Tutorial 1

Introduction to the course- 10 principles of economics

I. Short answer questions
1. Why is there trade-off between equality and efficiency?
2. Water is necessary for life. Diamonds are not. Is the marginal benefit
of an additional glass of water greater or lesser than an additional one-
carat diamond? Why?
3. If the government printed twice as much money, what do you think
would happen to prices and output if the economy were already
producing at maximum capacity?
4. A goal for a society is to distribute resources more equally and fairly.
How might you distribute resources if everyone were equally talented
and worked equally hard? What if people had different talents and
some people worked hard, while others did not?
5. Who is more self-interested? The buyer or the seller?
II. Practice problems
1. People respond to incentives. Governments can alter incentives and,
hence, behavior with public policy. However, sometimes public policy
generates unintended consequences by producing results that were not
anticipated. For each of the following public policies, determine which
result was likely the intended result and which was the unintended
consequences.
a. The government raises the minimum wage to $10 per hour. Some
workers find jobs at the higher wage making these workers better
off. Some workers find no job at all because few firms want to hire
low- productivity workers at this high wage.
b. The government places rent controls on apartments restricting rentx
to $300 per month. Few landlords are willing to produce an
apartment at this price causing more homelessness. Some low-
income renters are able to rent an apartment more cheaply.
c. The government raises the tax on gasoline by $2 per gallon. The
deficit is reduced, and people economize on their use of gasoline.
There is a boom in bicycle sales.
d. The government declares cocaine illegal. The price of illegal drugs
increases, creating more gangs and gang warfare. Due to the high
price of illegal drugs, fewer street drugs are consumed.
2. Opportunity cost is what you give up to get an item. Because there is
no such thing as free lunch, what would likely be given up to obtain
each of the items listed below?
a. Susan can work full-time or go to college. She chooses work.
b. Susan can work full-time or go to college. She chooses college
c. Farmer Jones has 100 acres of land. He can plant corn, which
yields 100 bushels per acre, or he can plant beans, which yield 40
bushels per acre. He chooses to plant corn.
d. Farmer Jones has 100 acres of land. He can plant corn, which
yields 100 bushels per acre, or he can plant beans, which yield 40
bushels per acre. He chooses to plant beans.
II. Multiple-Choice Questions

1. The English word that comes from a Greek word which means “ one
who manages a household” is
a. Market
b. Producer
c. Consumer
d. Economy

2. In considering how to allocate its scarce resources among its various

members, a household considers
a. each member’s abilities.
b. each member’s efforts.
c. each member’s desires.
d. all of the above
3. Economics deals primarily with the concept of
a. scarcity.
b. money.
c. poverty.
d. banking.
4. Which of the following is correct?
a. The word economy comes from the Greek word for “rational
thinker.”
b. Economists study the management of scarce resources.
c. Because economists believe that people pursue their best
interests, they are not interested in how people interact.
d. All of the above are correct.
5. The overriding reason why households and societies face many
decisions is that
a. resources are scarce.
b. goods and services are not scarce.
c. incomes fluctuate with business cycles.
d. people, by nature, tend to disagree.

6. The phenomenon of scarcity stems from the fact that

a. most economies’ production methods are not very good.
b. in most economies, wealthy people consume disproportionate
quantities of goods and services.
c. governments restrict production of too many goods and services.
d. resources are limited.
7. Economics is the study of
a. production methods.
b. how society manages its scarce resources.
c. how households decide who performs which tasks.
d. the interaction of business and government.
8. In most societies, resources are allocated by
a. a single central planner.
b. a small number of central planners.
c. those firms that use resources to provide goods and services.
d. the combined actions of millions of households and firms.
9. Oil is considered to be a non-renewable energy source. Oil
a. is an unlimited resource.
b. is a scarce resource.
c. is not a productive resource.
d. has no opportunity cost.
10. Which of the following is not an example of scarcity?
a. Only some people can afford to buy a Ferrari.
b. Every individual in society cannot attain the highest standard of
living to which he or she might aspire.
c. Doug has an unlimited supply of apples in his orchard.
d. Each member of a household cannot get everything he or she
wants.
11. Macroeconomists study
a. the decisions of individual households and firms.
b. the interaction between households and firms.
c. economy-wide phenomena.
d. regulations imposed on firms and unions.
12. Which of the following newspaper headlines is more closely related to
what micro-economists study than to what macroeconomists study?
a. Unemployment rate rises from 5 percent to 5.5 percent.
b. Real GDP grows by 3.1 percent in the third quarter.
c. Retail sales at stores show large gains.
d. The price of oranges rises after an early frost.
13. Which of the following questions is more likely to be studied by a
micro-economist than a macroeconomist?
a. Why do prices in general rise by more in some countries than in
others?
b. Why do wages differ across industries?
c. Why do national production and income increase in some periods
and not in others?
d. How rapidly is GDP currently increasing?
14. Which of the following topics are more likely to be studied by a
macroeconomist than by a micro-economist?
a. the effect of taxes on the prices of airline tickets, and the
profitability of automobile-manufacturing firms
b. the price of beef, and wage differences between genders
c. how consumers maximize utility, and how prices are established
in markets for agricultural products
d. the percentage of the labor force that is out of work, and
differences in average income from country to country
15. We would expect a macroeconomist, as opposed to a micro-economist,
to be particularly interested in
a. explaining how economic changes affect prices of particular
goods.
b. devising policies to deal with market failures such as
externalities and market power.
c. devising policies to promote low inflation.
d. identifying those markets that are competitive and those that are
not competitive.
16. Which of the following is not a question that macroeconomists address?
a. Why is average income high in some countries while it is low in
others?
b. Why does the price of oil rise when war erupts in the Middle
East?
c. Why do production and employment expand in some years and
contract in others?
d. Why do prices rise rapidly in some periods of time while they are
more stable in other periods?
17. The basic tools of supply and demand are
a. useful only in the analysis of economic behavior in individual
markets.
b. useful in analyzing the overall economy, but not in analyzing
individual markets.
c. central to microeconomic analysis, but seldom used in
macroeconomic analysis.
d. central to macroeconomic analysis as well as to microeconomic
analysis.
18. Which of the following statistics is usually regarded as the best single
measure of a society’s economic well-being?
a. the unemployment rate
b. the inflation rate
c. gross domestic product
d. the trade deficit