CHAPTERS 1 & 2 EXERCISES SET

1. A student decides to study four years in the university to graduate in Business

Administration (GADE) rather than start working in a firm. This student pays €1,000
tuition fee each year. The annual salary he would get in an average firm is €20,000 per
year. What is the opportunity cost of this student of obtaining a degree in GADE?
a. €80.000
b. €84.000
c. €4.000
d. There is no opportunity cost

2. A recent graduate of business administration decides to continue studying and doing a

biannual master in business and management at the University rather than start working
in a company. The cost of tuition per year is 1,500 euros. The average annual salary for a
graduate in GADE is 30,000 euros a year. What is the opportunity cost for this individual
of this decision?
a. 3,000 euros.
b. 63,000 euros.
c. 60,000 euros.
d. 31,500 euros.

4. Julia is a retired grandmother. She takes care of her grandchildren and she has free time
(5 hours a week) to pursue her hobby, painting ceramics. She can paint 2 plates per hour
or 4 cups per hour when she gets to it.
a) Draw the production possibility frontier for plates and cups per week of Julia
b) What is the opportunity cost of producing a ceramic plate?
c) What is the opportunity cost of producing a ceramic cup?

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5. Michael and Angelo live in a small town in Italy. They work as artists. Michael is the
more productive artist. He can produce 10 small sculptures each day but only 5
paintings. Angelo can produce 6 sculptures each day but only 2 paintings.

Output per day

Sculptures Paintings
Michael 10 5
Angelo 6 2

a. What is the opportunity cost of a painting for each artist?

b. Based on your answer in part a, who has a comparative advantage in producing
paintings?
c. If the two men decide to specialize, who should produce the sculptures and who
should produce the paintings?

6. Java is an island where they only produce cars and ships, the following table shows the
maximum annual output combinations of cars and ships. Obviously since there are
limitations on the resources and technology available, when more resources are used in
the production of cars, fewer resources are available for the production of ships.

Possible output Quantity of cars (units) Quantity of ships

combinations (units)
A 1000 0
B 800 300
C 600 500
D 400 600
E 200 650
F 0 675

a) Draw the Production Possibility Frontier (PPF) to illustrate these output combinations
of this economy, with the quantity of cars in the x axis (horizontal axis) and the
quantity of ships in the y axis (vertical axis). Plot the points A to F.
b) Can Java produce 500 units of ships and 800 units of cars? Explain your answer. Where
would you locate this point in relation with the PPF?
c) What is the opportunity cost of increasing the annual production from 600 units of
cars to 800 units?
d) What is the opportunity cost of increasing the annual production of cars from 200
units to 400 units?
e) Could you explain why the answers to questions c) and d) are not the same? What
does it mean in relation with the slope of the PPF?

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7. Julia is a retired grandmother. She takes care of her grandchildren and she has free time
(5 hours a week) to pursue her hobby, painting ceramics. She can paint 2 plates per hour
or 4 cups per hour when she gets to it.
a) Draw the production possibility frontier for plates and cups per week of Julia
b) What is the opportunity cost of producing a ceramic plate?
c) What is the opportunity cost of producing a ceramic cup?

8. Given the following data on the Production Possibility Frontier (PPF) of an economy:

Food

Clothing

a) Calculate the total opportunity cost of moving from combination A to combination

B.
b) Calculate the unit opportunity cost of moving from combination C to combination
D.
c) Calculate the unit opportunity cost of moving from combination D to combination
E.
d) Explain why the answers to questions b and c are different
e) Show graphically what would happen if a technological improvement in the
production of clothing takes place.

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9. INDICATE IF THE FOLLOWING STATEMENTS ARE TRUE OR FALSE:

a. The goal of macroeconomics is to study the behavior of each company.

b. The economic growth can be represented graphically by the rightward shift of the
PPF.
c. The existence of taxes and subsidies can be considered as an indicator that the
economy is a mixed economy.
d. The Law of Diminishing Returns to an input states that “if you keep adding
additional units of a variable factor to a fixed factor, then it will come to a point
when output will begin to decline”.

10. MULTIPLE CHOICE QUESTIONS:

In a free market system, the necessary coordination among economic agents is carried out:

a. Through the Government.

b. Through prices.
c. By agreeing after an argument.
d. Through advertising.

What is meant by positive economics?

a. Positive economics deals with ethical precepts, value judgements and standards of
justice.
b. Positive economics deals with subjective explanations on the functioning of the
economy.
c. Positive economics deals with objective explanations on the functioning of the
economy.
d. None of the answers is correct.

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When the PPF is linear:

a. The extreme combinations are preferred to the central combinations.

b. The opportunity cost is constant.
c. The opportunity cost is unitary.
d. All of the above.

The need to choose is a result of:

a. The opportunity cost.

b. The scarcity of resources.
c. Inefficiency.
d. Prices.

The following Figure shows the initial situation of production possibilities in an economy, the
Production Possibility Frontier 1 (FPP1):
Food
Alimentos

A
B
C

FPP1 FPP2

Clothing
Vestidos
If we start from point D, we can conclude that:
a. There is unemployment and the economy could produce more of both goods, clothing
and food.
b. It would be possible to produce more clothes, but reducing the production of food.
c. It would be possible to produce more food, but reducing the production of clothing.

With the following data:

Good Number of units of factor per unit of good Cost of one unit of factor

X 2 units 5 m. u.

Y 1 unit 5 m. u.

The opportunity cost of producing one unit of good X is:

a) 1 unit of good Y

b) 2 units of good Y

c) 2.5 units of good Y

d) 0.25 units of good Y

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With the following data on the Production Possibility Frontier (PPF) of an economy:

Combinations A B C D E F G

Calculators 21 20 18 15 11 6 0

Boats 0 1 2 3 4 5 6

When you move from the combination D to the combination E, the opportunity cost of the
fourth boat in terms of calculators is:

a. 2
b. 3
c. 4
d. 5

In economics, choices must be made because we live in a world of

a) unemployment.
b) scarcity.
c) greed.
d) unlimited resources.

Which of the following statements is true about scarcity?

a) Scarcity refers to the situation in which unlimited wants exceed limited resources.
b) Scarcity is not a problem for the wealthy.
c) Scarcity is only a problem when a country has too large a population.
d) Scarcity arises when there is a wide disparity in income distribution.

Classify each of the following statements as positive or normative.

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.
f) My dog weighs 75 pounds.
g) Dogs are required by law to have rabies shots.
h) You should take your dog to the veterinarian once a year for a check-up.
i) Chihuahuas are cuter than bulldogs.
j) Leash laws for dogs are a good idea because they reduce injuries.
k) Winters in Arkansas are too cold.
l) Everyone should work at a bank to see the true value of money.
m) The current exchange rate is 0.7 British pounds per US dollar.
n) On average, people save 15% when they switch to Geico (insurance company).
o) Everyone ought to have a life insurance policy.
p) University of Arkansas graduates earn more than Duke University graduates.
q) Harvard University is the top education institution in the country.
r) The average temperature in Fargo, North Dakota, in January is 56 degrees Fahrenheit.