Assignment One Fill in Questions:

1. The economizing problem arises because society’s economic wants are Unlimited and its
economic resources are limited .

2. Technological advances can shift a nation’s production possibilities curve outward because the
effects lead to Economic growth.

3. In a command economy, property resources are primarily (publicly, privately)___________

owned.

The coordinating device(s) in this economic system (is central planning, are markets and
prices)___________________.

4. The branch of economics concerned with the overall performance of the economy.
Macroeconomics

5. Commodities or services, such as land, labor, or capital, that are used by firms in their
production processes. Factors of production.

6. Measurement of cost based on the value of the next-best forgone alternative. Opportunity cost

7. Using the economy’s resources as effectively as possible to satisfy people’s needs and desires.
Allocative efficiency

8. Describes the facts and behavior of an economy. Positive economics

9. Commodities and resources that we value are limited in supply. Economic resources and
commodities

10. Goods that we value that are limited in supply. Economic goods

11. Commodities and resources that are available without limit. Free goods

12. A market structure in which a commodity is supplied by a single firm. Monopoly

13. Productive inputs that include all durable produced goods that are in competition turn used in
production. Capital goods
14. With each participant pursuing his or her own private interest, this system works to the benefit
of all.
The invisible hand
15. Occurs when the quantity supplied is greater than the quantity demanded. surplus

16. The quantities of a good demanded per unit of time at alternative substitutes prices, all else
being fixed. Demand schedule

17. The law of supply states that, other things being constant as prices increase, quantity supplied
decreases.

Multiple choice questions

1. Economics is concerned primarily with:
a. money.
b. determining corporate profits and losses.
c. the allocation of scarce resources.
d. balancing your checkbook.
e. all of the above.

2. When economists say that “goods are limited while wants seem limitless,” they mean that:
a. people are basically greedy and not willing to share.
b. the government needs to redistribute output.
c. current methods of production are inefficient.
d. there is no simple solution to the basic economic problems of scarcity and unlimited
human wants.
e. none of the above.
3. Which of the following statements applies to a mixed economy?
a. There is confusion and a lack of organization.
b. The allocation of resources changes from production period to production period.
c. There are no real examples of truly mixed economies.
d. Mixed economies include aspects of both market and command economies.
e. None of the above statements apply.

4. Capital is:
a. the same as money.
b. the headquarters of economic planning.
c. both an input and an output.
d. all of the above.
e. none of the above.

5. Land, labor, and capital are:

a. available only in finite amounts.
b. used to produce outputs.
c. the primary factors of production.
d. combined with technology in the production process.
e. all of the above.

6.Which of the statements below does not apply to the production-possibility frontier, or PPF?
a. The PPF is closely related to the concept of scarcity.
b. Quantities of inputs are measured along the axes of the PPF.
c. The PPF may shift over time.
d. Movements along the PPF may occur as the allocation of resources changes.
e. Technology may change the shape of the PPF.

7. Which of the following statements could be used to explain an outward shift in the
production- possibility frontier?
a. There is an increase in technology.
b. The population of the country increases.
c. The country decides to postpone current consumption in favor of capital investment.
d. New natural resources are discovered under the ocean.
e. All of the above apply.

8. Which of the following are measured along the axes of a PPF graph?
a. quantities of productive inputs or resources.
b. quantities of finished commodities.
c. values of finished commodities.
d. all of the above.
e. none of the above.

9. If an economy did somehow add to its input stock, or if it did discover new production
techniques, then the production-possibility curve would:
a. remain unchanged.
 b. move appropriately inward and to the left.
c. move appropriately outward and to the right.
d. all of the above.
e. none of the above.

Please use the above figure to answer questions 21 through 24. Figure 1-1
10. On the dark production frontier labeled ABCD, which point corresponds to the
economy’s valuing food most heavily?
a. A.
b. B.
c. C.
d. D.
e. E.

11. A shift in the dark PPF curve to the position indicated by the line marked “1” would be
appropriate to illustrate:
a. a change in the tastes of the population whereby its members want more food produced
and less clothing.
b. the appearance of some new resources useful only in the clothing industry.
c. an improvement in technology applicable to both industries.
d. a change in the production mix involving an increase in clothing output and a decrease in
food output.
e. the development of a better technology in the food industry alone.

