A1 (Answers) - Answer key for ASSIGNMENT#1 PDF

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Answer key for ASSIGNMENT#1...

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Assignment

I - Answers

Part 1: Short Answer

Questions

Q - 1[a] ◼ Calculate the marginal products on the tables for both corn and iron production in Aisha ’s and Betty ’s productions units. ◼ Answer:

Aisha's Production Unit Input Total Output Marginal Numer of Workers) (Corn in bushels) Product 0 0 20 50 50 / 20 40 90 40 / 20 60 120 30 / 20 80 140 20 / 20 100 150 10 / 20

Input Total Output Marginal Numer of Workers) (Iron in tons) Product 0 0 20 3 3 / 20 40 6 3 / 20 60 9 3 / 20 80 12 3 / 20 100 15 3 / 20

Betty's Production Unit Input Total Output Marginal (Numer of Workers) (Corn in bushels) Product 0 0 20 75 75 / 20 40 175 100 / 20 60 300 125 / 20 80 450 150 / 20 100 625 175 / 20

Input Total Output Marginal Numer of Workers) (Iron in tons) Product 0 0 20 6 6!  20 40 18 12 / 20 60 36 18 / 20 80 60 24 / 20 100 90 30 / 20

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Q - 1[b] ◼ Draw the individual production curves for both corn and iron for Aisha and Betty, being as exact and neat as possible. Put “number of workers ” as input on the negative horizontal axis. Assume that the dots define a complete curve. State what kind of marginal returns is presented in the production relations for each production curve, i.e., decreasing, constant, increasing marginal returns. ◼ Answer:

Production Curves for Aisha's Production Units Corn% 160" 140" 120" 100" 80" 60" 40" 20" 0" -100"

-90"

-80"

-70"

-60"

-50"

-40"

-30"

-20"

-10"

0"

Iron% 16" 14" 12" 10" 8" 6" 4" 2" 0" -100"

-90"

-80"

-70"

-60"

-50"

-40"

-30"

-20"

-10"

0"

Decreasing marginal returns - Constant marginal returns

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Production Curves for Betty's Production Units Corn% 700" 600" 500" 400" 300" 200" 100" 0" -100"

-90"

-80"

-70"

-60"

-50"

-40"

-30"

-20"

-10"

0"

Iron% 100" 90" 80" 70" 60" 50" 40" 30" 20" 10" 0" -100"

-90"

-80"

-70"

-60"

-50"

-40"

-30"

-20"

-10"

0"

Increasing marginal returns - Increasing marginal returns

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Q - 1[c] ◼ Draw the PPF for corn and iron for both Aisha and Betty, being as exact and neat as possible. Put iron on the horizontal axis. Assume that the dots define a complete curve. ◼ Answer: Aisha’s PPF Corn (Bushels ) 140 120 100 80 60 40 20 Iron (Tons ) 2

4

6

8

10

12

14

Betty’s PPF Corn (Bushels ) 600 500 400 300 200 100 Iron (Tons ) 20

40

60

80

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Q - 1[d] ◼ Is it possible or efficient to produce 100 bushels of corn and 10 tons of iron for Aisha and Betty? ◼ Answer: ◼ For Aisha it is not possible—would require MORE than an efficient use of resources! See below.

◼ For Betty, it is possible but very inefficient! See below.

Q - 1[e] ◼ If both Aisha and Betty are currently producing alternative III, then the average unit opportunity cost of moving to alternative II (the average opportunity cost of each unit increase 3 12 in corn production) is 20 = 0.15 tons of iron in Aisha ’s production unit, and 150 = 0.08 tons of iron in Betty ’s production unit. ◼ Answer: 0.15 and 0.08 tons of iron.

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Q - 1[f] ◼ Is the opportunity cost of producing corn higher or lower moving from alternative VI to V than moving from alternative II to I for Aisha and Betty? Compare your results. ◼ Answer: ◼ It is same for Aisha (3 tons of iron are foregone). ◼ But it is higher for Betty (30 tons of iron are foregone).

