Problem Set 1 (Lecture 1~3)
1. Water is necessary for life. Is the marginal benefit of a glass of water large
or small?
2. You win $100 in a basketball pool. You have a choice between spending the
money now and putting it away for a year in a bank account that pays 5
percent interest. What is the opportunity cost of spending the $100 now?
3. A 1996 bill reforming the federal government’s antipoverty programs
limited many welfare recipients to only two years of benefits.
a. How did this change affect the incentives for working?
b. How might this change represent a trade-off between equality and
efficiency?
4. (True or False) In a two-good, two country world, if one country has an
absolute advantage in the production of both goods, it cannot benefit by
trading with the other country.
Answer: _________
5. Suppose that there are 10 million workers in Canada and that each of these
workers can produce either 2 cars or 30 bushels of wheat in a year.
a. What is the opportunity cost of producing a car in Canada? What is the
opportunity cost of producing a bushel of wheat in Canada? Explain the
relationship between the opportunity costs of the two goods.
b. Draw Canada’s production possibilities frontier. If Canada chooses to
consume 10 million cars, how much wheat can it consume without trade?
Label this point on the production possibilities frontier.
c. Now suppose that the United States offers to buy 10 million cars from
Canada in exchange for 20 bushels of wheat per car. If Canada continues to
consume 10 million cars, how much wheat does this deal allow Canada to
consume? Label this point on your diagram. Should Canada accept the deal?
6. Imagine a society that produces military goods and consumer goods, which
we’ll call “guns” and “butter.”
a. Draw a production possibilities frontier for guns and butter. Using the
concept of opportunity cost, explain why it most likely has a bowed-out
shape.
b. Show a point on the graph that is impossible for the economy to achieve.
Show a point on the graph that is feasible but inefficient.
c. Imagine that the society has two political parties, called the Hawks (who
want a strong military) and the Doves (who want a smaller military).
Show a point on your production possibilities frontier that the Hawks
might choose and a point that the Doves might choose.
d. Imagine that an aggressive neighboring country reduces the size of its
military. As a result, both the Hawks and the Doves reduce their desired
production of guns by the same amount. Which party would get the
bigger “peace dividend,” measured by the increase in butter production?
Explain.
7. England and Scotland both produce scones and sweaters. Suppose that an
English worker can produce 50 scones per hour or 1 sweater per hour.
Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters
per hour.
a. Which country has the absolute advantage in the production of each
good? Which country has the comparative advantage?
b. If England and Scotland decide to trade, which commodity will Scotland
export to England? Explain.
c. If a Scottish worker could produce only 1 sweater per hour, would
Scotland still gain from trade? Would England still gain from trade?
Explain.
8. Classify each of the following topics as relating to microeconomics or
macroeconomics.
a. a family’s decision about how much income to save
b. the effect of government regulations on auto emissions
c. the impact of higher national saving on economic growth
d. a firm’s decision about how many workers to hire
e. the relationship between the inflation rate and changes in the quantity of
money
9. Classify each of the following statements as positive or normative. Explain.
a. Society faces a short-run trade-off between inflation and unemployment.
b. A reduction in the growth rate of the money supply will reduce the rate
of inflation.
c. The Federal Reserve should reduce the growth rate of the money supply.
d. Society ought to require welfare recipients to look for jobs.
e. Lower tax rates encourage more work and more saving.
[Link] the markets for video streaming services, TV screens, and tickets at
movie theaters.
a. For each pair, identify whether they are complements or substitutes:
i. video streaming and TV screens
ii. video streaming and movie tickets
iii. TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV
screens. Draw a diagram to show what happens in the market for TV
screens.
c. Draw two more diagrams to show how the change in the market for TV
screens affects the markets for video streaming and movie tickets.
[Link] a firm expects that the price of its product will be higher in the future than
it is today, then
A) the firm will go out of business.
B) the firm has an incentive to increase supply now and decrease supply in
the future.
C) the firm has an incentive to decrease quantity supplied now and increase
quantity supplied in the future.
D) the firm has an incentive to decrease supply now and increase supply in
the future.
Answer ________
12. Refer to the Figure above, If the price is $10,
A) there would be a surplus of 600 units.
B) there would be a shortage of 600 units.
C) there would be a surplus of 200 units.
D) there would be a shortage of 200 units.
Answer ___________
[Link] article in the Wall Street Journal in early 2001 noted two developments in
the market for laser eye surgery. The first development concerned side effects
from the surgery, including blurred vision. The second development was that
the companies renting eye-surgery machinery to doctors had reduced their
charges. In the market for laser eye surgeries, these two developments
A) decreased demand and decreased supply, resulting in a decrease in the
equilibrium quantity and an increase in the equilibrium price of laser eye
surgeries.
B) decreased demand and increased supply resulting in an increase in both the
equilibrium quantity and the equilibrium price of laser eye surgeries.
C) decreased demand and increased supply, resulting in a decrease in the
equilibrium price and an uncertain effect on the equilibrium quantity of laser
eye surgeries.
D) decreased demand and increased supply, resulting in a decrease in both the
equilibrium price and the equilibrium quantity of laser eye surgeries
Answer __________