Microeconomics Practice Introduction

PRACTICE MICROECONOMICS BACHELOR IN BUSINESS ADMINISTRATION PRACTICE 1: INTRODUCTION APPLY YOUR KNOWLEDGE 1. Describe some of the trade-offs faced by each of the following: a. a family deciding whether to buy a new car b. a member of Congress deciding how much to spend on national parks 2. You win €1000 in the EuroMillions Lottery. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5 per cent interest. What is the opportunity cost of spending the €1000 now? 3. The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he or she receives in Social Security benefits is typically reduced. a. How does the provision of Social Security affect people’s incentive to save while working? b. How does the reduction in benefits associated with higher earnings affect people’s incentive to work past age 65? 4. Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved. a. regulating cable TV prices b. providing some poor people with vouchers that can be used to buy food c. prohibiting smoking in public places d. breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several smaller companies e. imposing higher personal income tax rates on people with higher incomes f. instituting laws against driving while intoxicated 5. A small country produces two goods: corn (measured in bushels) and trucks. Points on a production possibilities frontier can be shown in a table or a graph: TRUCKS CORN A 0 70 B 10 60 C 20 45 D 30 25 E 40 0 a. Draw a production possibilities frontier from the numbers above. b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient. c. calculate the opportunity cost of increasing the number of trucks produced by ten: • between 0 and 10 • between 10 and 20 • between 20 and 30 • between 30 and 40 d. Imagine that now, 20% of the labour force is unemployed. Show, graphically, how this event would affect the PPF 6. Classify 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 7. Classify each of the following statements as positive or normative. Explain. Definition of positive statements: claims that attempt to describe the world as it is. Definition of normative statements: claims that attempt to prescribe how the world should be. a. Society faces a short-run trade-off between inflation and unemployment. b. A reduction in the rate of money growth will reduce the rate of inflation. c. The Federal Reserve should reduce the rate of money growth. d. Society ought to require welfare recipients to look for jobs. e. Lower tax rates encourage more work and more saving. TRUE OR FALSE 8. Classify each of the following statements as true or false 1. Economic models and theories are accurate statements of reality. 2. In the statement “consumption is a function of disposable income,” consumption is the dependent variable. 3. Graphs provide a visual representation of the relationship between two variables. 4. A production-possibility frontier depicts the unlimited wants of a society. 5. When there is full employment, the decision to produce more of one good necessitates decreased production of another good. 6. There are increasing costs of production because economic resources are not equally efficient in the production of all goods and services. 7. Microeconomics deals with small-size economic units 8. Money is not a factor of production 9. The circular flow model is a schematic representation of the activity in the markets for goods and services 10. WTO manages all the affairs having to do with development around the world 1 2 3 4 5 6 7 8 9 10 T F TEST YOUR PROGRESS 9. Choose the correct answer: 1.What is the basic economic problem? a)Scarcity is a result of limited needs and wants and unlimited resources. b)Scarcity stems from the fact that prices are too high. c) Scarcity is due to overpopulation in all regions of the world. d)Scarcity is caused by unlimited needs and wants and limited resources. 2.Which of the following best describes the circular flow of economic activity? a) b) c) d) Firms earn money in exchange for goods and services in a factor market. Firms and households both earn money in inputs and goods and services markets Households earn money in exchange for labor in a factor market. Households earn money in exchange for labor in a product market. a) b) c) d) The country has employed its previously underemployed resources. The country has increased its production. The country has received immigrants The country is experiencing inflation. 3.If a country’s production possibilities curve shifts outward, which one of the following is true? 4.If a country’s production possibilities curve shifts inward, which one of the following is true? a)The country has underemployed its previously employed resources. b)The country has decreased its production. c) Population has decreased d)The country is experiencing deflation. 5.Which one of the following is considered the driver of the market system? a) b) c) d) Government Government and firms Firms and taxes Suppliers and consumers