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Tutorial 2, Week 2A

The document summarizes key points from chapters 1 and 2 of an economics textbook. Chapter 1 discusses how to evaluate the costs and benefits of decisions, even when some benefits are psychological rather than financial. It also explains that past sunk costs are irrelevant to current decisions - what matters now is maximizing future profits or minimizing future losses based on marginal costs and benefits. Chapter 2 introduces production possibility frontiers (PPFs) and explains how different shapes of the PPF reflect changing or constant opportunity costs of producing different goods. A concave PPF shows increasing costs while a convex PPF shows decreasing costs.

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Kasmira K.Bathu Ganesan
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36 views3 pages

Tutorial 2, Week 2A

The document summarizes key points from chapters 1 and 2 of an economics textbook. Chapter 1 discusses how to evaluate the costs and benefits of decisions, even when some benefits are psychological rather than financial. It also explains that past sunk costs are irrelevant to current decisions - what matters now is maximizing future profits or minimizing future losses based on marginal costs and benefits. Chapter 2 introduces production possibility frontiers (PPFs) and explains how different shapes of the PPF reflect changing or constant opportunity costs of producing different goods. A concave PPF shows increasing costs while a convex PPF shows decreasing costs.

Uploaded by

Kasmira K.Bathu Ganesan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ECW1101

Tutorial 2
Chapter 1 & 2

Ten Principles of Economics & Thinking like an economist

Suggested Answers

Note: These suggested answers are brief, they should only serve as a guide and should not be
treated as sample answers.

Chapter 1

1. When the benefits of something are psychological, such as going on a vacation, it is not
easy to compare benefits to costs to determine if it is worth doing. But there are two ways
to think about the benefits. One is to compare the vacation with what you would do in its
place. If you did not go on vacation, would you buy something like a new set of golf
clubs? Then you can decide if you would rather have the new clubs or the vacation. A
second way is to think about how hard you had to work to earn the money to pay for the
vacation. You can then decide if the psychological benefits of the vacation were worth the
psychological cost of working.

2.

(a) The fact that you have already sunk $4 million is not relevant to your decision anymore,
because that money is gone. What matters now is the chance to earn profits at the margin.
If you spend another $1 million and can generate sales of $2million, you’ll earn $1
million in marginal profit, so you should do so. You are right to think that the project has
lost a total of $3 million ($5 million in costs and only $2 million in revenue) and you
should not have started it. However, if you do not spend the additional $1 million, you
will not have any sales and your losses will be $4 million. What matters now is to
minimize your loss.

* Point out to the students that when the marginal profit is $1 million, it reduces the loss by
$1 million.

(b) In fact, you would pay up to $2 million to complete the development; any more than that,
and you will not be increasing profit at the margin.
3. a. When welfare recipients have their benefits cut off after two years, they have a greater
incentive to find jobs than if their benefits were to last forever.

b. The loss of benefits means that someone who cannot find a job will get no income at
all, so the distribution of income will become less equal. But the economy will be
more efficient, because welfare recipients have a greater incentive to find jobs. Thus,
the change in the law is one that increases efficiency but reduces equality.

Chapter 2

4.

(a) The difference between the different PPC curves depends on the opportunity cost.

PPF1 – The concave PPF shows increasing cost (the meaning of increasing cost should be
explained to get full 1 mark allocated)

As Malaysia increases its output of one good, the opportunity cost (in terms of the
quantity of the other good that must be given up) increases.

• Graphically showing as we move down the PPF, the slope increases (get steeper)
mark] – therefore the concavity

• This happens when the inputs used in the two goods are not perfectly substitutable

PPF2 – Convex PPF shows decreasing cost

- the opportunity costs decline as you specialize in one good.

- One possible explanation is that the economy achieves economies of scale (give
example) when the production increases. Example of how economies of scale might
occur.
[other logical explanation may be possible]

PPF3 - The linear PPC shows constant opportunity cost

Malaysia always gives up the same quantity of one good to produce another good no matter
where it is on its PPC

• Indicates that the two goods require similar resources to produce

(b)

As latex rubber and durian require very different resources to produce, we would expect the
real economy’s PPF to look like PPF1 (concave). Suppose, we move down the PPF to produce
more durians. When we keep stretching the ability of the land to produce durian, it becomes
harder to produce more and the opportunity cost increases. Besides, the production of durian
can only be increased by releasing the resources from latex gloves production -- but the inputs
in latex gloves are very different from the resources required for durian.

- If the student provides a different answer (PPF 2 or PPF3), their answers have to be
convincing enough for you to reward them marks.

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