Economics Problems and Exercises.

Chapter 2
Questions for Review
2- Opportunity cost: Determine whether each of the following statements is true or false, or uncertain. Explain your answers.
• The opportunity cost of an activity is the total value of all the alternatives passed up.
• Opportunity cost is an objective measure of cost
• When making choices, people carefully gather all available information about the costs and benefits of alternative choices.
• A decision maker seldom knows the actual value of forgone alternatives and therefore must make decisions based on expected values.
7- Shifting production possibilities: In response to an influx of undocumented workers, Congress made it a federal offence to hire them. How do you think this measure affected the US production possibilities frontier? Do you think all industries were affected equally?
Problems and Exercises:
13- Opportunity Cost: You can spend spring break either working at home for $100 per day for five days or go to Florida for the week. If you stay home, your personal expenses will total about $120. If you go to Florida, the airfare, hotel, food, and miscellaneous expenses will total about $1,000. What’s your opportunity cost of going to Florida?
14- Absolute and Comparative Advantage You have the following information concerning the production of wheat and cloth in the United States and the United Kingdom:
Labor Hours Required to Produce One Unit:
United Kingdom United States
Wheat 2 1
Cloth 6 5
• What is the opportunity cost of producing a unit of wheat in the United Kingdom? In the United States?
• Which country has an absolute advantage in producing wheat? In producing Cloth?
• Which country has a comparative advantage in producing Wheat? In producing Cloth?
• Which country should specialize in producing Wheat? In producing Cloth?
16- Shape of the PPF Suppose a production possibilities frontier includes the following combinations:
Cars Washing Machines
0 1,000
100 600
200 0
• Graph the PPF, assuming that it has no curved segments
• What is the cost of producing an additional car when 50 cars are being produced?
• What is the cost of producing an additional car when 150 cars are being produced?
• What is the cost of producing an additional washing machine when 50 cars are being produced? When 150 cars are being produced?
• What do your answers tell you about opportunity costs?
20- Economic Systems: The United States is best described as having a mixed economy. What are some elements of command in the US economy?
Chapter 3
Questions for Review:
• Households as Demanders of Goods and Services Classify each of the following as a durable good, a nondurable good, or services:
• A gallon of Milk (Non-durable Good)
• A lawn mower (Durable Good)
• A smartphone (Durable Good)
• A manicure (Service)
• A pair of shoes (Durable Good)
• An eye exam (Service)
• A personal Computer (Durable Good)
• A neighborhood teenager mowing your lawn (Service)
Problems and Exercises:
14- Evolution of the Household Determine whether each of the following would increase or decrease the opportunity costs for mothers who decide not to work outside the home. Explain your answers:
• Higher levels of education for women
• Higher unemployment rates for women
• Higher average pay levels for women
• Lower demand for labor in industries that traditionally employ women
15- Household Production: Many households supplement their food budget by cultivating small vegetable gardens. Explain how each of the following might influence this kind of household production:
• Both husband and wife are professionals who earn high salaries
• The household is located in a city rather than in a rural area
• The household is located in a region with a high sales tax on food
• The household is located in a region with high property taxes.
16- Government: Complete each of the following sentences:
• Goods that are nonrival and nonexclusive are known as ________________________.
• _______________________ are cash or in-kind benefits given to individuals as outright grants from the government.
• A (n) _________________ confers an external benefit on third parties that are not directly involved in a market transaction.
• _________________ refers to the government’s pursuit of full employment and price stability through variations in taxes and government spending.
17- Tax Rates: Suppose taxes are related to income level as follows:
Income Taxes
$1000 $200
$2000 $350
$3000 $450
• What percentage of income is paid in taxes at each level?
• Is the tax rate progressive, proportional or regressive?
• What is the marginal tax rate on the first $1000 of income?
The second $1000? The third $1000?

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