Introduction to Economics EC100

Lekima Nalaukai Semester I, 2023

Tutorial 1 Questions
A. Multiple Choice

1. A rational decision maker takes an action if and only if

A. the average benefit of the action exceeds the average cost.
B. the average cost of the action exceeds the average benefit.
C. the marginal benefit of the action exceeds the marginal cost.
D. the marginal cost of the action exceeds the marginal benefit.

2. People are willing to pay more for a diamond than for a bottle of water because
A. the marginal cost of producing an extra diamond far exceeds the marginal cost of
producing an extra bottle of water.
B. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra
bottle of water.
C. producers of diamonds have a much greater ability to manipulate diamond prices than
producers of water have to manipulate water prices.
D. water prices are held artificially low by governments, since water is necessary for life.

3. Rational people make decisions “at the margin” by

comparing
A. average costs and benefits.
B. total costs and benefits.
C. additional costs and benefits.
D. opportunity costs and benefits.

4. In the circular-flow diagram,

A. firms own the factors of production.
B. the factors of production are labor, land, and capital.
C. the factors of production are also called “output.”
D. All of the above are correct.

5. In economics, capital refers to

A. the finances necessary for firms to produce their products.
B. buildings and machines used in the production process.
C. the money households use to purchase firms' output.
D. stocks and bonds.

6. Which of the following trade-offs does the production possibilities frontier illustrate?
Introduction to Economics EC100
Lekima Nalaukai Semester I, 2023
Tutorial 1 Questions
A. If an economy wants to increase efficiency in production, then it must sacrifice equality
in consumption.
B. Once an economy has reached the efficient points on its production possibilities
frontier, the only way of getting more of one good is to get less of the other.
C. For an economy to consume more of one good, it must stop consuming the other good
entirely.
D. For an economy to produce and consume goods, it must sacrifice environmental
quality.
 Introduction to Economics EC100
Lekima Nalaukai Semester I, 2023
Tutorial 1 Questions
B. Short Answers

1. Define Opportunity Cost.

2. What does the bowed shape of the Production Possibilities Frontier explained?

3. Give an example of government intervention that is intended to reduce an externality.

 Introduction to Economics EC100
Lekima Nalaukai Semester I, 2023
Tutorial 1 Questions
C. Calculations

1. Refer to a Pacific Island Country’s production possibility given below in the table and answer
the following questions.

Point Canned Tuna (000 per month) Honey (cartons per

month)
A 320 0
B 220 50
C 120 100
D 0 150

A. Based on the statistics above, draw the country’s Production Possibility Frontier (PPF).
Label your graph and illustrate a tradeoff.

B. If the country produces 220,000 of canned tuna per month, how many cartons of honey
must it process to achieve production efficiency?

C. Calculate the opportunity cost of moving from point B to point C

2.Using the outline below, draw a circular-flow diagram representing the interactions
between households and firms in a simple economy. Explain briefly the various parts of
the diagram.
Introduction to Economics EC100
Lekima Nalaukai Semester I, 2023
Tutorial 1 Questions
3. It costs a company $30,000 to produce 600 heart rate monitors. The company’s cost will
be $30,070 if it produces an additional heart rate monitor. The company is currently
producing 600 heart rate monitors.
A. What is the company’s average cost?

B. What is the company’s marginal cost?

C. A customer is willing to pay $60 for the 601st heart rate monitor. Should the company
produce and sell it? Explain.