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# Econ 102(01): Test 1 Review Questions S10 1

1. Your friends go to the movies one evening and you decide to stay home and
do your economics assignment and practice test. You get 80 percent on your
economics test compared with the 70 percent that you normally score. What is
the opportunity cost of your extra points?

2. You plan to go to school this summer. If you do, you won’t be able to take
your usual job that pays \$6,000 for the summer and you won’t be able to live at
home for free. The cost of tuition is \$2,000 and textbooks are \$200 and living
expenses are \$1,400. What is the opportunity cost of going to summer school?

3. Harold takes two hours off of work to go to the dentist. His firm pays him
\$25 an hour. The dentist charges Harold \$50. What is the opportunity cost of
Harold’s trip to the dentist?

4. One tradeoff society faces is between efficiency and equity. Define each term.
If the U.S. government redistributes income from the rich to the poor, explain
how this action affects equity as well as efficiency in the economy.

## 5. With the understanding that people respond to incentives, outline the

possible outcome for teachers if the K-12 school year is extended to 11 months
per year instead of the existing 9 months per year.

## 6. Using this outline, draw a circular-flow diagram representing the interactions

between households and firms in a simple economy. Explain briefly the various
parts of the diagram.
Econ 102(01): Test 1 Review Questions S10 2

## 7. Draw a production possibilities frontier showing increasing opportunity cost for

hammers and horseshoes.

## a) On a graph, identify the area of feasible outcomes and

the area of unfeasible outcomes.

## b) On the graph, label a point that's efficient as point "E"

and a point that inefficient as point "I".

## c) On a graph, illustrate the effect of the discovery of a

new vein of iron ore, a resource needed to make both horseshoes and
hammers, on this economy.

## d) On a graph for hammers and horseshoes, illustrate the

effect a new computerized assembly line in the production of hammers
would have.

8. The prairie dog has always been considered a problem for American cattle
ranchers. They dig holes that cattle and horses can step in and they eat grass
necessary for cattle. Recently, ranchers have discovered that there is a demand
for prairie dogs as pets. In some areas prairie dogs can sell for as high as \$150.
Cattlemen are now fencing off prairie dog towns on their land so these towns will
not be disturbed by their cattle.

## Draw a production possibilities frontier showing a rancher's production option

between cattle production and prairie dog production showing increasing
opportunity cost and show what would happen in each of the following situations.
(Use a separate graph for each situation.)

## a) The outcome is efficient, with ranchers choosing to

produce equal numbers of cattle and prairie dogs.

## b) As a protest against the government introducing the

gray wolf back into the wild in their state, ranchers decide not to use 25%
of the available grassland for grazing.

## c) The price of prairie dogs increases to \$200 each, so

ranchers decide to allot additional land for prairie dogs.

## d) The government grants new leases to ranchers, giving

them 10,000 new acres of grassland each for grazing.

## e) A drought destroys most of the available grass for

grazing of cattle, but not prairie dogs since they also eat plant roots.
Econ 102(01): Test 1 Review Questions S10 3

macroeconomics:

## a) The impact of a change in consumer income on the

purchase of luxury automobiles

## b) The effect of a change in the price of coke on the

purchase of pepsi

## c) The impact of a war in the middle east on the rate of

inflation in the united states

industry

## i) The effect of a balanced-budget amendment on

economic stability

## j) The impact of deregulation on the savings and loan

industry

10.Which of the following statements are positive, and which are normative?

## a) The minimum wage creates unemployment among

young and unskilled workers.

## c) If the price of a product in a market decreases, other

things equal, quantity demanded will increase.

## d) A little bit of inflation is worse for society than a little

bit of unemployment.

## e) There is a tradeoff between inflation and

unemployment in the short run.

## f) If consumer income increases, other things equal, the

demand for automobiles will increase.

## g) The U.S. income distribution is not equitable.

Econ 102(01): Test 1 Review Questions S10 4

benefits.

## j) If welfare benefits were reduced, the country would be

better off.
11. Julia can fix a meal in 1 hour, and her opportunity cost of one hour is \$50.
Jacque can fix the same kind of meal in 2 hours, and his opportunity cost of one
hour is \$20. Will both Julia and Jacque be better off if she pays him \$45 per meal
to fix her meals? Explain.

