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dr Adrian Solek, Department of Microeconomics, Cracow University of Economics

1. Identify each of the following as either a positive or norma- b) Let’s suppose you decided to choose the concert. What is
tive statement: the satisfaction you think the concert will give you (in terms
a) The general price level rose by 4 percent last year. of money)?
b) The government should put more emphasis on reducing in- c) Now let’s assume the ticket for the concert is not for free and
flation. its price is 30 dollars. What is the full opportunity cost of
c) People should be encouraged to save. attending the concert?
d) Raising interest rates encourages people to save. d) The entrance fee for the concert is still 30 dollars. If you
e) When the income tax rate is high, people tend to work would be willing to pay not more than 80 dollars for the
harder. concert, what is your net satisfaction from the concert?
f) Governments ought to arrange taxes so that people cannot Would you rather choose the concert or the match? You may
avoid paying them. use the table below to find your answers.
g) It’s desirable to raise wages to provide a just reward for hard
work. jazz concert basketball match
h) Raising wage rates causes people to work harder. willingness to pay
expenses
2. Below is a list of resources. Indicate whether each resource net satisfaction
is land, capital, labour, or entrepreneurship.
a) fishing grounds in the North Atlantic,
6. A student has 4 hours of leisure time (apart from sleep, rest
b) a cash register in a retail store,
and lessons) and can devote it to work at the rate of £8 per hour
c) uranium deposits in Canada,
or study. Four hours of study guarantee obtaining 100% marks
d) a theatre performance,
at the exam, three hours – 90%, two – 75%, one hour – 45%, a
e) the work performed by Steve Jobs,
decision not to learn at all implies 0% at the exam.
f) the oxygen breathed by human beings,
a) What is the "production factor"? What is the "product"?
g) a Sony factory in Japan,
b) Complete the table.
h) the work done by a car mechanic.
time of work 0h 1h 2h 3h 4h
3. George has €5000. time of study
a) He is considering how to invest his money to earn highest
earnings
possible revenue (he does not care about risk involved in
some assets). There are following options available: marks
i. buying shares with interest rate 4%,
c) What is the opportunity cost of spending the first hour on
ii. lending money to his neighbor who promises to return
work? And the second hour? The third one? The last one?
€5100 after a year,
d) What is the opportunity cost of spending the first hour on
iii. opening a deposit in a bank with 5% interest rate,
studying? And every other hour?
iv. buying security bonds with 3% interest.
e) Why do you think every additional hour devoted to studying
All the above interest rates are for one year. If George
gives a smaller increase of marks than preceding hours?
doesn’t want to split his money and does not care about the
f) Graph the student’s production possibilities frontier. What is
risk involved in some forms of investment, what is the best
its shape and why?
option for him? What is the opportunity cost of his choice?
g) Analyse the situation in which the student earns £16 and
b) What should his decision be if the interest on deposits in the
gets 60% points at the exam? What could be a possible rea-
bank fell to 2.5%? What would be the opportunity cost?
son?
h) Discuss the combination of £24 and 75% points. What can
4. There is a petrol station in the town where you can buy fuel at
be done to achieve it?
a price lower by 0.50 € than elsewhere, but you have to wait in
line for about 20 minutes to get it. Drivers usually buy 30 litres 40
of petrol at this station. What is the opportunity cost of their time
35
in euros per hour?
30
5. You won a ticket for a jazz concert (you did not pay for it). On
25
earnings

the same day there is a basketball match. You think that

watching the match would give you as much satisfaction as the 20
satisfaction from getting 100 dollars. The ticket for the match
costs 60 dollars. You cannot attend both events. 15
a) If you decide to go to the jazz concert, what will be the 10
opportunity cost of such a choice? Use the table below:
5
jazz concert basketball match
0
willingness to pay 0 10 20 30 40 50 60 70 80 90 100
expenses
marks
net satisfaction
7. The inhabitants of a small island in the Pacific Ocean grow
potatoes and produce honey. The production possibilities fron-
tier of this economy is: QP = –0.005QH2 – 0.5QH + 1500, where
QP is the output of potatoes and QH is the output of honey.
a) In the table below show how many potatoes can be collected
at the maximum for different levels of the output of honey.
output of honey (l) output of potatoes (kg)
0 f) all production factors have been employed in the economy,
100
200
300
400
500
b) Draw the production possibilities frontier.
c) Can the society produce 200 litres of honey and 500 kgs of
potatoes? Mark the appropriate point on the graph.
d) Can the society produce 400 litres of honey and 600 kgs of
potatoes? Mark the appropriate point on the graph.
e) What is the opportunity cost of increasing the output of
honey from 100 to 200 litres? Anf from 300 to 400 litres?
f) For every additional 100 litres of honey is the opportunity
cost rising, falling or constant? Why?
g) A new technology of growing potatoes has been implemen-
ted. It allows to increase the output by 500 kgs for every
amount of honey, as compared to the previous quantities.
Write a new equation of the production possibilitties frontier.
h) Complete the table and make a graph.
output of honey (l) output of potatoes (kg)
0 – payment for consumer goods
100
200
300
400
500
584.43 0
8. Link the following events in the economy to graphs:
a) unemployment appears in the economy,
b) wear and tear of many capital goods without producing new
ones to replace them,
c) implementing a better technology of production,
d) facing a war, factories produce more military goods instead
of civil ones; all resources are fully employed,
e) new deposits of oil are discovered in the country,
g) unemployment rate falls from 15% to 10%,
h) due to a lower demand many factories stop working,
i) a disastrous earthquake ruins the country.
good B
good B
good B
good A good A good A
1 2 3
good B
good B
good B
good A good A good A
4 5 6
9. Below is shown the circular flow model in a free market
economy.
Market of consumer
5 6
goods and services
4 3
Households Firms
1 2
Market of factors
8 7
of production
a) Match the following events to numbers in the graph.
– receiving income for services of land, labour and capital
– purchase of final goods and services
– using land, labour and capital for production
– receiving revenues from selling consumer goods
– renting away land, labour and capital for production
– offering consumer goods for sale
– payment for services of factors of production
b) Complete the following sentences with demand or supply:
In the market of consumer goods and services households rep-
resent the …………… side and enterprises – the ………………
side. In the market of factors of production households are on
the …………… side and enterprises on the ………………. side.
© Adrian Solek