12. Which alternative in question 22 would have applied if the dark PPF had shifted to position 2?
a. a change in the tastes of the population whereby its members want more food produced
and less clothing.
b. the appearance of some new resources useful only in the clothing industry.
c. an improvement in technology applicable to both industries.
d. a change in the production mix involving an increase in clothing output and a decrease in
food output.
 e. the development of a better technology in the food industry alone.

13. Which alternative in question 22 would have applied if the dark PPF had shifted to position 3?
a. a change in the tastes of the population whereby its members want more food produced
and less clothing.
b. the appearance of some new resources useful only in the clothing industry.
c. an improvement in technology applicable to both industries.
d. a change in the production mix involving an increase in clothing output and a decrease in
food output.
e. the development of a better technology in the food industry alone.

14.The opportunity cost of repairing the roads in town could be:

a. putting an addition on the school.
b. purchasing new snow removal equipment.
c. changing from a volunteer to a full-time fire department.
d. any of the above, depending upon which is the next-best alternative.
e. none of the above.

15. Markets can occur:

a. whenever buyers and sellers of the same product can communicate with one another.
b. only if buyers and sellers have some form of currency to use for exchange.
c. only if the government steps in and regulates the behavior of buyers and sellers.
d. all of the above.
e. none of the above.

16. There cannot be a problem of what goods to produce if

a. the supply of a productive resource is very small, so it must be devoted to the production
of goods selected from a set of essential necessities.

b. production has not yet reached the stage at which the law of diminishing returns begins to
operate.

c. the supply of productive resources is sufficiently large to make possible the production of
some luxury goods.

d. each productive input is so specialized that it can be used only in the production of one
good and no other.

e. production can be carried on under conditions of decreasing or constant cost, rather than
increasing cost.

17. The “invisible hand” refers to:

a. the role of government in the marketplace.
b. a system of taxation that redistributes wealth from the rich to the poor.
c. the fact that individuals, pursuing their own self-interest, achieve the best good for all
when operating in a market economy.
d. a production system whereby each individual performs the task to which he or she is best
suited.
e. a production system whereby each country produces the products that best suit each
particular resource base.
18. When reference is made to “a capitalist economy,” the speaker is probably contemplating
an economy:
a. in which most capital goods are privately owned.
b. in which the stock of capital is large relative to the population of that economy.
c. that is under communist or socialist direction, so property rights to the capital flow to the
government.
d. suffering from high and increasing rates of inflation.
e. that has limited economic resources with which to work.

19. The philosophy of laissez-faire means that:

a. government controls the economy through a central planning board.
b firms are allowed to monopolize industries in the economy to make greater profits.
c. barter is used instead of money to make all transactions.
d. the government uses taxing and spending policies to redistribute income and wealth.
e. government interferes as little as possible in economic affairs.

20. Government’s role in a modern economy is to:

a. ensure efficiency.
b. correct an unfair distribution of income.
c. promote economic growth and stability.
d. all of the above.
e. none of the above.

21. Perfect competition means that:

a. all goods and services have prices and are traded in markets.
b. no firm or consumer is large enough to affect the market price.
c. each industry is controlled by a single, monopolistic firm.
d. a and b.
e. all of the above.

22. Many governments subsidize primary research because it often benefits all citizens, even
those who are not actively involved in research. This makes primary research a(n):
a. negative externality.
b. private good.
c. public good.
d. efficient good.
e. equity good.

23. Energizer batteries and Everyday batteries are substitutes. If Energizer cust supply and
increases its price. Equilibrium price will…………….and quantity exchanged will in
the market for everyday batteries.
a. Rise, rise
b. Fall, rise
c. Fall, fall
d. Rise, fall
 e. No change

24. Fedrer’s tenis shirts and nike’s tennis shoes are complements. Nike notices a decrease in
the quantity demanded of Tennis shoes ( a movement along Nike’s demand curve). This could be
cause by:
a. A decrease in the income of Nike’s customers,
b. An increase in the price of Nike’s Tennis shoes,
c. An increase in the price of Fedrer’s tennis shirts,
d. An increased expectation that nike will reduce the price of tennis shoes in the near future.
e. None of the above

