunity Cost | Macroeconomics - Free Printable

Let's solve each part of this Macroeconomics Unit 1 Practice Sheet step by step, with clear explanations.

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Part 1: Production Possibilities

We are given the following production possibilities for Cliffordland:

| Combination | A | B | C | D | E |
|------------|-----|-----|-----|-----|-----|
| Capital Goods | 0 | 2 | 4 | 6 | 8 |
| Consumer Goods | 30 | 28 | 25 | 15 | 0 |

This table shows different combinations of capital goods and consumer goods that Cliffordland can produce using its resources efficiently.

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#### 1. Calculate the opportunity cost of switching from combination A to producing B.

- From A → B:
- Capital Goods increase: 0 → 2 → +2 units
- Consumer Goods decrease: 30 → 28 → -2 units

> Opportunity cost = What you give up / What you gain
> So, to produce 2 more capital goods, Cliffordland gives up 2 consumer goods.

✔ Opportunity cost = 2 consumer goods per 2 capital goods = 1 consumer good per capital good.

> So, 1 consumer good is the opportunity cost of producing 1 additional capital good (in this range).

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#### 2. Calculate the opportunity cost of switching from combination B to producing D.

- From B → D:
- Capital Goods: 2 → 6 → +4 units
- Consumer Goods: 28 → 15 → -13 units

> To get 4 more capital goods, they give up 13 consumer goods.

So, opportunity cost = 13 consumer goods / 4 capital goods = 3.25 consumer goods per capital good.

✔ Answer: 3.25 consumer goods per capital good

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#### 3. Calculate the opportunity cost of switching from combination B to producing A.

- From B → A:
- Capital Goods: 2 → 0 → -2 units
- Consumer Goods: 28 → 30 → +2 units

> To gain 2 consumer goods, they give up 2 capital goods.

So, opportunity cost = 2 capital goods / 2 consumer goods = 1 capital good per consumer good

But since we're going *from* B *to* A, we’re reducing capital goods to gain consumer goods. The opportunity cost of producing one more consumer good is 0.5 capital goods (since 2 consumer goods cost 2 capital goods → 1 consumer good costs 1 capital good? Wait — let’s be careful.)

Wait: Actually, when moving from B to A, we are giving up capital goods to gain consumer goods.

So, to get 2 more consumer goods, we lose 2 capital goods.

Thus, opportunity cost of 1 consumer good = 1 capital good.

✔ Answer: 1 capital good per consumer good

(Note: This is the inverse of question 1 — it depends on what you're measuring.)

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#### 4. Calculate the opportunity cost of switching from combination D to producing B.

- From D → B:
- Capital Goods: 6 → 2 → -4 units
- Consumer Goods: 15 → 28 → +13 units

To get 13 more consumer goods, we give up 4 capital goods.

So, opportunity cost of 1 consumer good = 4/13 ≈ 0.307 capital goods

Or, opportunity cost of 1 capital good = 13/4 = 3.25 consumer goods (same as in Q2)

But since we're going from D to B, we're producing fewer capital goods and more consumer goods.

So, the opportunity cost of producing 1 more consumer good is 4/13 ≈ 0.307 capital goods.

✔ Answer: ~0.307 capital goods per consumer good

(Alternatively, if asked for the cost of capital goods, it would be 3.25 consumer goods per capital good.)

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#### 5. Is this an example of increasing opportunity cost or constant opportunity cost? Explain.

Let’s look at the marginal opportunity cost between each point:

- A → B: 2 capital goods cost 2 consumer goods → 1 consumer good per capital good
- B → C: 2 capital goods cost 3 consumer goods → 1.5 consumer goods per capital good
- C → D: 2 capital goods cost 10 consumer goods → 5 consumer goods per capital good
- D → E: 2 capital goods cost 15 consumer goods → 7.5 consumer goods per capital good

→ The opportunity cost increases as we move along the curve.

✔ Answer: Increasing opportunity cost
Because producing more capital goods requires giving up increasing amounts of consumer goods. This reflects the law of increasing opportunity cost, due to resources being less adaptable to producing capital goods as we shift production.

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#### 6. Assume the economy of Cliffordland intentionally decides to produce combination D rather than combination B. What is the long-term trade-off of this decision? Explain.

- Combination B: 2 capital goods, 28 consumer goods
- Combination D: 6 capital goods, 15 consumer goods

Switching from B to D means:
- More capital goods (investment in machinery, infrastructure, etc.)
- Fewer consumer goods (less current consumption)

✔ Long-term trade-off:
- Short-term: Lower standard of living (fewer consumer goods now)
- Long-term: Higher potential future growth because more capital goods lead to greater productive capacity over time.

So, the trade-off is reduced current consumption for increased future economic growth.

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✔ Summary of Part 1 Answers:

1. From A to B: 1 consumer good per capital good
2. From B to D: 3.25 consumer goods per capital good
3. From B to A: 1 capital good per consumer good
4. From D to B: ~0.307 capital goods per consumer good
5. Increasing opportunity cost – due to rising sacrifice of consumer goods
6. Trade-off: Less current consumption for higher future growth

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## Part 2: FRQ Practice – 2019 AP Exam Question

Given:

| Country | Food | Capital Goods |
|--------|------|----------------|
| Sweden | 50 | 100 |
| Norway | 30 | 120 |

Assume both countries use equal quantities of resources, so the differences are due to efficiency.

