1) The statement "An increase in the price of gasoline will lead to a decrease in the amount

purchased" is
A) a political statement.
B) a positive statement.
C) a normative statement.
D) a scientific statement.
Ans: B

2) Society faces a tradeoff in all of the following situations except

A) when some previously unemployed workers find jobs.
B) when deciding how goods and services will be produced.
C) when deciding what goods and services will be produced.
D) when deciding who will receive the goods and services produced.
Answer: A

3) Mouza shares a one-bedroom apartment with her classmate. Her share of the rent is
$700 per month. She is considering moving to a studio apartment which she will not have to
share with anyone. The studio apartment rents for $950 per month. Recently, she has moved
into the studio apartment. Mouza is as rational as any other person. As an economics major,
you rightly conclude that

A) Mouza figures that the additional benefit of having her own place (as opposed to
sharing) is at least $250.
B) Mouza did not have a choice; she did not like her roommate.
C) the cost of having one's own space outweighs the benefits.
D) Mouza figures that the benefit of having her own place (as opposed to sharing) is at
least $950.
Answer: A

4) The unattainable points in a production possibilities diagram are

A) the points of the horizontal and vertical intercepts.
B) the points along the production possibilities frontier.
C) the points outside the production possibilities frontier.
D) the points within the production possibilities frontier.
Answer: C

5) A change in which variable will change the market supply for a product?
A) The price of the product. B) The number of firms in the market.
C) Expected future prices. D) The quantity supplied of the product.
Answer: B

6) The study of economics arises due to

A) scarcity. B) money. C) greed. D) resources.
Answer: A
7) Economists assume that individuals
A) are rational and respond to incentives.
B) behave in unpredictable ways.
C) will never take actions to help others.
D) prefer to live in a society that values fairness above all else.
Answer: A

8) The branch of economics which studies the behavior of entire economies and policies
that affect the economy as a whole is called
A) public economics. B) normative economics.
C) macroeconomics. D) microeconomics.
Answer: C

Problem 1

Production Earphones Mobile covers

point produced produced
A 0 and 42
B 4 and 40
C 8 and 36
D 12 and 30
E 16 and 22
F 20 and 12
G 24 and 0

The table above lists seven points on the production possibilities frontier for earphones and
mobile covers.

a) Graph the PPF.

b) What is the opportunity cost of producing the first four earphones?

The opportunity cost of the first four earphones is 2 MOBILE COVERs per earphone

c) What is the opportunity cost of producing the 10th earphone?

The 10th earphone is the midpoint between 8 and 12 earphones.The opportunity cost
 of gaining 4 additional earphones by producing 12 earphones instead of 8 earphones
is 6 MOBILE COVERs given up, so the opportunity cost of an additional earphone is
6 ÷ 4 = 1.5 MOBILE COVERs per earphone.

d) What is the opportunity cost of producing the first 12 mobile covers?

The opportunity cost of the first 12 MOBILE COVERs is 4 earphones.

e) What is the opportunity cost of producing the 26th mobile cover?

The 26th MOBILE COVER is the midpoint between 22 and 30 MOBILE COVERs.
The opportunity cost of gaining 8 MOBILE COVERs by producing 30 MOBILE
COVERs instead of 22 MOBILE COVERs is 4 earphones given up, so the
opportunity cost of an additional MOBILE COVER is 4 ÷ 8 = 0.5 earphones per
MOBILE COVER.

Problem 2

Suppose that Poland and Paraguay have the maximum outputs per worker in producing Chairs
and Tables shown in the table below.

Poland Paraguay
Chairs 240 260
Tables 2 1

a. Which country has an absolute advantage in Chairs and Tables?

None
b. Which country has a comparative advantage in producting Chairs and which in Tables?
Poland: must specialize in doing Tables
Opp. cost of Chairs (Poland) = 2/240
Opp. cost of Tables(Poland) = 120
Paraguay: must specialize in Chairs
Opp. Cost of Chairs = 1/260
Opp. Cost of Tables= 260

c. Before specialization on a normal day, the 2 countries used to divide their time equally
between Chairs and Tables (half-half). Show how would they gain or lose if they
specialize?
Before trade
Poland Paraguay
Chair 120 130 250
Table 1 0.5 1.5
Specialization
Poland Paraguay Total pages per hour
Chairs 0 260 260(10 gained)
Tables 2 0 2 (0.5 gained)
Trade
Poland Paraguay
 Chairs 120 (0 gained) 140 (10 gained)
Tables 1.5 (0.5 gained) 0.5 (0 gained)

So both countries became more productive after they specialize.

Problem 3

The hotel rooms market in Istanbul faces the following demand and supply.

Price
Rooms demanded Rooms supplied
(per night)
50 750 300
60 700 400
70 650 500
80 600 600
90 550 700
100 500 800

a) Draw a figure showing the demand and supply curves for hotel rooms. What are the
equilibrium price and quantity?
Figure equilibrium at P= 60 and Q= 600

b) Suppose the price is $70. Describe the situation in the market and explain how the price
of a room adjusts.
If the price is $70, there is a shortage of 150 a rooms. The shortage leads to a risein
the price.

c) How will the market adjust?

The market will adjust itself through increasing the prices back to the equilibrium price

d) Now suppose the price is $90. Describe the situation in the market and explain how the
price of a room must adjust.
If the price is $90, there is a surplus of 150 a rooms. The surplus leads to a Fall in the
price.

e) How will the market adjust?

The market will adjust itself through decreasing the prices back to the equilibrium price.

Problem 4

Using supply-and-demand diagrams, show and explain the effects of the following events on
the price of DVDs and the quantity of DVDs sold. For each event, identify which of the
determinants of demand or supply is affected, how it influences demand or supply, and what
happens to the equilibrium price and quantity.
a) The price of a DVD players falls.
 Demand increases. Shifts right. P and Q increase

b) Producers introduce new cost-saving technologies in their DVD production plants.

Supply increases. Shifts right. P decreases while Q increases.
.

c) The Price of DVDs double in the market.

Qd will decrease, while Qs will increase. There will be a surplus in the market.

Problem 5

General Electric is a mp3 players producer. Demand and supply functions for mp3 players are
as follows:
QD= 1,450 - 25P (Demand)
QS= -100 + 75P (Supply)

Where P is the price of mp3 players.

a. Calculate the market equilibrium price/output combination.

QD=QS
1450- 25P=-100 + 75P
P=$1550/100=15.5
To solve for Q, set:
Demand: QD = 1,062.5.

b. What will happen in the market if the price of mp3 players increased to $40?
At P=40, QD=450 and Qs=2900 thus there will be a surplus of 2450.

c. How will the market adjust?

The market will adjust itself through decreasing the prices of mp3 players back to the
equilibrium price.

d. What will happen in the market if the price of mp3 players increased to $10?
At P=10, QD=1200 and Qs=650 thus there will be a shortage of 550.

e. How will the market adjust?

The market will adjust itself through increasing the prices of mp3 players back to the
equilibrium price.