Econ 101
Professor Yimin Ye
2/13/2014
Exam 1 Review
Chapter 1:
1. Suppose that you are considering what to do on an upcoming weekend. Here are your options, from least to most preferred: (1) study for upcoming midterms; (2) fly to Colorado for a quick ski trip; (3) go into seclusion in your dorm room and try to improve your score on a computer game. What is the opportunity cost of a decision to play the computer game all weekend? (Your answer will not be in dollars.)
2. Water is necessary for life. Is the marginal benefit of a glass of water large or small?
3. Consider the table below:
Type of Institution / Two-Year Public / Four-Year Public / Four-Year PrivateTuition and fees / $2,713 / $7,605 / $27,293
Books and supplies / $1,133 / $1,137 / $1,181
Room and board / $7,259 / $8,535 / $9,700
Transportation and other expenses / $3,532 / $3,062 / $2,302
Total out of pocket costs / $14,637 / $20,339 / $40,476
Assume the average yearly income of an 18 to 24 year old high school graduate who worked full time was about $24,000. If we assume that only nine months of work must be sacrificed to attend college (that is, you’d still work full-time in the summer), then foregone income is about ¾ of $24,000, or $18,000. Use the information in the table above to calculate the average opportunity cost of a year in college for a student at a four-year private institution under each of the following special assumptions:
a) The student receives free room and board at home at no opportunity cost to the parents.
b) The student receives an academic scholarship covering all tuition and fees (in the form of a grant, not a loan or work-study aid).
c) The student works half-time while at school (assume for this problem that the leisure or study time sacrificed has no opportunity cost).
Chapter 2:
4. In your own words, explain the Law of Increasing Opportunity Cost.
5. Imagine a society that produces military goods and consumer goods, which we’ll call “guns” and “butter.”
a. Draw a production possibilities frontier for guns and butter.
b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient.
c. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and point the Doves might choose.
d. Imagine an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Draw the new production possibilities frontier for guns and butter.
6. In your own words, explain why production possibilities frontiers are usually bowed outward.
Chapter 3:
7. Explain how absolute advantage and comparative advantage differ.
8. Consider the table below:
Labor Required for:1 Fish / 1 Cup of Berries
Maryanne / 1 hour / 1 hour
Gilligan / 3 hours / 1 ½ hours
a) Who has absolute advantage in picking berries? In catching fish?
Suppose that one day, Gilligan (the castaway) eats a magical island plant that turns him into an expert at everything. In particular, it now takes him just half an hour to pick a cup of berries, and 15 minutes to catch a fish.
b) Redo the table above.
c) Now who has absolute advantage in picking berries? In catching fish?
d) Who—Gilligan or Maryanne—has a comparative advantage in picking berries? In catching fish?
e) Suppose that Gilligan allocates his time to produce two more units of his comparative advantage good and that Maryanne does the same. Construct a table showing how production changes for each castaway and for the island as a whole.
9. Is absolute advantage or comparative advantage more important for trade? Explain your reasoning.
Chapter 4:
10. Explain in your own words, the concept of complementary goods and substitute goods. How would an increase in the quantity demanded of peanut butter affect the demand for jelly? How would a decrease in the quantity demanded of Coke affect the demand for Pepsi?
11. The following table gives hypothetical data for the quantity of two-bedroom rental apartments demanded and supplied in Peoria, Illinois.
Monthly Rent / Quantity Demanded (thousands) / Quantity Supplied (thousands)$800 / 30 / 10
$1,000 / 25 / 14
$1,200 / 22 / 17
$1,400 / 19 / 19
$1,600 / 17 / 21
$1,800 / 15 / 22
a) Graph the demand and supply curves.
b) Find the equilibrium price and quantity.
c) Explain briefly why a rent of $1,000 cannot be the equilibrium in this market.
d) Suppose a tornado destroys a significant number of apartment buildings in Peoria but doesn’t affect people’s desire to live there. Illustrate on your graph the effects on equilibrium price and quantity.
12. Consider the market for minivans. For each of the events listed here, demonstrate on a graph how these changes affect the demand and supply curves.
a) People decide to have more children.
b) A strike by steelworkers raises steel prices.
c) Engineers develop new automated machinery for the production of minivans.
d) The price of sports utility vehicles rises.
e) A stock-market crash lowers people’s wealth.
f) The price of minivans decreases.