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(a) Draw a correctly labeled graph of the production possibilities curve for Sweden. Place food on the horizontal axis and capital goods on the vertical axis. Plot the relevant numerical values on the graph.

We need to plot Sweden’s PPF.

- Maximum food: 50 → (50, 0)
- Maximum capital goods: 100 → (0, 100)

So, draw a downward-sloping line connecting these two points.

Label axes:
- X-axis: Food
- Y-axis: Capital Goods

Plot points:
- (50, 0): All food, no capital
- (0, 100): All capital, no food

Connect them with a straight line (assuming constant opportunity cost, unless stated otherwise — but we’ll see).

> Note: Since no information about diminishing returns, assume linear PPF.

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(b) On your graph, indicate the following:

(i) Point E: Efficient level of production

- Any point on the PPF curve is efficient.
- Choose any point on the line between (50,0) and (0,100), e.g., (25, 50)

(ii) Point I: Inefficient level of production

- Inside the PPF curve → underutilization of resources.
- Example: (20, 30)

(iii) Point U: Unattainable level of production

- Outside the PPF curve → beyond current capabilities.
- Example: (60, 110)

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(c) Assume Sweden moves from producing 20 units of food and 60 units of capital goods to producing 30 units of food and 40 units of capital goods. What will happen to economic growth in Sweden in the future?

Current production: (20, 60) → inside the PPF? Let’s check:

Is (20, 60) on the PPF?

The slope of PPF = (100 - 0)/(0 - 50) = -2 → For every 1 unit of food, you give up 2 capital goods.

So, if Sweden produces 20 food, how many capital goods can it make?

Use equation:
Capital Goods = 100 - 2 × Food
→ At 20 food: 100 - 40 = 60 → So (20, 60) is on the PPF → efficient

New point: (30, 40)

At 30 food: max capital goods possible = 100 - 2×30 = 40 → So (30, 40) is also on the PPF

So both points are on the frontier.

But the change is: more food, less capital goods

→ Reduced investment in capital goods → less future growth

✔ Answer: Economic growth in Sweden will slow down in the future because fewer capital goods are being produced, which reduces future productive capacity.

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(d) Which country has the comparative advantage in the production of capital goods? Explain.

We need to calculate opportunity cost of producing capital goods.

#### For Sweden:
- Max food = 50, Max capital = 100
- Opportunity cost of 1 capital good = ?
→ To get 100 capital goods, give up 50 food →
→ 1 capital good = 0.5 food

So, OC of 1 capital good = 0.5 food

#### For Norway:
- Max food = 30, Max capital = 120
- To get 120 capital goods, give up 30 food →
→ 1 capital good = 30/120 = 0.25 food

So, OC of 1 capital good = 0.25 food

✔ Norway has lower opportunity cost (0.25 < 0.5), so Norway has comparative advantage in capital goods.

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(e) Based on the table above, identify a specific number of units of capital goods that could be traded for 10 units of food and be mutually beneficial.

We need to find a trade price between the opportunity costs of the two countries.

- Sweden’s OC of 1 food = 2 capital goods (since 100 capital goods = 50 food → 1 food = 2 capital goods)
- Norway’s OC of 1 food = 120/30 = 4 capital goods

So:
- Sweden is willing to trade 1 food for up to 2 capital goods (since it gives up 2 capital goods to make 1 food)
- Norway is willing to trade 1 food for at least 4 capital goods (since it gives up 4 capital goods to make 1 food)

So, mutually beneficial trade occurs when:
> 2 capital goods < price of 1 food < 4 capital goods

So for 10 units of food, acceptable trade:
> 10 × 2 = 20 capital goods < trade value < 40 capital goods

So, any amount between 20 and 40 capital goods for 10 food is beneficial.

✔ Example answer: 30 units of capital goods for 10 units of food

- Sweden gains: It values 10 food at 20 capital goods → gets 30 → gains
- Norway gains: It values 10 food at 40 capital goods → pays only 30 → gains

So, 30 capital goods for 10 food is mutually beneficial.

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✔ Final Answers – Part 2:

(a) Graph: PPF from (50,0) to (0,100), labeled

(b)
- E: On the curve (e.g., (25,50))
- I: Inside (e.g., (20,30))
- U: Outside (e.g., (60,110))

(c) Future economic growth will slow down because less capital goods are being produced, reducing future productivity.

(d) Norway has comparative advantage in capital goods because its opportunity cost (0.25 food per capital good) is lower than Sweden’s (0.5 food per capital good).

(e) 30 units of capital goods for 10 units of food is mutually beneficial (any value between 20 and 40 works).

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🟩 Summary of Key Concepts Covered:

- Opportunity Cost: What you give up to get something else
- PPF Curve: Shows trade-offs between two goods
- Efficient vs. Inefficient Points: On vs. inside the curve
- Comparative Advantage: Based on lower opportunity cost
- Gains from Trade: When trade price lies between opportunity costs

Let me know if you'd like a visual sketch of the PPF or help formatting this for a classroom!