Tutorial 1( Ten Principles of Economics)

Tutorial 1(Week 2):(Ten Principles of Economics)

Section A

1. The overriding reason as to why households and societies face many decisions is
that
a. resources are scarce.
b. goods and services are not scarce.
c. incomes fluctuate with business cycles.
d. people, by nature, tend to disagree.

2. A tradeoff exists between a clean environment and a higher level of income in that
a. studies show that individuals with higher levels of income actually pollute
less than low-income individuals.
b. efforts to reduce pollution typically are not completely successful.
c. laws that reduce pollution raise costs of production and reduce incomes.
d. by employing individuals to clean up pollution, employment and income
both rise.

3. Which of the following is true?

a. Efficiency refers to the size of the economic pie; equity refers to how the pie is
divided.
b. Government policies usually improve upon both equity and efficiency.
c. As long as the economic pie continually gets larger, no one will have to go hungry.
d. Efficiency and equity can both be achieved if the economic pie is cut into equal
pieces.

4. Economists use the phrase "There is no such thing as a free lunch," to illustrate the
principle that
a. inflation almost always results in higher prices over time.
b. nothing is free in a market economy.
c. making decisions requires trading off one goal against another.
d. if something looks too good to be true, it probably is not worth pursuing.

5. Efficiency means that

a. society is conserving resources in order to save them for the future.
b. society's goods and services are distributed equally among society's
members.
c. society's goods and services are distributed fairly, though not necessarily
equally, among society's members.
d. society is getting the maximum benefits from its scarce resources.

6. Zeti decides to spend three hours working overtime rather than watching a video
with her friends.She earns $8 an hour. Her opportunity cost of working is
 a. the $24 she earns working.
b. the $24 minus the enjoyment she would have received from watching the
video.
c. the enjoyment she would have received had she watched the video.
d. nothing, since she would have received less than $24 of enjoyment from the
video.

7. Making rational decisions "at the margin" means that people

a. make those decisions that do not impose a marginal cost.
b. evaluate how easily a decision can be reversed if problems arise.
c. compare the marginal costs and marginal benefits of each decision.
d. always calculate the marginal dollar costs for each decision.

8. An example of an externality is the impact of

a. bad weather on the income of farmers.
b. the personal income tax on a person's ability to purchase goods and services.
c. pollution from a factory on the health of people in the vicinity of the factory.
d. increases in health care costs on the health of individuals in society.

9. The primary determinant of a country's standard of living is

a. the countrys ability to prevail over foreign competition.
b. the countrys ability to produce goods and services.
c. the total supply of money in the economy.
d. the average age of the country's labor force.

10. A persons willingness to pay for a good is based on

a. the availability of the good.
b. the marginal benefit that an extra unit of the good would provide for that person.
c. the marginal cost of producing an extra unit of the good.
d. esoteric factors, the study of which lies beyond the boundaries of economics.

11. Which of the following topics would be studied in a microeconomics course?

a. How a trade agreement between the United States and Mexico affects both
nations unemployment rates.
b. Comparing inflation rates across countries.
c. How rent ceilings impact the supply of apartments.
d. How a tax rate increase will impact total production.
12. On Saturday morning, you rank your choices for activities in the following order: go to
the library, work out at the gym, have breakfast with friends, and sleep late. Suppose
you decide to go to the
library. Your opportunity cost is
a. working out at the gym, having breakfast with friends, and sleeping late.
b. working out at the gym.
c. zero because you do not have to pay money to use the library.
d. not clear because not enough information is given.
13. Corporate scandals, such as Enron and MCI,
 a. prove that self interest cannot promote social interest
b. are examples of a conflict between self interest and social interest in a market
economy
c. clearly show that a market economy cannot be efficient and should be replaced
with a government central planning agency.
d. are examples of the new economy.

14. John has two hours of free time this evening. He ranked his alternatives, first go to
a concert, second go to a movie, third study for an economics exam, and fourth
answer his e-mail. What is the opportunity cost of attending the concert for John?
a. Attending a movie
b. Studying for an economics exam
c. Answering his e-mail
d. Attending a movie, studying for an economics exam, and answering his e-
mail

15. Your employer has asked you to start working overtime and has offered to pay $18
per hour for every hour you work beyond forty hours a week. The wage rate for
each of the first forty hours will continue to be the usual $15 per hour. In terms of
dollars, what is the marginal benefit of working each hour of overtime?
a. zero.
b. $3.00.
c. $15.00.
d. $18.00.

16. Which of the following will create an incentive to increase the amount of an
activity?
a. An increase in the marginal cost of the activity and a decrease in the
marginal benefit of the activity.
b. A decrease in the marginal cost of the activity and an increase in the
marginal benefit of the activity.
c. Constant marginal cost and constant marginal benefit of the activity.
d. None of the above will create an incentive to increase the amount of an
activity.
Section B
Question 1
What is scarcity? Why is scarcity central to the study of economics?
Question 2
Use a suitable economic model to explain the management of scarce resources that have
alternative uses.

