AP® Microeconomics · Free response

Two studios, mugs and vases: opportunity cost, comparative advantage and terms of trade

write it first, then score yourself point by point

Short free-response question · four-function calculator · 5 points · about 12 minutes

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The question

Name: ______________________   Date: ____________   Two studios, mugs and vases: opportunity cost, comparative advantage and terms of trade (5 points)

Two invented pottery studios each have the same number of potters and kilns. In one day, Pinecrest Studio can make 60 mugs or 20 vases, and Quarry Lane Studio can make 24 mugs or 12 vases. Each studio can make any combination on a straight line between those amounts (constant opportunity cost).

  1. (A) Draw a correctly labeled production possibilities curve for Quarry Lane Studio, with mugs on the horizontal axis. On your graph, plot point X, a combination of mugs and vases Quarry Lane could consume after specializing and trading with Pinecrest but could not produce on its own. [2 points]

  2. (B) Calculate Pinecrest's opportunity cost of making one vase, in mugs. Show your work. [1 point]

  3. (C) Identify which studio has the comparative advantage in vases, and explain using the opportunity costs. [1 point]

  4. (D) The studios specialize according to comparative advantage and agree to trade 1 vase for 2.5 mugs. Explain whether these terms of trade benefit both studios. [1 point]