Part%2:%Multiple-Choice%Questions%(2%points%each)%% ! 1.!The!four!essential!economic!activities!are!...! ! a) production,!consumption,!exchange,!and!resource!maintenance.! b) administration,!transfer,!exchange,!and!technological!progress.! c) administration,!consumption,!resource!maintenance,!and!production.! d) production,,consumption,,distribution,,and,resource,maintenance., e) production,!administration,!distribution,!and!resource!maintenance.! ! 2. The difference between positive and normative economics is best summarized as saying that … ! a) positive!economics!is!optimistic,!while!normative!economics!is!pessimistic.! b) positive!economics!is!pessimistic,!while!normative!economics!is!optimistic.! c) positive!economics!is!objective,!while!normative!economics!is!biased.! ! d) positive!economics!is!biased,!while!normative!economics!is!objective.! e) positive,economics,is,descriptive,,while,normative,economics,is,prescriptive., ! 3.!Using!a!minimum!amount!of!resources!to!achieve!a!desired!result!is!referred!to!as!...! ! a) efficiency., b) wealth.! c) normative.! d) positive.! e) consumption.! ! 4. Which of the following is not an example of an external cost (or negative externality)? ! a) air!pollution!from!automobiles.! b) water!pollution!from!a!paper!mill.! c) the,rise,in,the,price,of,gasoline,because,oil,prices,are,rising., d) irritation!when!others!talk!during!a!movie.! e) the!rising!chance!of!getting!a!disease!because!others!refuse!to!take!vaccines!for!that! disease.! 5.!Which!one!of!the!following!statements!best!describes!a!positive!externality?! ! a) Lisa!decides!to!go!out!to!a!club!instead!of!studying!economics.! b) A!worker!likes!his!job.! c) Robin,plants,some,flowers,,which,her,neighbor,enjoys,seeing., d) A!new!environmental!regulation!results!in!cleaner!air.! e) Rodney!buys!a!new!CD!that!he!has!been!wanting!for!weeks.! ! 6.!Tradeoffs!between!possible!production!levels!for!two!goods!are!illustrated!by!the!economic! concept!of!...! 1

! a) b) c) d) e)

efficiency.! a,production,possibilities,frontier., negative!externalities.! well-being.! resource!maintenance.!

!

7. Using the graph above, suppose that society chooses to produce 100 pounds of butter. How many guns could it produce? a) b) c) d) e)

4 5 7 9 50

8. In the graph above, which point represents an unattainable combination of guns and butter? a. b. c. d. e.

A B C D None of the above.

9. What is opportunity cost if society moves from point B to point A on the graph above? a. 60 pounds of butter b. 7.5 pounds of butter c. 8 guns d. 9 guns e. None of the above. 2

10. How does the above graph illustrate that there is a tradeoff between guns and butter? a. b. c. d. e.

The PPF is concave. The PPF is downward sloping. Guns and butter are on different axes. Society can produce much more butter than guns. None of the above

11. In the graph above, which point represents an efficient combination of guns and butter? a. b. c. d. e.

A B C D There is more than one efficient point.

12. Which of the following concepts is not illustrated by a PPF? a. scarcity b. correlation c. tradeoff d. efficiency e. opportunity costs 13. Technological progress tends to… a. b. c. d. e.

lower incomes. increase scarcity. shift out the production possibility frontier. make previously attainable combinations of goods unattainable. None of the above

! For%Questions%14%and%15,%refer%to%the%graph%below.%

! 14.!In!the!graph!above,!at!which!point!should!this!society!produce!in!order!to!maximize!their! level!of!well-being?!

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! a) Point!A! b) Point!B! c) Point!C! d) Point!D! e) It,can’t,be,determine,from,the,graph, ! 15.!Based!on!the!graph!above,!which!one!of!the!following!statements!is!false?! ! a) Point!A!is!inefficient.! b) Point!C!is!efficient.! c) Point,A,is,preferred,to,Point,B., d) Point!D!cannot!be!attained!with!current!technology.! e) Point!B!is!efficient.! ! 16.!Which!one!of!the!following!statements!is!false?! ! a) An!economist!would!consider!shipping!TVs!from!a!factory!in!Mexico!to!an!electronics! store!in!American!city!as!“production.”! b) Current!resource!maintenance!can!affect!a!society’s!future!production!possibilities! frontier.! c) Tradeoffs!must!be!made!between!the!production!of!different!economic!goods.! d) Technological!progress!can!shift!a!production!possibilities!frontier.! e) Producing,at,a,point,on,a,production,possibilities,frontier,indicates,idle,resources., ! 17. The fact that the PPF usually bows away from the origin implies that … a) as,the,production,of,any,good,increases,,there,is,an,increase,in,the,opportunity,cost,of, producing,it., b) as!the!production!of!any!good!increases,!there!is!a!decrease!in!the!opportunity!cost!of! producing!it.! c) getting!more!of!one!good!means!getting!less!of!another!good.! d) getting!more!of!one!good!means!getting!more!of!another!good.! e) resources!are!perfectly!fungible,!easily!moved!between!alternative!uses!to!satisfy! consumer!demand.! ! 18. The circular flow diagram ignores... a) b) c) d) e)

households selling labor to firms. households renting land to firms. households lending capital to firms. firms maintaining natural resources. firms selling goods and services to households.

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19. Economics is defined in the textbook as the study of… a) b) c) d) e)

how people manage their resources to meet their needs and enhance their well-being. profit maximization by private enterprises. inflation, unemployment and taxation. how households, businesses and governments attain wealth all of the above

20. The opportunity cost of producing any good or service is… a. b. c. d. e.

the value of all possible alternatives that are forgone. the time required to produce the good or service. the value of the best alternative that is forgone. the cost of inputs required to produce the good. the value of the worst alternative that is forgone.

Quantity of Resource Maintenance

Refer to the figure below for Question 21.

B

A

Quantity of Current Production

!

!

