DEPARTMENT OF ECONOMICS

ECON1000: Principles of Economics

Problem Set 1: The Core Principles

1.

Why do most governments have a policy of not negotiating with kidnappers? Why do relatives of
kidnap victims not have the same policy?

2.

Slavery persists to this day, particularly in some parts of the Sudan. Raiding parties steal children
from their home villages and sell them in slave markets many miles away. When news of this
ongoing tragedy came to public attention, well-intentioned charitable foundations raised money
for slave redemption buying victims out of slavery to return them to their families. Was that a
good idea?

3.

Rupert is a yam grower. He invests all his spare cash in yam, which grows on otherwise useless
captured land behind his house. The yam doubles in weight during the first year, after which
time they are harvested and sold at a constant price per pound. Ruperts friend, Wally, wants a
loan from Rupert. How much interest will Wally have to pay for Rupert to recover his
opportunity cost of making the loan?

4.

Renee used to work at an accounting firm where she earned $3 million a year. After saving up,
she invested $20 million in her own accounting consultancy. Her profit is $4 million a year, which
Renee receives as her only compensation. She concludes that the investment paid off because the
20 percent return that the profit represents is much better than the 8 percent interest the bank
was paying on her savings account. Explain why her conclusion is wrong.

5.

Annual revenue for a small restaurant that sells a variety of meals is shown
in the table at right. The average price of a meal was $50 in 2012. The
restaurant raises the prices of all its menu items by exactly 10 percent
every year. Calculate the real sales of the restaurant each year and
interpret the results.

Year

Revenue

2012
2013
2014
2015

$157,100
$164,450
$180,532
$216,953

6.

Kingston often suffers from a water shortage that results in lock-offs and
restrictions on water use. How would an economist analyze and solve this problem?

7.

From the dozen seeds you planted in a small flower bed in front of your house, ten of them
germinated and grew into plants. Liking how they look, you planted another dozen seeds in the
same bed. This time, only seven of the seeds grew into plants.
a) What is the marginal product of the first planting? The second planting?
b) Comparing the two values of the marginal product exemplifies which economic property?

8.

Why does your doctor have a nurse take your vital signs (temperature, blood pressure) instead
of doing it himself and saving money?