Introduction to Economics

Exercise 1
1. Freakonomics claims that drug dealers mostly have to live with their mothers because
although they know that very few dealers get to be a drug lord, they will be the one that does.
How does this relate to Adam Smith's statement about the:
“over-weening conceit which the greater part of men have of their own abilities,”… “the
chance of gain is by every man more or less over-valued, and the chance of loss is by most
men under-valued.”

Look at the slides about Adam Smith and work it out.

2. Suppose that one day's labour in Britain and France has labour productivities (outputs
per person per day) in making ale and wine as given in Table 1 below. Which of the
following statements is correct and which incorrect? [2 marks for each answer and 3
for an explanatory sentence; 15 marks total]

(i) Britain has a comparative in ale production.

(ii) France has an absolute advantage in wine production.
(iii) Britain has an absolute advantage in ale production.

Ale Wine
Britain 4 2
France 5 4

3. Which of the following decisions has the greatest opportunity cost? Explain your answer:
• A decision to use an undeveloped lot in London's financial district for an apartment
building.
• A decision to use a square mile in the Kalahari Desert for a petrol station.

4. What is the opportunity cost of buying a cappuccino with a free coffee voucher?

5. What ideas did Keynes and Hayek have in common?

6. What were their main points of difference?

7. Classify the following as either positive or normative statements.

(i) There has been a steady rise in wage inequality in the UK since 1978.
(ii) The government was right to ban smoking in public areas.
(iii) The prevailing minimum wage is an unfair hourly rate for any job.

See hidden slides: Positive statements are based on what is or seems to be the case.
Normative statements are about what should be so.