Page 60 - 2023-bfw-Macro-Krugman-Econ-4e

UNIT ONE REVIEW

2. Fruity Farm and Peachy Farm have identical resources 3. Assume the market for sandals is competitive.
and produce oranges and/or peaches at a constant a. Draw a correctly labeled graph of the market for
opportunity cost. The table below shows the maximum sandals showing each of the following:
quantity of oranges and peaches each farm could i. the supply of sandals and the demand for
produce if it devoted all of its resources to that fruit. sandals
ii. the equilibrium price and quantity in the market
Output (bushels per day) for sandals, labeled P and Q 1
1
Oranges Peaches b. On your graph from part a, illustrate the effect on
Fruity Farm 80 40 the equilibrium price and quantity of sandals if
consumer income increases and sandals are a normal
Peachy Farm 60 20
good. Label the new equilibrium price and quantity
a. On a correctly labeled graph, and using the numbers P and Q .
2
2
in the table, draw the production possibilities curve c. Does the market for sandals adjust to a new
for Peachy Farm. equilibrium in part b as a result of a surplus or a
b. What is Fruity Farm’s opportunity cost of producing shortage? Indicate the amount of the surplus or
one bushel of peaches? shortage that occurs at P on your graph from part a.
1
c. Suppose each farm agrees to specialize in one good d. If the wages of workers producing sandals decrease
and trade for the other good. at the same time consumer income increases,
i. Which farm should specialize in peaches? will the equilibrium quantity of sandals increase,
Explain. decrease, or remain the same compared to Q and P ?
1
1
ii. If the farms specialize as indicated in part c (i), Explain. (10 points)
would the terms of trade of four oranges in
exchange for one peach be acceptable to both
farms? Explain.
d. Now suppose Peachy Farm obtains new technology
used only for the production of peaches. Show the
effect of this change on the graph drawn for part a.
(5 points)

Macro • Unit 1 Review 61
Copyright © Bedford, Freeman & Worth Publishers.
Strictly for use with its products. For review purposes only. Not for redistribution.

02_APKrugman4e_40932_MacroU01_002_062.indd 61 24/08/22 1:20 PM