AP_Krugman_Textbook

2. The accompanying figure shows a decrease in demand by
   4 million rides, represented by a leftward shift of the
   demand curve from D 1 to D 2 : at any given price, the
   quantity demanded falls by 4 million rides. (For example,
   at a price of $5, the quantity demanded falls from
   10 million to 6 million rides per year.) This eliminates
   the effect of a quota limit of 8 million rides. At point E 2 ,
   the new market equilibrium, the equilibrium quantity is
   equal to the quota limit; as a result, the quota has no
   effect on the market.

Tackle the Test:

Multiple-Choice Questions

1. d


2. b


3. b


4. d


5. a

0 6 8 10 12 14

$7.00

6.00

5.00

4.00

3.00

Quantity of rides (millions per year)

Fare

(per ride)

D 1

D 2

S

E 2

E 1

Quota

0891012146

5.50

5.00

4.50

3.00

$7.00

Quantity of rides (millions per year)

Fare

(per ride)

D

S

E

C

D

Deadweight

loss

Tackle the Test:

Free-Response Question

2.

Module 10

Check Your Understanding

1. Let’s start by considering the relationship between the total
   value added of all domestically produced final goods and
   services, and aggregate spending on domestically produced
   final goods and services. These two quantities are equal
   because every final good and service produced in the econ-
   omy is either purchased by someone or added to invento-
   ries, and additions to inventories are counted as spending
   by firms. Next, consider the relationship between aggregate
   spending on domestically produced final goods and ser -
   vices and total factor income. These two quantities are
   equal because all spending that is channeled to firms to
   pay for purchases of domestically produced final goods and
   ser vices is revenue for firms. Those revenues must be paid
   out by firms to their factors of production in the form of
   wages, profit, interest, and rent. Taken together, this means
   that all three methods of calculating GDP are equivalent.


2. Firms make sales to other firms, households, the govern-
   ment, and the rest of the world. Households are linked to
   firms through the sale of factors of production to firms,
   through purchases from firms of final goods and services,
   and through lending funds to firms in the financial mar-
   kets. Households are linked to the government through
   their payment of taxes, their receipt of transfers, and
   their lending of funds to the government to finance gov-
   ernment borrowing via the financial markets. Finally,
   households are linked to the rest of the world through
   their purchases of imports and transactions with foreign-
   ers in financial markets.


3. You would be counting the value of the steel twice—once
   as it was sold by American Steel to American Motors and
   once as part of the car sold by American Motors.

Tackle the Test:

Multiple-Choice Questions

1. c


2. e

Fare

(per ride)

Quantity of rides

Demand price

Supply price

E

D

S

Quota

rent

Quota

SOLUTIONS TO AP REVIEW QUESTIONS S-7