25. if a firm supplying pens must obtain higher prices than they did previously to produce the
same level of output as before, then we can say that there has been
a. An increase in quantity supplied
b. An increase in supply
c. A decrease in supply
d. A decrease in quantity supplied
e. Movement along the curve

26. the demand curve has “price” on the

a. Vertical axis, “quantity demanded per time period” on the horizontal axis, and an upward
sloping demand curve
b. Horizonal axis, ““quantity demanded per time period” on the vertical axis, and an upward
sloping demand curve
c. Vertical axis, “quantity demanded per time period” on the horizontal axis, and a
downward sloping demand curve
d. Horizonal axis, ““quantity demanded per time period” on the vertical axis, and a
downward sloping demand curve
27. A demand curve for widgets shows:
a. how people’s spending patterns change as their income changes.
b. that people spend more money on widgets as the price of widgets increases.
c. the quantity of widgets that would be purchased per unit of time at each alternative price,
holding other factors influencing demand fixed.
d. that firms are willing to supply more output, per unit of time, as prices increase.

28. As the price of airline tickets increases, the:

a. demand for airline tickets increases.
b. supply of airline tickets decreases.
c. quantity of tickets demanded decreases.
d. quantity of tickets supplied decreases.

29. The law of downward-sloping demand holds that:

a. a surplus of goods will cause price to fall.
b. people normally buy more of a good as their incomes rise.
c. the quantity of a good that consumers willingly purchase increases as the price of the good falls.
d. the quantity of a good purchased will decrease as it goes out of style or is replaced by
something of better quality

30. The supply curve describes:

a. an inverse relationship between price and quantity supplied.
b. a direct relationship between income and quantity supplied.
c. a cyclical relationship between consumption and savings.
d. a direct relationship between price and quantity supplied.

31. An increase in the cost of materials needed to produce snow skis causes the following
change in the snow ski market:
a. the demand curve shifts to the right.
b. the supply curve shifts to the left.
c. both the demand and supply curves shift to the left.
d. neither curve shifts.

32. Consider the producer who makes leather shoes and leather purses. An increase in the
price of leather shoes would cause:
a. a decrease in the supply of leather purses.
b. movement along the supply curve for purses.
c. a shift in the demand curve for leather shoes.
d. the supply curve for leather shoes and the supply curve for purses to shift to the left

33. An increase in the supply of commodity X for any given price of X could be caused by:
a. an increase in the price of X
b. an increase in the prices of factors of production important to this commodity.
c. a decrease in the prices of factors of production important to this commodity.
d. none of the above

34. What does the Production Possibilities Frontier represent?

a. A catalog of all possible production options, represented as percentages.
b. The tradeoffs between production and consumption options.
c. The tradeoffs between possible production levels for two goods.
d. The amount that a society could produce if it devoted all its resources to producing one good.
e. The possible gains from international trade in two or more goods.
35. Assume that sofas and arm chairs are substitute goods. The graph shown above illustrates
the demand curve for sofas. Which of the following events could have triggered the shift in
demand from D1 to D2, as shown above?
a. The price of sofas increased.
b. The price of armchairs increased.
c. The price of labor for making sofas increased.
d. The price of sofas decreased.
e. The price of armchairs decreased.

36. When the supply of a good increases, what happens to equilibrium price and quantity?
a. They both increase
b. They both decrease
c. Price increases, quantity decreases
d. Price decreases, quantity increases
e. The effect is ambiguous

Answer questions 37,38 and 39 on the basis of the data in the following table. Consider the
following supply and demand schedules for bushels of corn.
Quantity Quantity
Price Demanded Supplied
$20 395 200
22 375 250
24 350 290
26 320 320
28 280 345
30 235 365
37. The equilibrium price in this market is
a. $22
b. $24
c. $26
d. $28
38. An increase in the cost of labor lowers the quantity supplied by 65 bushels at each price.
The new equilibrium price would be
a. $22
b. $24
c. $26
d. $28

39. If the quantity demanded at each price increases by 130 bushels, then the new
equilibrium quantity will be
a. 290
b. 320
c. 345
d. 365

