ECON 2113: Microeconomics Problem Set 1 Instructor: Fei DING

Problem Set 1 (Ch1-2)

Microeconomics, ECON 2113
------------------------------------------------------------------------------------------------------------------------------------

Part I: Multiple Choice Questions: choose the best answer

Assume perfect competitive market unless otherwise specified in the question.

1) Which of the following statements are CORRECT?

I. The "highest-valued alternative given up to get something" is the opportunity cost. ✓
II. Wealthy economies don't experience opportunity costs.✗
III. Scarcity creates opportunity costs. ✓
A) I only
B) I and II
0
C) I and III
D) I, II, and III

2) Fred and Ann are both given free tickets to see a movie. Both decide to see the same movie. We
know that

:
A) both bear an opportunity cost of seeing the movie because they could have done other things instead
of seeing the movie.
B) both bear the same opportunity cost of seeing the movie because they are doing the same thing.
C) it is not possible to calculate the opportunity cost of seeing the movie because the tickets were free.
D) the opportunity cost of seeing the movie is zero because the tickets were free.

3) Bill Bonecrusher graduates from college with a choice of playing professional football at $2 million
a year or coaching for $50,000 a year. He decides to play football, but eight years later, though he
could continue to play football at $2 million a year, he quits football to make movies for $3 million a
year. His opportunity cost of playing football at graduation was ________ and eight years later the
opportunity cost of making movies was ________.
A) $50,000; $2 million
B) $2 million; $2 million✗
C) $2 million; $3 million ✗
D) $50,000; $50,000

4) Which of the following is a positive statement?

A) An unemployment rate of 9 percent is a national disgrace.
B) Unemployment is a more important problem than inflation.
1
 ECON 2113: Microeconomics Problem Set 1 Instructor: Fei DING

0
C) When the national unemployment rate is 9 percent, the unemployment rate for inner-city youth is
often close to 40 percent.
D) Unemployment and inflation are equally important problems.

5) Mark Zuckerberg believes everyone in the world should have Internet access.
A) This is a positive statement and is not in the social interest if the marginal benefit of Internet access
exceeds the marginal cost.

I.
B) This is a positive statement and is not in the social interest if the marginal cost of Internet access
exceeds the marginal benefit.
C) This is a normative statement and is not in the social interest if the marginal benefit of Internet
access exceeds the marginal cost.

:
D) This is a normative statement and is not in the social interest if the marginal cost of Internet access
exceeds the marginal benefit.

6) "As part of the financial crisis bailout plan in 2008, the Federal Reserve should not bail out banks
that made risky loans." This is an example of
A) a positive statement.
B) the Federal Reserve taking actions that are not at the margin.
C) opportunity costs.
D) a normative statement.

7) Which of the following is NOT true concerning a society's production possibilities frontier (PPF)?
A) It reveals the maximum amount of any two goods that can be produced from a given quantity of
resources.
B) Tradeoffs occur when moving along a PPF.
C) Production efficiency occurs when production is on the frontier itself.

:
D) Consumers will receive equal benefits from the two goods illustrated in the PPF.

8) If a country must decrease current consumption to increase the amount of capital goods it produces
today, then it must
A) be using resources inefficiently today, but will be more efficient in the future.
B) be producing along the production possibilities frontier today and its production possibilities
frontier will shift outward if it produces more capital goods.
C) must be producing outside the production possibilities frontier and will continue to do so in the
future.
D) must not have private ownership of property and will have to follow planning authorities' decisions
today and in the future.

2
ECON 2113: Microeconomics Problem Set 1 Instructor: Fei DING

9) Some time ago the government of China required many highly skilled technicians and scientists to
engage in unskilled agricultural labor in order to develop "proper social attitudes." Assume the
productivity of the high-skilled labor in unskilled agricultural work is very low. This policy probably
caused China to produce
A) outside its production possibilities frontier.
B) outside its production possibilities frontier with respect to food, but inside with respect to
high-technology goods.
C) inside its production possibilities frontier with respect to food, but outside with respect to
high-technology goods.

0
D) inside its production possibilities frontier.

10) In one day, Sue can change the oil on 20 cars or change the tires on 20 cars. In one day, Fred can
change the oil on 20 cars or change the tires on 10 cars. Sue's opportunity cost of changing oil is
________ than Fred's and her opportunity cost for changing tires is ________ than Fred's.

:
A) greater; less
B) less; greater
C) less; less
D) greater; greater

11) A PPF bows outward because

A) not all resources are equally productive in all activities.
B) consumers prefer about equal amounts of the different goods.
C) entrepreneurial talent is more abundant than human capital.
D) resources are used inefficiently.

12) One point on a PPF shows production levels at 50 tons of coffee and 100 tons of bananas.
Remaining on the PPF, an increase of banana production to 140 tons shows coffee production at 30
tons. Still remaining on the PPF, coffee production at 10 tons allows banana production at 160 tons.
The opportunity cost of a ton of bananas is
A) constant because coffee production decreased by the same amount each time.
B) decreasing, since the increase in banana production is less at each point considered.
C) 16 to 1, that is every 1 ton of coffee given up will result in 16 more tons of bananas.

:
D) increasing from 1/2 ton of coffee per ton of bananas to 1 ton of coffee per ton of bananas.

