Transcript
1st Tutorial
Introduction to Economics
Solutions
True or False
1. The opportunity cost is the benefit forgone from the next best alternative. True/False
2. The production possibility frontier illustrates the problem of infinite wants. True/False
3. The economic examination of a firm, or industry would be a microeconomic topic. True/False
4. A market economy only exists in rural towns and villages. True/False
5. Government provision of goods and services, such as education, would be characterised as planned. True/False
Answer:
1. The opportunity cost, is the benefit forgone from the next best alternative. The cost resulting from making a choice between two options is the benefits given up from the next best alternative. See section 1.1 of Begg and Ward. True/False
2. The production possibility frontier illustrates the problem of infinite wants. The frontier represents the maximum achievable outputs that can be produced with the economy’s finite resources. So the frontier, amongst other things, illustrates finite resources not infinite wants. See Figure 1.1 in Begg and Ward. True/False
3. The economic examination of a firm, or industry would be a microeconomic topic. True, the examination, or study of individuals, or firms is a microeconomic topic. The study of entire economies is a macroeconomic topic. Micro for small, macro for big. See section 1.1 of Begg and Ward. True/False
4. A market economy only exists in rural towns and villages. A market economy is one in which markets allocate scarce resources to the production of different goods and services. The government plays no role in allocating resources. While markets in the open might be common-place in rural towns and villages, markets exist wherever a product is traded: in a supermarket, on the internet, or at a market stall. See section 1.1 of Begg and Ward. True/False
5. Government provision of goods and services, such as education, would be characterised as planned. Whenever a government allocates resources to the production of goods and services, as in the case of education, then the provision can be categorised as planned. See section 1.1 of Begg and Ward. True/False
Question 1
a) An individual has a job in which she earns £25,000 per year. This individual is contemplating leaving work and beginning a degree course at university. What would be the opportunity cost of going to university?
The opportunity cost is the benefits foregone from the next best alternative. If the individual decided to enrol on a degree course, then they would be giving up work. Assuming work is the next best alternative, then the opportunity cost is the benefits forgone, which equal £25,000 per year.
b) You decide to start a degree course in economics at University after you have been offered a job, which will earn you a monthly salary of £2000. What is the opportunity cost of going to university at an annual basis?
The opportunity cost is the benefits foregone from the next best alternative. If you decided to enrol on a degree course, then you would be giving up work. Assuming work is the next best alternative, then the opportunity cost is the benefits forgone, which equal £2,000x12=24,000 per year.
c) You have £10,000 in the bank earning 2.5% interest. You could use this money to buy a Treasury Bond, earning a return of 5%. Or you could use them to buy risky assets and generate a return of 20% with a probability of 0.5. What is the opportunity cost of using the 10,000 to buy these risky assets?
This example is slightly trickier, the opportunity costs are still the benefits forgone from the next best alternative, but which is the next best alternative? Investing in Treasury bonds generates a higher return, i.e. 5%, rather than the 2.5% in the bank. However, investing riskier assets may generate a higher return, i.e. 20%, with a probability of 0.5%, which still makes this investment more profitable. So, the opportunity cost is 50% buying the risky assets and 50% buying treasury Bond.
Question 2
Which of the following statements are the concern of microeconomics and which are the concerns of macroeconomics?
1. A fall in the price of DVD’s Micro / Macro
2. A rise in the interest rate by the central bank Micro / Macro
3. The takeover of a company by a competitor Micro / Macro
4. The introduction of cheaper production technology Micro / Macro
5. An increase in the level of inflation Micro / Macro
6. The level of profits made in the airline industry Micro / Macro
7. Adoption of the Euro Micro / Macro
8. The use of performance bonuses to reward company directors Micro / Macro
9. The impact of new production methods on costs Micro / Macro
10. The setting of taxation rates by the government Micro / Macro
Any issue that relates to the entire economy, such as interest rates, is a macroeconomic topic. Any issue that relates to an individual, worker, consumer, or a firm, or industry is a microeconomic topic. However, since the macro economy is simply a collection of all the microeconomic issues, then sometimes it is difficult to separate the two. For example, a rise in the wage rate for workers might be a microeconomic topic, but if it leads to unemployment or inflation, then it becomes a macroeconomic concern.
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