40. if two goods are substitutes for each other, an increase in the price of one will necessarily
a. Decrease the demand for the other
b. Increase the demand for the other
c. Decrease the quantity demanded of the other
d. Increase the quantity demanded of the other

VII. PROBLEM SOLVING

1. Determine whether the following events would lead to store shelves that are
understocked or overstocked, and explain the effect of this on prices in a market economy.

a. Flooding in the Midwest destroys a large portion of the corn crop. Will store shelves tend
to be understocked or overstocked with corn? Prices will go (up / down).

b. Your college wins the NCAA basketball championship. Will bookstore shelves tend to be
understocked or overstocked with sweatshirts? Prices will go (up / down).

c. Scientists find that much of the popcorn sold at movie theaters is bad for our health. Will
theaters tend to be understocked or overstocked with popcorn? Prices will go (up / down).

2. Consider the following events. Do they indicate a movement toward or away from the
notion of laissez faire?

a. President Ronald Reagan fires the nation’s striking air traffic controllers. (Toward / Away from)

b. President Bill Clinton supports the notion of nationalized health insurance. (Toward /
Away from)

c. British Prime Minister Margaret Thatcher “privatizes” national industries, like British
Airways, by selling them to private investors. (Toward / Away from)

d. The Federal Reserve takes actions to decrease the money supply, thereby increasing
interest rates. (Toward / Away from)

e. The government requires all auto manufacturers to install safety belts in newly produced
automobiles. (Toward / Away from)
 3. For the past several decades, governments have been taking steps to preserve the
environment. Recently, a new policy initiative has emerged that uses basic economic concepts to
provide incentives for polluters. Markets have emerged in which pollution “rights” are traded
between “owners” of these rights. Government authorities establish maximum amounts of
pollutants that firms can emit into the air on a region-by-region basis. They then dole these rights
out to firms in the area, who are allowed to emit pollutants only as long as they own the rights to
emit them.

a. Using this information, explain how markets for pollution rights emerge. How are
property rights established, and why is it important to establish these property rights?

the pollution rights market emerges in the following steps:

1) the government establishes the maximum amounts of pollutants that the firm can emit into the
air on a region-by-region basis.
2) each firm assesses how much pollutant they are going to emit and whether they will be
omitting below or above the maximum amounts of pollutants available for them.
3) companies which will be emitting higher than the maximum available for them will be
interested in buying pollution rights from firms who will have emissions lower than the maximum
allowed limit of pollution
4) then they will bragian of the price until they reach the equilibrium price of pollution rights

It is important to establish property rights to create an incentive for the companies to stop
polluting because if firms have to pay they will be more likely to try to minimize their emissions.
Also, it is important so that every company know its pollution rights and no company claims
having more rights than they actually do

b. Why might this policy fail to provide incentives for firms to limit pollution to the greatest
extent possible? Explain.

This policy can fail if:

1) the maximum quantity available for each company is too high, more than they actually emit
2) if the total quantity available is too high that will lead pollution rights to be very cheap and
companies might find it cheaper to pollute than to reduce their pollution.
3) finally, if the law enforcement is weak
4) if companies can find ways that allow them to produce more emissions more than allowed
without being caught

4. Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow
of goods and services and the flow of dollars for each of the following activities:
a. Haidy pays a storekeeper $1 for a liter of milk.

b. Mahir earns $4.50 per hour working at a fast-food restaurant.

c. Mansour spends $30 to get a haircut.

d. Wafaa earns $10,000 from her 10 percent ownership of Acme Industrial.

(a) the whole process of this questions happened in the product market where, there is a flow of
goods (milk) from the firms(represented by the storekeeper ) to households (represented by
Haidy) and the flow of dollars ($1 in this case), from the household (represented by Haidy)
to the firms (represented by the storekeeper) in return for the milk she bought

