Microeconomic

MGMT SCHOOL

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 Topic #2
Thinking Like an Economist

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1. Should an economic model describe reality exactly?

Answer: Economics models such as diagrams and equations can omit many realistic details, which often
allows for useful study and understanding of these models. Including assumptions in our initial learning
process gives us a firm framework to build upon, just as you wouldn't teach an advanced mathematical
concept without first learning basic algebra. The same applies with economics in analyzing basic models
with given assumptions to eventually learn and understand complex macro- and microeconomic concepts.

2. Name one economic interaction that isn't covered by the simplified circular-flow diagram.

Answer: This simple diagram does not cover the roles of government and international trade. This is due in
part to being a diagram aimed at basic understanding of how the economy is organized and how the pieces
fit together.

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3. Draw and explain a production possibilities frontier for an economy that produces milk and
cookies. What happens to this frontier if disease kills half of the economy's cows?

Answer: Figure shows a production possibilities frontier

between milk and cookies (PPF1). If a disease kills half of
the economy's cow population, less milk production is
possible, so the PPF shifts inward (PPF2). Note that if the
economy produces all cookies, so it doesn't need any cows,
then production is unaffected. But if the economy produces
any milk at all, then there will be less production possible
after the disease hits.

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4. What are the two subfields into which economics is divided? Explain what each subfield studies.

Answer: Economics is divided into microeconomics and macroeconomics. Microeconomics is the study of how
households and firms make decisions and how they interact in markets, while macroeconomics is the study of
economy wide phenomena, including inflation, unemployment, and economic growth. In the end, individuals make all
decisions, so microeconomics is the basis of all economics.
5. What is the difference between a positive and a normative statement? Give an example of each.

Answer: Positive statements are claims that attempt to describe the world as it is, while normative statements are
claims that attempt to prescribe how the world should be. Positive Statement: Most dairy farmers don't make very
much money because people don't want to pay more than $4 per gallon of milk. Normative Statement: A gallon of
milk should cost $6 to give dairy farmers a higher living standard.

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1. Which arrow represents the flow of goods and services?
ANSWER: B

2. Which arrow represents the flow of spending by households?

ANSWER: A
3. Which arrow represents the flow of land, labor, and capital?
ANSWER: C
4. Which arrow represents the flow of income payments?
ANSWER: D

5. Raymond buys a refrigerator for his new home. To which of the arrows does this transaction directly contribute?
ANSWER: A and B

6. Harvey receives his first paycheck for working as an ice cream vendor. To which of the arrows does this transaction directly
contribute?

ANSWER: C and D

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1. What are the coordinates of point C?
ANSWER: (60,3)
2. What is the x-coordinate of point R?
ANSWER: 20
3. How are price and quantity related in this graph?
ANSWER: negatively correlated
4. What is the slope of the line with points A, B, and C?
ANSWER: -0.1
5. Is a move from point A to point B considered a shift of the curve or a
movement along the curve?
ANSWER: movement along the curve
6. Is a move from point A to point R considered a shift of the curve or a
movement along the curve?
ANSWER: shift of the curve
7. Given that price is measured on the vertical axis, quantity is measured on the
horizontal axis, and that the curves are downward-sloping, what type of curves are
depicted here?
ANSWER: demand curves

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Use the following graph to answer the following questions.
A. How would point J be represented as an ordered pair?
Answer: (20,24)
B. What type of curve is this?
Answer: demand curve
C. Does this curve show a positive or negative correlation between price and
quantity?
Answer: Negative correlation
D. Compute the slope of D1 between points J and L.
Answer: -2/5
E. What is the slope of D1 between points L and N? Why would you not have to
calculate this answer?
Answer: -2/5; slope of a straight line is constant
F. What is it called if we move from D1 to D2?
Answer: An increase in demand
G. How do you know that the slope of D2 is the same as the slope of D1?
Answer: because they are parallel

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 Consider the production possibilities curve for a country that can produce sweaters, apples (in bushels), or a
combination of the two.

1. The bowed outward shape of the production possibilities curve

indicates that opportunity cost of apples in terms of sweaters is
ANSWER: increasing.
2. Which point(s) on the graph is(are) efficient production possibilities?
ANSWER: Q, R, U, and V
3. Which point(s) on the graph show unemployment of resources?
ANSWER: T and W
4. Which point(s) on the graph is(are) unattainable given current
resources and technology?
ANSWER: S and X
5. What is the opportunity cost of moving from point T to point R?
ANSWER: zero
6What is the opportunity cost of moving from point R to point Q?
ANSWER: 80 bushels of apples

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1. Consider the production possibilities frontier for an economy that
produces only sofas and cars. As the economy moves from point A to
point D, is the opportunity cost of cars increasing, constant, or
decreasing?
ANSWER: constant
2. Consider the production possibilities frontier for an economy that
produces only sofas and cars. The opportunity cost of one car is
ANSWER: 3/2 sofas.

3. Consider the production possibilities frontier for an economy that

produces only sofas and cars. The opportunity cost of one sofa is
ANSWER: 2/3 of a car.

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 Mobile Phones Pizzas
0 10,000
200 8,000
500 6,000
900 4,000
1400 2,000
2000 0

1. Consider the production possibilities table for an economy that produces only mobile phones and pizzas. What is the
opportunity cost of increasing production of mobile phones from 200 to 500?
ANSWER: 2,000 pizzas.

2. Consider the production possibilities table for an economy that produces only mobile phones and pizzas. What is the
opportunity cost of increasing production of pizzas from 4,000 to 6,000?
ANSWER: 400 mobile phones.

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A team consisting of three people is working on a big project, which involves manual entry of data in a computer, with
subsequent processing of these data and making a poster presentation. Naturally, each member of the team has different
abilities in performing either task.
• Adam can make 1 poster or 400 data entries in a day.
• Hard-working Becci can make 2 posters or 1200 data entries in a day.
• Artistic Cliff can make 3 posters or 900 entries in a day.

a. Originally, the entire team (each of them having their own personal computer) starts with entering data. How many entries
will be made in a day?
Answer: 400 + 1200 + 900 = 2500
b. As the time comes to start making posters, you decide to assign one member of the team to this task. Whom would you
choose? Explain why.
Answer: Since along with making posters you will still need to enter data, you may want to look for the scenario in which each
poster produced costs you the least in terms of data entries forgone. If you ask Adam to make posters, the opportunity cost of
each poster is 400 entries. In the case of Becci, each poster costs 1200:2 = 600 entries. If Cliff switches to making posters,
then each poster costs your team 900:3 = 300 entries. The last option is the most attractive, so Cliff should be the first who is
assigned to do the posters.

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• Adam can make 1 poster or 400 data entries in a day.
• Hard-working Becci can make 2 posters or 1200 data entries in a day.
• Artistic Cliff can make 3 posters or 900 entries in a day.

c. Draw a sketch of your team's production possibility frontier, placing the number of numerical entries on the vertical axis and
the number of posters on the horizontal axis.
Answer:

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