Practice Questions #1

Goal:

• Provide a review of introductory material.
• Provide a review of some basic math skills needed in the course.
• Provide questions about positive and normative, absolute and comparative advantage, graphing and the interpretation of numerical data, solving two equations in two unknowns, and assorted other topics.

1.  Identify whether or not the following statements are normative (N) or positive (P).       

a.  The proposed tax cuts by the Republicans if approved by Congress and the President will result in an increase in spending by consumers since the tax cuts will increase the disposable income available to consumers.

b.  The proposed tax cuts should stimulate the economy resulting in higher levels of employment, but no increase in the level of inflation according to some economists who have studied the proposed tax cuts.

c.  The welfare revision of the past years has reduced welfare cases.

d.  The primary goal of the President with regard to the aggregate economy should be the pursuit of high levels of employment.

2.Graph the following sets of equations. Each set of equations should be on its own graph and each graph should have the x and y axis labeled, the solution for the two equations identified (i.e., what value of x and y will satisfy both equations) as Xe and Ye.

a. Y = 2X + 10

Y = -5X + 2

b. Y = 2X + 5

Y = -2X + 9

c. X = 3Y + 15

X = -2Y + 5

d. X = 2Y + 12

X = -3Y + 14

3. Solve the sets of equations given in problem 2 algebraically. Make sure you show all your work (i.e., do not plug the equations into a calculator to solve).

4. You are given the following information sets and are asked to find the slope, the y-intercept, and the equation for each set of information.

      a. Two sets of (X, Y) points that satisfy this equation are (2,4) and(6,8)

           Slope =

           y-intercept =

           equation:

b.  Two sets of (X, Y) points that satisfy this equation are (5, 10) and (-10, 0)

            Slope =

            Y-Intercept =

            Equation:

c. Two sets of (X, Y) points that satisfy this equation are (-4, -10) and (4, -5)

      Slope =

      Y-Intercept =

      Equation:

d.  Two sets of (X, Y) points that satisfy this equation are (0, 10) and (0, 20)

      Slope =

      Y-Intercept =

      Equation:

5.

The figure gives a bowed out from the origin PPF with good Y on the y axis and good X on the x axis. Points A, B, and C are on the PPF; points D,E and F are interior to the PPF; and points G, H, and I are beyond the PPF boundary.

a. Which points are feasible and obtainable for the economy represented in the above graph?

b. Which points are infeasible and unobtainable for the economy represented in the above graph?

c. Which points are efficient points for the economy represented in the above graph?

d. Production possibility frontiers are drawn with a bowed out from the origin shape and this shape leads us to talk about the Law Of Increasing Opportunity cost. Explain what this means in your own words.

6. Use the following table to answer this question.

Macroland

    Production of consumer goods in 2000  Production of capital goods in 2000

            1000 units                          0 units

             800 units                          100 units

            600 units                           200 units

            200 units                           400 units

Assume that this table gives the general relationship between the production of capital and consumer goods in Macroland for the year 2000. There are other feasible points on the PPF of Macroland and the table only gives several points that are possible.

a. What is the maximum amount of capital good production possible in the year 2000 in Macroland?

b. What is the slope of the PPF represented in the above table?

c. Does this PPF represent increasing, decreasing, or constant opportunity cost?

d. If growth is your primary objective, explain where you think this economy should produce and what tradeoffs this choice might represent for this economy.

 7.  This question is one about absolute and comparative advantage. We will simplify the problem by assuming that both individuals face linear production possibility frontiers and thus have constant opportunity cost with regard to the production of the goods that we will be discussing (note that constant does not mean equivalent opportunity cost).

 Suppose that there are two individuals in Macroland and each of them can produce either food or entertainment. Assume that the opportunity cost is constant along the PPF.

                Bob                                         Sue

         Food    Entertainment                        Food     Entertainment

            20       60                                 30        60

            50       45                                 50        40

a. What is Bob's opportunity cost for one more unit of entertainment?

b. What is Bob's opportunity cost for one more unit of food?

c. What is Sue's opportunity cost for one more unit of entertainment?

d. What is Sue's opportunity cost for one more unit of food?

e. In order to achieve the highest level of production, Sue should   specialize in producing _________________ while Bob specializes in producing _____________________.

f. Bob has an absolute advantage in producing _______________ and a comparative advantage in producing ________________.

g. Sue has an absolute advantage in producing _______________ and a comparative advantage in producing __________________.

8.  Judy can produce 2 fish in 3 hours of 5 loaves of bread in 2 hours. Mike can produce 3 fish in 4 hours and 3 loaves of bread in 3 hours. Currently, Judy is producing 8 fish and 30 loaves of bread while Mike is producing 9 fish and 12  loaves of bread. Judy and Mike are not trading initially. Assume that Judy and Mike both have 24 hours a day that they can work (i.e., they don't need to sleep).

a. What is the opportunity cost of producing one more fish for Judy?

b. What is the opportunity cost of producing one more loaf of bread for Judy?

c. What is the opportunity cost of producing one more fish for Mike?

d. What is the opportunity cost of producing one more loaf of bread for Mike?

e. In a single day of 24 hours, who has the absolute advantage in producing fish?

f. In a single day of 24 hours, who has the comparative advantage in producing fish?

g. Mike should specialize in producing ____________ while Judy specializes in producing ______________.

h. If Mike and Judy both specialize, the maximum amount of fish that can be produced is and the maximum amount of bread that can be produced is _______________________.