(b) The whole process of this questions happened in the factor market where, there is a flow of
factors (Mahir as labor) from households to firms (represented by the fast-food restaurant)
and the flow of dollars ($4.5 per hour wage in this case), from the firm (represented by the
fast-food restaurant) to the household in return for the labor
 (c) the whole process of this questions happened in the product and service market where, there
is a flow of service(haircut) from the firms(represented by the barbershop ) to households
(represented by mansour) and the flow of dollars ($30 in this case), from the household
(represented by Mansour) to the firms (represented by the barbsershop) in return for the
hircust service he got
(d) The whole process of this questions happened in the factor market where, there is a flow of
factors (10% capital as investment from wafaa) from households to firms (represented by
Acme Industrial.) and the flow of dollars ($10,000 in this case), from the firm (represented
by the Acme Industrial.) to the household in return for the capital

5. The first principle of economics is that people face trade-offs. Use a production
possibilities frontier to illustrate society’s trade-off between two “goods” – a clean environment
and the quantity of industrial output. What do you suppose determines the shape and position of
the frontier? Show what happens to the frontier if engineers develop a new way of producing
electricity that emits fewer pollutants.

The PPF illustrates vividly the idea of trade and that you can get all what you want and in order to
get more of one thing you have to sacrifice from the other.

in this ppf drawn below, we can see on the x-axis the amount of clean environment and on the
y-axis the quantity of industrial output. and we can see the idea of the trade off because as we
increase the quantity of industrial output, we have to sacrifice having clean environments and vice
versa.

What determines the shape of the frontier is the opportunity cost between clean environment and
industrial output. If the opportunity cost of industrial output increases as we produce more
industrial output then it would be bow shaped but if the opportunity cost of industrial output is
constant then the ppf would be straight line.

What determines the position of the frontier is the economy choice whether it want a combination
with low industrial output and a very clean environment or a combination with high industrial
output and low quantity of clean environment.

what happens to the frontier if engineers develop a new way of producing electricity that emits
fewer pollutants. then the curve would shift as seen in the dotted line in the graph below and
economy will be able to produce more output without sacrificing a lot of clean environment or
can produce the same amount of industrial output at the same level clean environment
 6. Consider the following events: Scientists reveal that eating oranges decreases the risk of
diabetes, and at the same time, farmers use a new fertilizer that makes orange trees produce more
oranges. Illustrate and explain what effect these changes have on the equilibrium price and
quantity of oranges.

The effect of the first event: Scientists reveal that eating oranges decreases the risk of diabetes.

As a result, demand for oranges increases, so the demand curve shifts to the right causing
equilibrium price and equilibrium quantity to increase

On the other hand, new fertilizers that makes orange trees produce more oranges causes the supply
curve shifts to the right causing equilibrium price to decrease and equilibrium quantity to increase
so overall, when we look at the effect of the 2 events together, we can see that the equilibrium
quantity will increase and and price will be indeterminate and it will depend on the magnitude of
change in the demand and supply curves.
 7. Given the following individuals’ demand schedules for product X, and assuming these
are the only three
consumers of X, which set of prices and output levels below will be on the market demand curve
for this product?

Consumer Consumer Consumer

Price X 1 2 3
Qd Qd Qd
$5 1 2 0
4 2 4 0
3 3 6 1
2 4 8 2
4 5 10 3
(a) ($5, 2); ($1, 10)
(b) ($5, 3); ($1, 18)
(c) ($4, 6); ($2, 12)
(d) ($4,0); ($1,3)
8. On the basis of the content suggested by the titles, indicate whether you expect the
research to be primarily related to micro or macroeconomics. Use the letters MI for micro, and
MA for macro:

a. Orley Ashenfelter, “Union Relative Wage Effects,” in Stone and Petersen (eds.),
Econometric Contributions to Public Policy MA
b. Edward Denison, “Is U.S. Growth Understated because of the Underground Economy?
Employment Ratios Suggest Not,” Review of Income and Wealth MA
c. R. J. Gordon, “Inflation, Flexible Exchange Rates and the Natural Rate of
Unemployment,” in M. N. Baily (ed.), Workers, Jobs and Inflation MA
d. A. Berle, Jr., and Gardner Means The Modern Corporation and Private Property MI

9. Indicate which of the following are statements of normative (N) or positive (P) character.
a. Taxes should be progressive. N
b. Taxes discourage work effort. P
c. Inflation tends to be high when unemployment is low. P
d. Inflation is less harmful than unemployment. N
e. Pollution restraints cost jobs. p
f. Pollution restraints are worth the cost N