MICROECONOMICS - PROBLEM SET

1. Two countries (namely A and B) produce car and rice, both countries have 240 labors. Below table shows the required labors to
produce one unit of rice or car.
a. Draw the production possibility frontiers for both countries. Show your choice of production.
b. What is the opportunity cost to produce each item?
c. Find the absolute advantage and comparative advantage of each country (if any)
d. What happen if countries specialize and exchange? Show the result on the diagrams

Required labor for 1 Output produced by all Opportunity cost Specialization Exchange
unit of labors

Car Rice Car Rice Car Rice Car Rice Car Rice

Country A 10 5

Country B 12 3

2. Two countries (namely A and B) produce car and rice, both countries have 240 labors. Below table shows the required labors to
produce one unit of rice or car.
a. Draw the production possibility frontiers for both countries. Show your choice of production.
b. What is the opportunity cost to produce each item?
c. Find the absolute advantage and comparative advantage of each country (if any)
d. What happen if countries specialize and exchange? Show the result on the diagrams
Required labor for 1 Output produced by all Opportunity cost Specialization Exchange
unit of labors

Car Rice Car Rice Car Rice Car Rice Car Rice

Country A 10 2
Country B 12 4

3. Identify each of the following topics as being part of microeconomics or macroeconomics:

a. the impact of a change in consumer income on the purchase of luxury automobiles
b. the effect of a change in the price of Coke on the purchase of Pepsi
c. the impact of a war in the Middle East on the rate of inflation in the United States
d. factors influencing the rate of economic growth
e. factors influencing the demand for tractors
f. the impact of tax policy on national saving
g. the effect of pollution taxes on the U.S. copper industry
h. the degree of competition in the cable television industry
i. the effect of a balanced-budget amendment on economic stability
j. the impact of deregulation on the savings and loan industry
4. Which of the following statements are positive, and which are normative?
a. The minimum wage creates unemployment among young and unskilled workers.
b. The minimum wage ought to be abolished.
c. If the price of a product in a market decreases, other things equal, quantity demanded will increase.
d. A little bit of inflation is worse for society than a little bit of unemployment.
e. There is a tradeoff between inflation and unemployment in the short run.
f. If consumer income increases, other things equal, the demand for automobiles will increase.
g. The U.S. income distribution is not equitable.
h. U.S. workers deserve more liberal unemployment benefits.
i. If interest rates increase, investment will decrease.
j. If welfare benefits were reduced, the country would be better off.

5. Gary and Diane must prepare a presentation for their marketing class. As part of their presentation, they must do a series of
calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required calculation and 10 hours to prepare
the slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the slides.
a. How much time would it take the two to complete the project if they divide the calculations equally and the slides equally?
b. How much time would it take the two to complete the project if they use comparative advantage and specialize in calculating or preparing
2
 slides?
c. If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize in calculating or
preparing slides?

6. Supply, demand and Market equilibrium

Given market demand and supply as follows: Qd = 100 – P, Qs = P.

a) Draw the supply and demand curves

b) Find the equilibrium quantity and price.
c) If government imposes ceiling price at 30, what will happen, find the deadweight loss (if any)
d) If government imposes floor price at 60, what will happen, find the dead weight loss (if any)
e) Find the demand and supply elasticity at the equilibrium, give your comments. For certain reasons, supply increases, what happen to total
revenue of the market.
f) Government imposes tax on the sellers, new supply curve is Qs = P – T. Find the new market equilibrium, seller price, buyer price, tax
revenue, dead weight loss by T.
g) If T = 10, find the new equilibrium price and quantity, consumer’s surplus, producer’s surplus, total surplus, tax revenue, dead weight loss
(if any) before and after tax.
h) Find the tax burden for the parties.
i) If government wants to maximize tax revenue, what is T?

3
7. International trade
Given domestic supply and demand Qd = 100 – P, Qs = 4P. The world price is $10. Government decides to impose $5 unit tax for imported
product. Draw the diagram, find the market price, total demand, total domestic supply, total surplus, consumer’s surplus, producer’s surplus, tax
revenue, dead weight loss in the following cases

a. Close economy.
b. Free market.
c. Import Tax at 5.
d. Import quota at 20.

