2009/2010 1

EC1301 Principles of Economics

Semester

TUTORIAL 1 24-28 August 2009 Short Answer Questions

1.

One tradeoff that society faces is between efficiency and equity. Define each term and explain this tradeoff. ANSWER: Efficiency is the property of society getting the most it can from its scarce resources. Equity is defined as the property of distributing economic prosperity fairly among the members of society. Often, these two goals conflict. When the government redistributes income from the rich to the poor, it reduces the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. When the government tries to cut the economic pie into more equal slices, the pie gets smaller. Most analysts believe that the failure of communism can be blamed on the failure of central planning to allocate resources efficiently. Why is it difficult for central planners to allocate resources efficiently? ANSWER: Efficient allocation of resources depends on information which reflects the true marginal benefit to society of consuming products and the true marginal cost to society of producing products. Market prices contain this information. These prices are determined automatically in a market economy through the interactions of the decisions of millions of households and firms. Since the central planners do not have access to all of the information the market uses in determining prices, it is impossible for the planners to set prices which reflect marginal benefit and marginal cost. Therefore, it is impossible for the central planners to allocate resources efficiently. How important are prices in allocating resources in a market economy? ANSWER: Prices play the key role in the allocation of resources in a market economy, providing the signals to which buyers and sellers respond. In turn, the combined actions of buyers and sellers determine the forces of supply and demand which move prices toward equilibrium in the market. In the end, the buyers who are willing to pay the most obtain the scarce goods and services, and the sellers who are able to produce the goods and services at the lowest cost obtain the sales. Prices play a similar role in the allocation of resources to the production of alternative goods and services, with those producers who are willing to pay the most obtaining the scarce resources.

2.

3.

Connie CHUNG

2009/2010

EC1301 Principles of Economics

Semester 1

Without the allocative role of prices in rationing scarce goods and services, there would be no automatic mechanism to guide the allocation of resources.
4.

Jack Neo Ah Teck, a Singaporean fisherman, goes out with a boat and a net early each morning. At 7:00 a.m., Jack takes his day's catch to the fish market and sells it at the market price. As a result of new information about the beneficial effects on health of a fish-rich diet, the demand for fish increases. How will Jack's supply of fish respond to the increased demand and higher price for his product in the short run and in the long run? ANSWER: In the very short run, a period of one day, Jack cannot respond at all to the increased price of fish, since his supply is perfectly inelastic. In the short run, Jack can respond to the higher price by using more labor and nets to catch more fish. In the long run, Jack can also add more boats to the production process and catch even more fish. The longer the time horizon, the more elastic will be Jack's supply of fish. Why do you think that the demand for coffee is less elastic than the demand for restaurant meals? ANSWER: It probably has to do with the availability of good substitutes. People can always eat at home. But its harder to find a good substitute for coffee, so people are less sensitive to coffee price changes than to restaurant meal price changes.

5.

Multiple Choice Questions

6.

Carolyn decides to spend an additional hour working overtime rather than watching a video with her friends. She earns $8 for her hours work. Her opportunity cost of working is A. the $8 she earns. B. the enjoyment she would have received had she watched the video. C. the $8 minus the enjoyment she would have received from watching the video. D. nothing, since she would have received less than $8 of enjoyment from the video. In the former Soviet Union, producers were paid for meeting output targets, not for selling products. Under those circumstances, what were the economic incentives for producers?
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7.

2009/2010 1

EC1301 Principles of Economics

Semester

to produce good quality products so that society benefits from the resources used B. to conserve on costs, so as to maintain efficiency in the economy C. to produce those products that society desires most D. to produce enough to meet the output target, without regard for quality or cost
8.

A.

Which of the following concepts is NOT illustrated by the production possibilities frontier? A. Efficiency B. Opportunity cost C. Equity D. Tradeoffs

9.

On the production possibilities frontier shown above, the opportunity cost of getting 5 additional bikes by moving from point A to point C is

Connie CHUNG

2009/2010

EC1301 Principles of Economics

Semester 1

A. 15 roller blades. B. 10 roller blades. C. 5 roller blades. D. It is impossible for the economy to move from point A to point C.
10.

B.

C.
D.

Joe quit his job as a salesman where he made $35,000 per year to start his own T-shirt making business. His business expenses are $6,000 per year on rent, $12,000 per year on supplies, and $4,000 per year on part-time help. As for his personal expenses, his apartment costs him $4,800 per year and his personal bills are an extra $1,200 per year. What is Joes opportunity cost of running a business? A. $63,000 $57,000 $41,000 $35,000
11.

Suppose you like banana cream pie made with vanilla pudding. Assuming all other things are constant, you notice that the price of bananas is higher. How would your demand for vanilla pudding be affected by this? A. It would decrease. B. It would increase. C. It would be unaffected. D. There is insufficient information given to answer the question. Which of the following would NOT shift the demand curve for a good or service? A. a change in income B. a change in the price of a related good C. a change in expectations about the price of the good or service D. a change in the price of the good or service

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13.

A technological advancement A. will shift the demand curve to the right. B. will shift the demand curve to the left. C. will shift the supply curve to the right. D. will shift the supply curve to the left.
14.

A.
B. C.

A dress manufacturer is expecting higher prices for dresses in the near future. We would expect the dress manufacturer to supply more dresses now. the demand for this manufacturers dresses to fall. the dress manufacturer to supply fewer dresses now.
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D. 15.

EC1301 Principles of Economics

Semester

the demand for this manufacturers dresses to rise. Wheat is the main input in the production of flour. If the price of wheat increases, all else equal, we would expect the supply of flour to be unaffected. the supply of flour to decrease. the supply of flour to increase. the demand for flour to decrease. If, at the current price, there is a shortage of a good, A. the price is below the equilibrium price. B. the market can be in equilibrium. C. sellers are producing more than buyers wish to buy. D. All of the above answers are correct.

A.
B. C. D. 16.

17.

When there is a surplus in a market, A. there is downward pressure on price. B. there is upward pressure on price. C. the market could still be in equilibrium. D. there are too many buyers chasing too few goods. Demand is said to be elastic A. if the price of the good responds substantially to changes in demand. B. if demand shifts substantially when the price of the good changes. C. if the quantity demanded responds substantially to changes in the price of the good. D. if buyers don't respond much to changes in the price of the good.
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18.

If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price would result in a A. 4.0 percent decrease in the quantity demanded. B. 10 percent decrease in the quantity demanded. C. 40 percent decrease in the quantity demanded. D. 400 percent decrease in the quantity demanded.

20. The local pizza restaurant makes such great bread sticks that consumers do not

respond much to a change in the price. If the owner is only interested in increasing revenue, he should A. lower the price of the bread sticks. B. raise the price of the bread sticks. C. leave the price of the bread sticks alone. D. reduce costs.
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2009/2010

EC1301 Principles of Economics

Semester 1

Connie CHUNG