1.  Three managers of the Magic Potion Company are discussing a possible increase in production. Each suggests a way to make this decision:

  1. Harry: We should examine whether our company’s productivity – gallons of potion per worker – will rise or fall.
  2. Ron: We should examine whether our average cost – cost per worker – would rise or fall.
  3. Hermione: We should examine whether the extra revenue from selling the additional potion would be greater or smaller than the extra costs.

2.  Your roommate is a better cook than you are, but you can clean more quickly than your roommate can. If your roommate did all of the cooking and you did all of the cleaning, would your chores take you more or less time than if you dividend each task evenly? Give a similar example of how specialization and trade can make two countries both better off.

3.  You win $100 in a basketball pool (a lottery). You have a choice between spending the money now or putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the $100 now?

4.  A recent U.S. bill reforming the government’s antipoverty programs limited many welfare recipients to only two years of benefits. How does this change affect the incentives for working? How might this change represent a trade-off between equity and efficiency?

5.  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:

  1. Households provide firms with labour at the cost of 15$ an hour
  2. Firms sell households pizza at the price of 6$ each.
  3. Firms rent land at the cost of 500$ a month.
  4. Households buy earrings at the price of 15$ each.

6.  Imagine a society that produces military goods and consumer goods, which will call “guns” and “butter”.

  1. Draw a production possibilities frontier for guns and butter. Explain why it most likely has a bowed-out shape.
  2. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient.
  3. Imagine that the society has two political parties, called the Hawks and the Doves. The Hawks want a strong military, and therefore they want to produce a lot of guns and not much butter. The Doves want a small military, and therefore want to produce less guns and more butter than Hawks. Show a point on your production possibilities frontier that the Hawks might choose and a point that the Doves might choose.