Tutorial 1 (Week 2) :( Thinking Like An Economist)

Section A
1. The goal of an economist who formulates new theories is to
a. provide an interesting framework of analysis, whether or not the framework turns
out to be of much use in understanding how the world works.
b. provoke stimulating debate in scientific journals.
c. demonstrate that economists, like other scientists, can formulate testable theories.
d. contribute to an understanding of how the world works.

2. In the circular-flow diagram,

a. firms are buyers in the markets for goods and services.
b. households are sellers in the markets for the factors of production.
c. firms are sellers in the markets for factors of production and in the markets
for goods and services.
d. dollars that are spent on goods and services flow directly from firms to
households.

3. When constructing a production possibilities frontier, which of the following

assumptions is not made?
a. The economy produces only two goods or two types of goods.
b. Firms produce goods using factors of production.
c. The technology available to firms is given.
d. The quantities of the factors of production that are available are increasing
over the relevant time period.

4. Unemployment would cause an economy to

a. produce inside its production possibilities frontier.
b. produce on its production possibilities frontier.
c. produce outside its production possibilities frontier.
d. experience an inward shift of its production possibilities frontier.
5. The circular-flow diagram is a
a. visual model of how the economy is organized.
b. visual model of the relationships among money, prices, and businesses.
c. model that shows the effects of government on the economy.
d. mathematical model of how the economy works.
6. Production is efficient if the economy is producing at a point
a. on the production possibilities frontier.
b. outside the production possibilities frontier.
c. on or inside the production possibilities frontier.
d. inside the production possibilities frontier.
7. Here are some production possibilities for an imaginary economy for a given year.

Cars Newspapers
10 400
12 360
14 ?

If the production possibilities frontier is bowed outward, then in place of "?" we

might have
a. 340.
b. 330.
c. 320.
d. 310.

8. A production possibilities frontier can shift outward if

a. government increases the amount of money in the economy.
b. there is a technological improvement.
c. resources are shifted from the production of one good to the production of
the other good.
d. the economy abandons inefficient production methods in favor of efficient
production methods.
9. Jane produces only corn and cloth. Taking account of her preferences for corn and
cloth
a. makes her production possibilities frontier straighter.
b. makes her production possibilities frontier steeper.
c. makes her production possibilities frontier flatter.
d. does not affect her production possibilities frontier.

10. When resources are assigned to inappropriate tasks, that is, tasks for which they are
not the best match, the result will be producing at a point
a. where the slope of the PPF is positive.
b. where the slope of the PPF is zero.
c. inside the PPF.
d. outside the PPF.
11. Production Productio
Point of soda n
of pizza
A 40 0
B 28 3
C 20 5
D 12 7
E 0 10

Suppose that, for given resources and production technology, the above table is an
accurate description of the production relationship between soda and pizza. For the
sake of simplicity we assume the relationship is linear. Which of the following
production possibilities is not attainable?
a. 15 sodas, 5 pizzas
b. 40 sodas, 0 pizzas
c. 5 sodas, 10 pizzas
d. All of the above possibilities are attainable.

12. Increasing opportunity cost is due to

a. firms needs to earn more and more profits.
b. ever increasing taxes.
c. the fact that it is more difficult to use resources efficiently the more society
produces.
d. the fact that resources are not equally suited for different types of
production.

Section B

Question 1

Why do economists use models in order to help explain how the economy works? Use a suitable
model to explain the interaction between the household and the business sectors.

Question 2

Explain the concept of opportunity cost and discuss how it relates to the problem of choice
between scarce alternatives. Illustrate your answer using a suitable model.

Question 3

What generates economic growth? How does economic growth influence the production
possibilities frontier?
Question 4
The data in Table 1 below is for the small country of Murreyville.

Table 1

Combination Consumer goods Capital goods

A 200 0
B 180 90
C 150 170
D 110 240
E 60 300
F 0 350

i) Draw the production possibilities curve for Murreyville, with consumer goods on the x-
axis and capital goods on the y-axis. Label the production possibilities curve PPF.

ii) Can this economy produce 200 capital goods and 60 consumer goods and why?

iii) Given PPF, what can you say about the economy of Murreyville if 120 capital goods and
150 consumer goods are being produced?

iv) A technological change occurs that enables Murreyville to produce 30% more capital
goods. Develop Table 2, with the new quantities of capital and consumer goods at
combinations A to F, as in Table 1, that Murreyville may produce given the technological
change.

v) Given PPF, and assuming that the economy is producing at combination C, what is the
opportunity cost of producing 91 more units of capital goods?