8. Use the following graph shown to fill in the table that follows.

WITHO WITH CHAN

UT TAX TAX GE

Consumer
surplus

Producer
surplus

Tax
revenue

Total
surplus

4
9. Use the graph to answer the following questions about CDs.
a. What is the equilibrium price of CDs before trade?
b. What is the equilibrium quantity of CDs before
trade?
c. What is the price of CDs after trade is allowed?
d. What is the quantity of CDs exported after trade is
allowed?
e. What is the amount of consumer surplus before
trade?
f. What is the amount of consumer surplus after
trade?
g. What is the amount of producer surplus before
trade?
h. What is the amount of producer surplus after trade?
i. What is the amount of total surplus before trade?
j. What is the amount of total surplus after trade?
k. What is the change in total surplus because of
trade?

5
10. Using the graph, assume that the government imposes a $1 tariff on hammers. Answer the following questions given this
information.

a. What is the domestic price and quantity demanded of hammers after the tariff is imposed?
b. What is the quantity of hammers imported before the tariff?
c. What is the quantity of hammers imported after the tariff?
d. What would be the amount of consumer surplus before the tariff?
e. What would be the amount of consumer surplus after the tariff?
f. What would be the amount of producer surplus before the tariff?
g. What would be the amount of producer surplus after the tariff?
h. What would be the amount of government revenue because of the tariff?
i. What would be the total amount of deadweight loss due to the tariff?
11. The public transport systems in some cities charge higher fares during rush hour than during the rest of the day. Why might they
do this?
12. Draw the marginal cost, average total cost curves, average variable cost curves, average fixed cost curves, for a typical firm.
Explain why the curves have the shapes that they do and why they cross where they do.

6
13. Consider the following table of long-run total cost for four different firms
Quantity 1 2 3 4 5 6 7
Firm 1 $210 $340 $490 $660 $850 $1,060 $1,290
Firm 2 $180 $350 $510 $660 $800 $930 $1,050
Firm 3 $120 $250 $390 $540 $700 $870 $1,050
Firm 4 $150 $300 $450 $600 $750 $900 $1,050

Which firm has constant returns to scale over the entire range of output?
Which firm has diseconomies of scale over the entire range of output?
Which firm has economies of scale over the entire range of output?
Which firm has economies of scale and then diseconomies of scale as output increases from 1 to 7?
Which firm's long-run marginal cost decreases as output increases?
Firm 1's efficient scale occurs at what quantity?
14. OISP corporation manufactures and sells a line of tablets with the total cost as TC = 200 + Q + Q2. Firm’s objective is to maximize
profit. There are two cases
- OISP is a perfect competitive firm in which market price is P = 50
- OISP is a monopoly firm in which market demand is P = 100 - Q
a. Express ATC, AVC, AFC, MC in term of Q.
b. Express total profits (p) in terms of Q for each case
c. In each case, what level of output are total profits maximized? What price will be charged? What is revenue, what is profit?
d. For the case of monopoly, what level of output that gives maximum revenue, what is the price and revenue.
15. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from taxation?
16. What is the prisoners’ dilemma, and what does it have to do with oligopoly?
17. Draw a diagram of the long-run equilibrium in a monopolistically competitive market. How is price related to average total costs?
How is price related to marginal cost?
18. Draw the diagrams of the typical firms in the following market to maximize profits.
a. Perfect competition
b. Monopoly
7
c. Monopolistic competition
d. Oligopoly
19. In this payoff matrix for the location strategies of companies for Mega
the only two supermarket at the local province. The payoff
Super Area A Area B
(15,17) means that Super profit is 15 and 17 for Mega
respectively. Area A 15, 17 12,13

Area B 10,12 18,16

a. Find the dominant strategy for each company (if any), briefly explain.
b. Find the Nash Equilibrium (if any), briefly explain.
c. Is it a prisoner’s dilema?
c. If Mega has the right to go first, what is the choice and final equilibrium?
d. If Super has the right to go first, what is the choice and final equilibrium?
20. Cheng Zhi and Tze Yong own the only two bicycle repair shops in town. Each must choose between a low price for repair work and
a high price. The annual economic profit from each strategy is indicated in the table. The profits are shown as (Tze Yong, Cheng
Zhi) in each cell.
Cheng Zhi

Low Price High Price

Tze Low Price (1500, 1500) (5000, 200)

Yong High Price (200, 3000) (4000, 4000)

a. Find the dominant strategy for each company (if any), briefly explain.
b. Find the Nash Equilibrium (if any), briefly explain.
c. Is it a prisoner’s dilema?

