The Economic Problem – Tutorial Exercises

ECON7200 Economic Principles (M)

Exercise 1
Julian submits the following response to a question asking the opportunity cost of his
lecture attendance.
“Instead of attending a one hour economics lecture, I could have watched an episode of
Game of Thrones, or played tennis. Therefore, the opportunity cost of attending the lecture
is the tennis and the Game of Thrones that I had to give up”
Is Julian’s analysis correct? Explain your answer.

Exercise 2
Suppose Hannah lives right next door to a Harvey Norman. She has to drive 20 minutes out
of her way to get to a JB Hi-Fi.
Last week, a SanDisk 32GB USB was $30 at Harvey Norman, and at JB Hi-Fi the same USB
was only $20. Hannah decided to drive down to JB Hi-Fi to buy the cheaper USB.
This week, the Apple MacBook Pro 15” is selling for $2094 at Harvey Norman, and is $2084
at JB Hi-Fi. Hannah decides to buy the MacBook Pro at Harvey Norman.
Discuss whether you think Hannah’s decisions are rational.

Exercise 3
Are the following statements true or false? Discuss.
a) ‘Certain very talented people have comparative advantage in everything they do’
b) ‘If a certain trade is good for one person, it can’t be good for the person they are
trading with’
Exercise 4
Ruby and Oliver live together on the deserted island of Eyl that contains only a corn field,
and is surrounded by water that they can catch fish in.
Their production possibilities with respect to the production of corn and fish are as
presented in Tables 1 and 2 below.

Table 1 Table 2
Ruby’s Production Possibilities Oliver’s Production
Possibilities

fish corn fish corn

300 0 150 0

200 50 100 100

100 100 50 200
0 150 0 300

a) Draw graphs of both Ruby’s and Oliver’s production possibility curves.

b) What are the opportunity costs of producing fish at each output in the table for Ruby and
for Oliver?
c) What are the opportunity costs of producing corn at each output in the table for Ruby
and for Oliver?
They now decide to specialise in only one task each and trade with each other.
d) Who will cultivate corn and who will fish? Explain why.
e) Draw the production possibility curve for the island of Eyl.