## 12. In Portugal, the opportunity cost of a bale of wool is 3 bottles of wine. In

England, the opportunity cost of 1 bottle of wine is 3 bales of wool. Which
country has a comparative advantage in wine production?

## f) Are opportunity costs increasing or constant along this PPF?

g) What has to occur in order to reach a point like point C? (two things)
Econ 102(01): Test 1 Review Questions S10 5

14. Two countries, Country A and Country B produce only two goods: teapots (T)
and coffeepots (C). The tables Country A and Country B give the production
possibilities for Country A and Country B respectively:

Country A Country A
T
Teapots (T) Coffeepots (C)
(number per week) (number per week)
150 0
100 25
50 50
0 75 C

Country B
T Country B
Teapots (T) Coffeepots (C)
(number per week) (number per week)
150 0
100 50
50 100
C
0 150

## a) List the opportunity cost of producing teapots and coffeepots in

Country A and List the opportunity cost of producing teapots and coffeepots in
Country B.

## d) Does either Country A or Country B have an absolute advantage

in producing any of the goods?

15. Mexico and Canada produce both oil and apples using labour only. A barrel of oil
is produced with 4 hours of labour in Mexico and 8 hours of labour in Canada. A
bushel of apples is produced with 8 hours of labour in Mexico and 12 hours of

## d) A comparative advantage in apple production

Econ 102(01): Test 1 Review Questions S10 6

16. Assume:

## Andy and Bob Pizza and Ice-Cream Sundaes 8 hour day

Production Possibilities:

Andy Bob
Pizzas 240 80
Sundaes 100 80

## a) Draw the PPF for both Andy and Bob.

b) What are the opportunity costs for both?
c) Who has a comparative advantage in pizza?
d) Who has a comparative advantage in sundaes?
e) Who has an absolute advantage in pizza?
f) Who has an absolute advantage in sundaes?

17. Consider Table 1 and Table 2 below. Draw the production possibilities curve for
each table and comment on its shape.

A 0 65000
B 10000 60000
C 20000 52000
D 30000 38000
E 40000 0

## Point Bushels of Soybeans Bushels of Wheat

A 0 40000
B 10000 30000
C 20000 20000
D 30000 10000
E 40000 0
Econ 102(01): Test 1 Review Questions S10 7

## 18. Draw a production possibilities frontier representing the economy’s possible

production of milk and eggs. Now, show what will happen to the frontier or the
production point under each of the following circumstances. Use a separate
graph to illustrate each situation.

a) The outcome for the economy is efficient, with society choosing approximately
equal amounts of milk and chicken.

milk

eggs

## b) A recession causes a significant percentage of the labour force to become

unemployed.

milk

eggs

c) Some cows are found to be infected with Mad Cow Disease, and about one-third
of the cows must be destroyed.
milk

eggs
Econ 102(01): Test 1 Review Questions S10 8

d) Chickens are infected with a rare disease and egg-laying is reduced by one-half.
milk

eggs

chickens.
milk

eggs

milk

eggs

## g) The Surgeon General announces that drinking milk prolongs life.

milk

eggs
Econ 102(01): Test 1 Review Questions S10 9

19. GDP is defined as the market value of all final goods and services produced
within a country in a given period of time. In spite of this definition, some
production is left out of GDP. Explain why some final goods and services are not
included.

20. Explain why the value of intermediate goods produced and sold during the year
are not included separately as part of GDP, but intermediate goods produced and
not sold are included separately as part of GDP.

21. Identify the immediate effect of each of the following circumstances on Canadian
GDP and its components.
a. James receives some pension benefits.
b. John buys an Italian sports car.
c. Henry buys domestically produced tools for his construction company.

## 22. Define the following terms:

a) Transfer payments
b) Intermediate goods

Table 1
Item \$ million

## Exports of goods and services 6 709

Depreciation 4 769

## a) Calculate net domestic income at factor cost

b) Calculate GDP income-based
c) Calculate GDP expenditure-based