8
MACROECONOMICS - PROBLEM

21. Between 2010 and 2012, NNP measured in current prices fell from $96 billion to $48 billion. Over the same period, the relevant price
index fell from 100 to 75.
a. What was the percentage decline in nominal NNP from 2010 to 2012?
b. What was the percentage decline in real NNP from 2010 to 2012? Show your work.
22. Explain why it is the case that the value of intermediate goods produced and sold during the year is not included directly as part of
GDP, but the value of intermediate goods produced and not sold is included directly as part of GDP.
23. Since it is counted as investment, why doesn’t the purchase of earthmoving equipment from China by a U.S. corporation increase
U.S. GDP?
24. In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI has 50
units of food and 10 units of clothing.
food clothin
g
2002 price $4 $10
2003 price $6 $20
a. What are the percentage increases in the price of food and in the price of clothing?
b. What is the percentage increase in the CPI?
c. Do these price changes affect all consumers to the same extent? Explain.

25. Jay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over
the term of the loan, and they agree on a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over the
term of the loan.
a. What was the expected real interest rate?
b. What was the actual real interest rate?
c. Who benefited and who lost because of the unexpected inflation?
26. Consider how each of the following events is likely to affect real GDP. Do you think the change in real GDP reflects a similar change
in economic well-being?
a. A hurricane in Florida forces Disney World to shut down for a month.
b. The discovery of a new, easy-to-grow strain of wheat increases farm harvests.
9
c. Increased hostility between unions and management sparks a rash of strikes.
d. Firms throughout the economy experience falling demand, causing them to lay off workers.
e. Congress passes new environmental laws that prohibit firms from using production methods that emit large quantities of pollution.
f. More high-school students drop out of school to take jobs mowing lawns.
g. Fathers around the country reduce their workweeks to spend more time with their children.

27. Given a two-goods economy.

2014 2015 2016
Q P Q P Q P
Rice (ton) 1,000 10 1,200 15 1,500 20
Car 500 200 600 300 700 250

Find the all the following values for 3 years, clearly show your work, 2014 as a base year.

Nominal GDP
(current price)
Real GDP
GDP Growth
CPI
Inflation (CPI)
Deflator
Inflation (deflator)
28. Compare and contrast the following pairs of concepts:
a. Bonds and stocks?
b. Financial Market and Financial Intermediaries
c. GNP vs GDP
d. Nominal GDP and real GDP
e. Nominal Interest rate and real interest rate
f. Fiscal Policies and Monetary Policies

10
29. Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if a
government goes from a deficit to a surplus.
30. What is the difference between commodity money and fiat money? Why do people accept fiat money in trade for goods and
services?
31. What is the inflation tax, and how might it explain the creation of inflation by a central bank?
32. Identify each of the following as nominal or real variables.
a. the physical output of goods and services
b. the overall price level
c. the dollar price of apples
d. the price of apples relative to the price of oranges
e. the unemployment rate
f. the amount that shows up on your paycheck after taxes
g. the amount of goods you can purchase with the wage you get each hour
h. the taxes that you pay the government
33. Using separate graphs, demonstrate what happens to the money supply, money demand, the value of money, and the price level if:
a. the Central Ban increases the money supply.
b. people decide to demand less money at each value of money.
34. Suppose that a decrease in the demand for goods and services pushes the economy into
35. Are the effects of an increase in aggregate demand in the aggregate demand and aggregate supply model consistent with the Phillips
curve? Explain.
36. Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion. Suppose that the MPC is
.80 and that there are no crowding out or accelerator effects. What is the combined effects of these changes?
37. How does a reduction in the money supply by the Central Bank make owning stocks less attractive?
38. Use the money market to explain the interest-rate effect and its relation to the slope of the aggregate demand curve.
39. Suppose the Vietnam government institutes a “Buy Vietnamese” campaign, in order to encourage spending on domestic goods.
What effect will this have on the Vietnam trade balance?
40. Use the money market to explain why the aggregate demand curve slopes downward.
41. Why and in what way are fiscal policy lags different from monetary policy lags?
11