Name:______

Unit 1 Review Problems (answer all 6 questions)

  1. Andrew Whittaker Jr. of West Virginia got a surprise present on Christmas Day 2002 when he won the $314.9 million jackpot of the Powerball lottery. This jackpot was the biggest ever won by a single person in the U.S.
  2. Do the people who buy lottery tickets face scarcity?
  3. Do the winners of big prizes face scarcity after receiving their winners’ checks?
  4. Do people face a marginal cost and a marginal benefit when they decide to buy a lottery ticket?
  5. Does a person who buys a lottery ticket make a rational change?
  1. Think about each of the following situations and explain how they affect incentives and might change the choices that people make.
  2. A hurricane hits Central Florida
  3. The World Series begins tonight but a thunderstorm warning is in effect for the area in which the stadium is located.
  4. Political Stability in the Middle East cuts world oil production and sends the price of gasoline to $4 a gallon.
  5. Your school builds a new parking garage that increases the number of parking places available but doubles the price of parking on campus.
  1. Explain whether each of the following government activities is motivated by a concern about equity or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved.
  2. regulating cable TV prices
  3. providing some poor people with vouchers that can be used to buy food
  4. prohibiting smoking in public places
  5. breaking up Standard Oil (which owned 90 percent of oil refineries) into several smaller companies
  6. Imposing higher personal income tax rates on people with higher incomes
  7. Instituting laws against driving while intoxicated
  1. Use the concept of opportunity cost to explain the following situations.
  2. More people choose to get graduate degrees when the job market is poor.
  3. More people choose to do their own home repairs when the economy is slow and hourly wages are down.
  4. A decision to use an underdeveloped lot in Tokyo’s financial district for an apartment building.
  5. A decision to use a square mile in the desert for a gas station.
  1. Classify each of the following statements as positive and normative. Explain.
  2. Society faces a short-run trade-off between inflation and unemployment.
  3. A reduction in the rate of growth of money will reduce the rate of inflation.
  4. The Federal Reserve should reduce the rate of growth of money.
  5. Society ought to require welfare recipients to look for jobs.
  6. Lower tax rates encourage more work and more saving.
  7. Personal income fell in November to a seasonally adjusted rate of $4.879 trillion.
  8. Deregulation of the airline industry has failed.
  9. Limitations on the number of terms a president may serve are a good idea.
  10. The FED lowered the discount rate to 3.5%
  11. Speaker Pelosi believes there should be a balanced budget amendment.
  1. The table below is a set of hypothetical production possibilities for a nation.

Combination / Automobiles (thousands) / Beef (thousands of tons)
A / 0 / 10
B / 2 / 9
C / 4 / 7
D / 6 / 4
E / 8 / 0
  1. Plot these production possibilities data. What is the opportunity cost of the first $2,000 automobiles produced? Between which points is the opportunity cost per thousand automobiles highest? Between which points is the opportunity cost per thousand tons of beef highest?
  2. Label a point F inside the curve. Why is this an inefficient point? Label a point G outside the curve. Why is this point unattainable? Why are points A through E all efficient points? What point would the nation have to produce to reach allocative efficiency?
  3. Does this production possibilities curve reflect the law of increasing opportunity costs? Explain.
  4. What assumptions could be changed to shift the production possibilities curve?
  1. (Bonus) England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour.
  2. Which country has the absolute advantage in the production of each good? Which country has the comparative advantage?
  3. If England and Scotland decide to trade, which commodity will Scotland export to England? Explain.
  4. Explain at what price of scones (in terms of sweaters) the two countries might trade.