Problem Set 1

QUESTIONS
1. What is an opportunity cost? How does the idea relate to the definition of economics? Which of the
following decisions would entail the greater opportunity cost: Allocating a square block in the heart of
Toronto for a surface parking lot or allocating a square block at the edge of a typical suburb for such a
lot? Explain.
Answer: An opportunity cost is what was sacrificed to do or acquire something else. The condition of
scarcity creates opportunity cost. If there was no scarcity, there would be no need to sacrifice one thing to
acquire another.
The opportunity cost would be much higher in Toronto as the alternative uses for that square block are
much more valuable than for a typical suburban city block.
2. Cite three examples of recent decisions that you made in which you, at least implicitly, weighed
marginal cost and marginal benefit.
Answer: Answers may include the decision to come to class, to skip breakfast to get a few extra minutes
of sleep, to attend college, or to make a purchase. Marginal benefits of attending class may include the
acquisition of knowledge, participation in discussion, and better preparation for an upcoming
examination. Marginal costs may include lost opportunities for sleep, meals, or studying for other classes.
In evaluating the discussion of marginal benefits and marginal costs, be careful to watch for sunk costs
offered as a rationale for marginal decisions.
3. What is meant by the term utility and how does the idea relate to purposeful behaviour?
Answer: Utility refers to the pleasure, happiness, or satisfaction gained from engaging in an activity
(eating a meal, attending a ball game, etc.). It is an important component of purposeful behaviour because
people will allocate their scarce time, energy, and money in an attempt to gain the most utility possible.
4. What are the key elements of the scientific method and how does this method relate to economic
principles and laws?
Answer: The key elements include the gathering of data (observation), the formulation of possible
explanations (hypothesis), testing the hypothesis, determining the validity of the hypothesis, and repeated
testing of hypotheses that have appeared to be valid in prior tests.
The scientific method is the technique used by economists to determine economic laws or principles.
These laws or principles are formulated to explain and/or predict behaviour of individuals or institutions.
5. Indicate whether each of the following statements applies to microeconomics or macroeconomics:
a. The unemployment rate in Canada was 7.4 percent in November 2011.
b. A Canadian software firm discharged 15 workers last month and transferred the work to India.
c. An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise.
d. Canadian output, adjusted for inflation, decreased by 3.3 percent in 2010.
e. Last week Scotiabank lowered its interest rate on business loans by one-half of 1 percentage point.
f. The consumer price index rose by 1.8 percent in 2010.
Answer:
Macroeconomics: (a), (d), and (f)
Microeconomics: (b), (c), and (e)

6. State (a) a positive economic statement of your choice, and then (b) a normative economic statement
relating to your first statement.
Answer: Example: (a) The unemployment rate is 6.8 percent; (b) the unemployment rate is too high. In
general we treat what is statements as positive, what should be as normative, but keep an eye out
for statements like at full employment an increase in the production of pizzas should come at the cost
of less robots. This statement as positive despite the use of the term should.
7. What are economic resources? What categories do economists use to classify them? Why are resources
also called factors of production? Why are they called inputs?
Answer: Economic resources are the natural, human, and manufactured inputs used to produce goods and
services. Economic resources fall into four main categories: labour, land (natural resources), real capital
(machines, factories, buildings, etc.,) and entrepreneurs. Economic resources are also called factors of
production because they are used to produce goods and services. They are called inputs because they go
in to a production process (like ingredients go into a bowl to make a cake), with the resulting goods and
services also being referred to as output.
8. Why is money not considered to be a capital resource in economics? Why is entrepreneurial ability
considered a category of economic resource, distinct from labour? What are the major functions of the
entrepreneur?
Answer: Money is not considered a capital resource because money is not productive it provides access
to resources but itself does not directly contribute to the production of goods and services. Additionally,
the quantity of money in circulation does not determine an economys productive capacity, while the
amount of capital and other resources does. Doubling the amount of money in circulation does not change
the economys physical capacity to produce goods and services. Money is, however, referred as a
financial resource and financial capital, reflecting its ability to acquire real economic resources.
Entrepreneurial ability and labour are both human resources, but they perform different functions in the
productive process. Entrepreneurial ability does not directly produce goods and services; it organizes the
resources that do. Labour refers to the human inputs that directly engage in production.
Entrepreneurs are risk-takers: They coordinate the activities of the other three inputs, namely land, labour,
and capital for profitor loss, which is why they are called risk-takers. Entrepreneurs sometimes manage
companies that they own, but a manager who is not an owner is not necessarily an entrepreneur but may
be performing some of the entrepreneurial functions for the company. Entrepreneurs are also innovators,
or perhaps inventors, and profits help to motivate such activities.
9. Explain how (if at all) each of the following events affects the location of a countrys production
possibilities curve:
a. The quality of education increases.
b. The number of unemployed workers increases.
c. A new technique improves the efficiency of extracting iron from ore.
d. A devastating earthquake destroys numerous production facilities.
Answer:
(a) Assuming better education translates into better work skills, then productivity should rise and this
would shift the curve outward.
(b) Should not affect location of curve. Production moves inward, away from the curve.
(c) The curve should shift outward as more production is possible with existing resources.
(d) The curve should shift inward with the destruction of resources (capital).

10. Suppose that, on the basis of a nations production possibilities curve, an economy must sacrifice
10,000 pizzas domestically to get the 1 additional industrial robot it desires but that it can get the robot
from another country in exchange for 9000 pizzas. Relate this information to the following statement:
Through international specialization and trade, a nation can reduce its opportunity cost of obtaining
goods and thus move outside its production possibilities curve.
Answer: The message of the production possibilities curve is that an individual nation is limited to the
combinations of output indicated by its production possibilities curve. International specialization means
directing domestic resources to output which a nation is highly efficient at producing. International trade
involves the exchange of these goods for goods produced abroad. Specialization and trade have the same
effect as having more and better resources or discovering improved production techniques. The output
gains from greater international specialization and trade are the equivalent of economic growth.
PROBLEMS
1. Potatoes cost Janice $1 per kilo, and she has $5.00 that she could possibly spend on potatoes or other
items. If she feels that the first kilo of potatoes is worth $1.50, the second kilo is worth $1.14, the third
kilo is worth $1.05, and all subsequent kilos are worth $0.30, how many kilos of potatoes will she
purchase? What if she only had $2 to spend?
Answer: 3, 2
2. Pham can work as many or as few hours as she wants at the college bookstore for $9 per hour. But due
to her hectic schedule, she has just 15 hours per week that she can spend working at either the bookstore
or at other potential jobs. One potential job, at a caf, will pay her $12 per hour for up to 6 hours per
week. She has another job offer at a garage that will pay her $10 an hour for up to 5 hours per week. And
she has a potential job at a daycare center that will pay her $8.50 per hour for as many hours as she can
work. If her goal is to maximize the amount of money she can make each week, how many hours will she
work at the bookstore?
Answer: 4.