21. The Production Possibilities Frontier can be used to analyze the tradeoff between current production and resource maintenance for the future. Referring to the graph above, which one of the following statements is false? a. Point A depicts the case of high current production and low resource maintenance for the future. b. Point B depicts the case of lower current production than point A and higher resource maintenance for the future. c. Choosing point B will likely lead to an expanded PPF in future years. d. Choosing point A will likely lead to an expanded PPF in future years. e. Choosing point A will likely lead to a reduced PPF in future years. 5

! 22. Which of the following statements about economic models is false?% a. b. c. d. e.

A model highlights some aspects of reality while ignoring others. A model assumes away many real-world details and complications. A model captures all the details of reality. A model often makes limited assumptions about the motives of economic actors. A model is a simplification of reality that leaves away the larger historical and environmental context.

! ! 23. What are the two distinguishing characteristics of a public good? a) It is provided by the core sphere; it is freely available to anyone. b) It is provided by the public purpose sphere; it is freely available to anyone. c) It is freely available to anyone; use by one person diminishes the ability of another person to use it. d) It is freely available to anyone; use by one person does not diminish the ability of another person to use it. e) It is provided at low cost; use by one person does not diminish the ability of another person to use it. ! 24. Which one of the following is an example of a public good? a) b) c) d) e)

National defense A meal cooked at home A meal purchased in a restaurant A college education Unemployment benefits

! 25. Which one of the following is not a strength of economic activity in the business sphere? a) b) c) d) e)

It leads to innovation It can increase efficiency It can lead to cost reduction It can produce a wide variety of goods and services It can adequately meet well-being needs

! 26. Illegal economic transactions are classified into which economic sphere? a) b) c) d)

Informal sphere Underground sphere Business sphere Core sphere 6

e) Shadow sphere ! 27. Which one of the following is a market in the sense of being a social institution? ! a) A local organic food market b) The!global!system!of!free!markets! c) WalMart!stores! d) A!laissez-faire!economy! e) The,market,for,stocks,in,U.S.,companies, 28. Which one of the following is a market in the sense of being an economic system? ! a) Wal-Mart stores b) A,laissez-faire,economy, c) The!market!for!stocks!in!U.S.!companies! d) A!local!organic!food!market! e) The!market!for!entry-level!high!school!teachers! ! 29. Which one of the following is not an institutional requirement for markets to operate smoothly? ! a) A equal balance of economic power among buyers and sellers b) Social institutions of trust c) Money as a medium of exchange d) Individualist institutions related to private and decision making e) Infrastructure for the flow of goods and information ! ! 30. Which one of the following is an example of an implicit contract? ! a) b) c) d) e)

The!reputation!of!a!business! Private!property!rights! The,expectation,that,students,will,maintain,personal,hygiene, The!date!rent!is!due!for!an!apartment!rental! A!Better!Business!Bureau!

! 31. Which one of the following is not necessary for something to be considered money? ! a) b) c) d) e)

It must be widely accepted It!must!be!a!durable!store!of!value! It!must!have!minimal!storage!costs! An!understanding!that!others!will!take!it!as!exchange! It,must,be,backed,by,precious,metals,

! 32. Markets in which producers purchase raw materials that they will use to create new goods and services are known as ...

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! a) b) c) d) e)

resale markets. wholesale!markets.! underground!markets.! commodity,markets., retail!markets.!

33. The grocery prices in a supermarket are most likely determined by ... ! a) b) c) d) e)

bargaining.! posted,prices., resale!markets.! open!auctions.! futures!markets.!

34. Which one of the following statements is false? ! a) The,core,sphere,efficiently,provides,public,goods., b) Markets!have!no!inherent!corrections!for!the!excessive!concentration!of!economic! power.! c) Markets!encourage!producers!to!respond!flexibly!to!consumers’!desires.! d) The!costs!of!environmental!damage!are!generally!external!to!market!transactions.! e) An!excessive!focus!on!individualism!may!lead!!loss!of!community!values.! ! 35. Which one of the following is not an advantage of markets? ! a) b) c) d) e)

Markets!allow!individual!freedom!in!decision-making.! Markets!coordinate!feedback!between!buyers!and!sellers.! Markets,have,inherent,corrections,for,the,excessive,concentration,of,economic,power., Markets!encourage!businesses!to!respond!to!consumer!preferences.! Markets!encourage!certain!forms!of!innovation.!

36. Which of the following is not potentially an example of a public good? a. A national park b.A personal computer c. A fire department d.Fireworks e. An effective justice system

37. Which of the following are characteristics of public-purpose institutions? a) They are non profit.

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b) They offer all goods and services free-of-charge. c) Their primary focus is the provision of goods and services itself and not the financial benefits of these activities. d) Both a. and b. e) Both a. and c.

38. Which one of the following statements is false? a) b) c) d) e)

A laissez-faire economy is an economy with little government regulation. A laissez-faire view of the economy favors unregulated markets. A laissez-faire view is that self-interested individuals interact in a socially beneficial way. Laissez-faire is a French term that means “let it be.” A laissez-faire economy is an economy with central planning.

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