Wollo University

College of Business and Economics

Department of Economics

ASSIGNMENTOnIntroduction to Economics for accounting extension Students

1. What is the basic difference between cardinal and ordinal approaches of utility?
2. Explain why the point of tangency of the budget line with an indifference curve is the
consumer's equilibrium position.
3. Explain briefly the following concepts.
A) Utility B) Indifference curve
C) Law of diminishing marginal utilityD) Budget line
E) Consumer preferenceF) Marginal rate of substitution
4. Discuss the three major differences between CPI and GDP deflator.
5. What is the difference between GDP and GNP? Which one is a better measure of
theeconomic performance of a country?
6. A person has $ 100 to spend on two goods X and Y whose respective prices are $3 and $5.
A. Draw the budget line
B. What happens to the original budget line if the budget falls by 25%?

7. Given utility function U= where PX = 12 Birr, Birr, PY = 4 Birrand the income

ofthe consumer is, M= 240 Birr.
A.Find the utility maximizing combinations of X and Y.
B.Calculate marginal rate of substitution of X for Y (MRSX,Y) at equilibrium and
interpret your result.

8. Consider the following information for a particular economy.

Total population = 60 million Number of employed = 30 million

Total labor force = 40 million Natural rate of unemployment = 12%
a) Find the total unemployment rate
Unemployment rate = Number of Unemployed Persons / Labor Force
Unemployment rate = (40-30)/40 = 25%

b) Calculate the cyclical unemployment rate

Cyclical unemployment rate = Total unemployment rate - Natural rate of
unemployment
Cyclical unemployment rate = 25-12= 13%
9. Consider an economy that produces and consumes Bread and Automobile. Data for two
different years 2005 and 2010 is given in the following table.
Year 2005 2010
Price of Automobiles $ 5000 $ 6000
Price of a loaf of bread $10 $20
Number of automobiles produced 100 120

Number of loaves of bread produced 500,000 400,000

Using the year 2005 as a base year,

a) Calculate the nominal and real GDP of 2010.
Yn = 6,000×120 + 20×400,000 = 8,720,000.
The real GDP of 2010 is:
Yn = 5,000×120 + 10×400,000 = 4,600,000

b) Find the value of GDP Deflator for the year 2010 and interpret.
Deflator = 8,720,000/4,600,000×100 = 189.56.
So, the real GDP is almost twice lower than the nominal GDP

c) Calculate the inflation rate in 2010.

The inflation rate in 2010 comparing to 2005 was 189.56 - 100 = 89.56%.

10. Based on the information given below table 1.1 with regard to a hypothetical economy data,
you have to calculate the following questions:-
A. Calculate GDP with expenditure method
B. Calculate GNP
C. Calculate NFI
D. Calculate NNP
E. Calculate national income (NI)
F. Calculate net investment(NI)
Table 1.1A hypothetical income account data of a given country’s economy in million birr

Items Total amount (millions of birr)

Proprietors income 3425
Net interest 5643
Wage of employees 90654
Non-durable goods 63423
Corporate profit 76543
Services 34532
Residential fixed investment 11234
Durable goods 43213
Export 1564
Inventory investment 1230
Defense expense 4907
Compensation of employees 67553
State and local 23479
Non-defense 3451
Rental income 45327
Indirect business tax 3278
Payment to abroad 4321
Depreciation 1632
Import 2621
Non-residential fixed 13421
investment
Income from abroad 3214