Page 849 - Krugmans Economics for AP Text Book_Neat

S-3
SOLUTIONS TO AP REVIEW QUESTIONS

if he were producing coconuts himself—with trade, a vention in economics that, if price is a variable, it is
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coconut costs 1 ⁄2 = ⁄3 of a fish, less than the ⁄3 of a fish measured on the vertical axis. The quantity of frozen
1
2
he must give up if he does not trade. yogurt that consumers buy is on the horizontal axis. The
slope is positive.
Tackle the Test: e. Panel (d) illustrates this relationship. Because the intent
Multiple-Choice Questions is for diet books to influence the number of pounds lost,
1. a the number of diet books is the independent variable and
2. a belongs on the horizontal axis. The number of pounds
lost is the dependent variable measured on the vertical
3. a axis. The absence of a discernable relationship between
4. d the number of diet books purchased and the weight loss
of the average dieter results in a horizontal curve. The
5. d slope is zero.
Tackle the Test: f. Panel (b) illustrates this relationship. Although price is
the independent variable and salt consumption the
Free-Response Questions dependent variable, by convention the price appears on
2. a. Country A: opportunity cost of 1 bushel of wheat = the vertical axis and the quantity of salt on the horizontal
4 units of textiles axis. Since salt consumption does not change regardless
Country B: opportunity cost of 1 bushel of wheat = of the price, the curve is a vertical line, and the slope is
6 units of textiles infinity.
b. Country A has an absolute advantage in the production 2. a. The income tax rate is the independent variable and is
of wheat (15 versus 10) measured on the horizontal axis. Income tax revenue is the
c. Country A: opportunity cost of 1 unit of textiles = dependent variable and is measured on the vertical axis.
1 ⁄4 bushel of wheat
Country B: opportunity cost of 1 unit of textiles = Income
1 ⁄6 bushel of wheat tax
revenue
Country B has the comparative advantage in textile pro-
duction because it has a lower opportunity cost of pro-
ducing textiles. (Alternate answer: Country B has the
comparative advantage in the production of textiles
because Country A has a comparative advantage in the
production of wheat based on opportunity costs shown in
part a.)
0 80 100%
Income tax rate (percent)
Appendix
Check Your Understanding b. If the income tax rate is 0% (there is no tax), tax revenue
is zero.
1. a. Panel (a) illustrates this relationship. The higher price of c. If the income tax rate is 100% (all of your income is
movies causes consumers to see fewer movies. The rela- taxed), you will have no income left after tax. Since peo-
tionship is negative, and the slope is therefore negative. ple are unwilling to work if they receive no income after
The price of movies is the independent variable, and the tax, no income will be earned. As a result, there is no
number of movies seen is the dependent variable. income tax revenue.
However, there is a convention in economics that, if price d. For tax rates less than 80%, tax rate and tax revenue are
is a variable, it is measured on the vertical axis. So the positively related, so the Laffer curve has a positive slope.
quantity of movies is measured on the horizontal axis. For tax rates higher than 80%, the relationship between
b. Panel (c) illustrates this relationship. Since it is likely tax rate and tax revenue is negative, so the Laffer curve
that firms would pay more to workers with more experi- has a negative slope. Therefore, the Laffer curve looks like
ence, then years of experience is the independent variable the accompanying graph with a maximum point at a tax
that would be shown on the horizontal axis, and the rate of 80%.
resulting income, the dependent variable, would be
shown on the vertical axis. The slope is positive.
c. Panel (d) illustrates this relationship. With the tempera- Module 5
ture on the horizontal axis as the independent variable, Check Your Understanding
and the consumption of hot dogs on the vertical axis as
the dependent variable, we see that there is no change in 1. a. The quantity of umbrellas demanded is higher at any
hot dog consumption regardless of the temperature. The given price on a rainy day than on a dry day. This is a
slope is zero. rightward shift of the demand curve, since at any given
d. Panel (c) illustrates this relationship. When the price of price the quantity demanded rises. This implies that any
ice cream goes up, this causes consumers to choose a specific quantity can now be sold at a higher price.
close alternative, frozen yogurt. The price of ice cream is b. The quantity of weekend calls demanded rises in response
the independent variable and the consumption of frozen to a price reduction. This is a movement along the demand
yogurt is the dependent variable. However, there is a con- curve for weekend calls.