Solutions for Topic 1: Introduction to Economics

Question 1.1

All of the following are examples of normative statements EXCEPT:

        A)           Reducing cost should not be done at the expense of inferior quality.

        B)            The government must act decisively to reduce pollution.

        C)            The company should employ less workers and use more machines in the production.

        D)           In this year, the company’s profit increases by 5%.

        E)            The market price of car is too high in Singapore.

Solution to 1.1

The correct answer is (d).

(d) is a positive statement because we can test the statement to ascertain whether the company profit had increased by 5%.  The other statements involved value judgement.

Question 1.2

Amy is thinking about going to the movies tonight to see Jurassic Park 2.  A ticket costs $7 and she will have to cancel her tuition job that pays $30.  The opportunity cost of seeing the movie is

        A)           $7.

        B)            $30.

        C)            $37.

        D)           $37 minus the benefit of seeing the movie.

        E)            indeterminate.

Solution 1.2

 The correct answer is (c).

The ticket costs $7 and the money can be used for other purposes.  The time spend costs her $30.  So total opportunity cost is $37.

Question 1.3

Jay has estimated that the additional benefit of writing 50 more lines of computer programming code is $20 and the additional cost is $10. He should:

      A)     not write the code because it would not be a rational choice.

      B)      write the code because it would be a rational choice and an optimal quantity.

      C)      write the code because it would be a rational choice but it is not an optimal quantity.

      D)     not write the code because it would not be a rational choice but it would be an optimal quantity.

      E)      not write the code because it would not be a rational choice, nor would it be an optimal quantity

Solution 1.3

The answer is (c).

He should write the code because the marginal benefit exceeds the marginal cost.  But it is not optimal because marginal benefit is not equal to marginal cost with the additional code written.

Question 1.4

What happen to the PPF model that produces 2 goods X and Y if:

(1) All resources are perfect substitutes in producing the two products?

(2) There are unemployed resources in the economy?

(3) Previously unused resources are now being utilized?

Solution 1.4

(1) When resources are perfect substitutes, the opportunity cost will be the same and hence the PPF will become a straight line.

(2) With unemployed resources in the economy, production will occur at a point within or below the PPF, indicating inefficiency in the production.

(3) The economy will move from a point below the PPF to a point on the PPF

Question 1.5

Use the Production Possibility Model to analyze the following effects on an economy that produces Good X and Y:

(1) An improvement in technology that favours Good X only

(2) A decrease in the population in the Economy

Solution 1.5

(1) The PPF changes in such a way that the maximum output of X increases but that of Y remains unchanged. (Use the diagram on slide 32 of your handout notes)

(2) The PPF shifts inwards, indicating lower maximum output for both X and Y since there are fewer labour resources. (Draw a diagram of the PPF shifting inwards)