13) Abe can catch 10 pounds of fish an hour or pick 10 pounds of fruit. Zeb can catch 30 pounds of fish
an hour or pick 20 pounds of fruit. The opportunity cost of fish is ________ for Abe than for Zeb, and
the opportunity cost of fruit is ________ for Abe than for Zeb.
A) higher, lower
3
 ECON 2113: Microeconomics Problem Set 1 Instructor: Fei DING

B) lower, higher✗
C) higher, higher
D) lower, lower ✗

14) In an eight-hour day, Andy can produce either 24 loaves of bread or 8 pounds of butter. In an
eight-hour day, Bob can produce either 8 loaves of bread or 8 pounds of butter. Andy has a
comparative advantage in the production of
O
A) bread, while Bob has a comparative advantage in the production of butter.
B) butter, while Bob has a comparative advantage in the production of bread.
C) bread and neither has a comparative advantage in the production of butter.
D) both bread and butter.

15) Missouri can produce 10,000 tons of pecans per year or 5,000 tons of pears per year. Washington
can produce 12,000 tons of pecans per year or 48,000 tons of pears per year. If these two states were to
engage in trade, which of the following is TRUE?
A) Missouri would specialize in pear production and trade pears to Washington pecans.

O B) Missouri would specialize in pecan production and trade pecans to Washington for pears.
C) Washington would produce both pears and pecans and Missouri would produce neither.
D) Half of both Washington's and Missouri's resources would be devoted to pears and the other half to
pecans because that is the comparative advantage.

16) Suppose that a typical German factory can produce 20 cameras or 1 computer in an hour, and that
a typical American factory can produce 10 cameras or one computer in an hour. If Germany produces
one less computer and switches resources to cameras, and the United States produces one more
computer and takes resources out of cameras, then the net change in camera production in both
countries taken together is
A) 0.
B) minus 10 cameras.
O C) plus 10 cameras.
D) plus 20 cameras.

17) Suppose that when NBC produces 1 new drama series in a season it gives up the chance to produce
3 new reality shows. This means that
A) the opportunity cost of a new drama series is 1/3 of a new reality show.✗
O
B) the opportunity cost of a 1 new reality show is 1/3 of a new drama series.
C) NBC has a comparative advantage in producing new drama series.
D) NBC has a comparative advantage in producing new reality shows.

4
 ECON 2113: Microeconomics Problem Set 1 Instructor: Fei DING

18) In one week Alice can produce 5 pairs of shoes or 4 bookshelves while Roger can produce 10 pairs
of shoes or 6 bookshelves. Alice has ________ advantage in producing ________.
A) an absolute; shoes ✗
B) a comparative; shoes
C) an absolute; bookshelves✗

0
D) a comparative; bookshelves

19) Betty and Ann live on a desert island. With a day's labor, Ann can produce 8 fish or 4 coconuts;
Betty can produce 6 fish or 2 coconuts. Ann's opportunity cost of producing 1 coconut is ________ and
she should specialize in the production of ________.
A) 8 fish per coconut; fish ✗
0
B) 2 fish per coconut; coconuts
C) 6 fish per coconut; coconuts ✗
D) 2 fish per coconut; fish

20) The state of Georgia offers free college tuition to high school students with a "B" average. In 2007,
the state raised the requirement so that fewer students qualified for the scholarship. At the same time,
Georgia increased state spending on health care. Suppose that college education is on the vertical axis
and health care is on the horizontal axis of a PPF. Georgia's change in spending would be shown as
A) a movement up along the PPF.
0B) a movement down along the PPF.
C) a shift out of the PPF.
D) a shift in of the PPF.

Part II: Short- and long-answer questions

1. Cost of Rio Olympics

Brazilian federal, state, and local governments spent R$2.8 billion and private sponsors spent R$4.2
billion on 17 new Olympic facilities, 10 of which will be used for sporting events after the Olympics.
Source: Financial Times, August 6, 2016
Was the opportunity cost of the Rio Olympics R$2.8 or R$7 billion? Explain your answer.

5
ECON 2113: Microeconomics Problem Set 1 Instructor: Fei DING

2. Before starring in Guardians of the Galaxy, Chris Pratt had appeared in 11 movies that grossed an average of
$7 million on the opening weekend. Guardians of the Galaxy grossed $94 million.
a. How will the success of Guardians of the Galaxy influence the opportunity cost of hiring Chris Pratt?
b. How have the incentives for a movie producer to hire Chris Pratt changed?

Use the following data to work Problems 3 and 4.

In an hour, Marco can produce 5 cups of pesto sauce or 15 platters of pasta and Giorgia can produce 8 cups of
pesto sauce or 20 platters of pasta.

3. a. Calculate Marco’s opportunity cost of producing a cup of pesto sauce.

b. Calculate Giorgia’s opportunity cost of producing a cup of pesto sauce.

c. Who has a comparative advantage in producing pesto sauce?

d. If Marco and Giorgia specialize in producing the good in which they have a comparative advantage and
then trade 11 platters of pasta for 4 cups of pesto sauce, who gains from the specialization and trade?

4. Suppose that Giorgia finds a new way to cook pasta that enables her to make 30 platters an hour. (She can
still make only 8 cups of pesto sauce an hour.)

a. Who now has a comparative advantage in producing pasta?

b. Can Marco and Giorgia gain from trade?

c. Would Marco and Giorgia still be willing to trade 11 platters of pasta for 4 cups of pesto sauce? Explain
your answer.

6
1. R$7 billion is an opportunity cost of the Olympics, because it is the total money cost
spent on the 17 new Olympic facilities.

2. a) The opportunity cost increases, as the salary paid to Chris Pratt to appear in future
movies increased.
b) Since the opportunity cost of hiring Mr. Pratt increased, the incentive to hire him
decreased.

3. a) Marco's opportunity cost of producing one cup of sauce is 3 platters of pasta.

b) Giorgia’s opportunity cost of producing one cup of sauce is 2.5 platters of pasta
c) Giorgia
d) Both gain from trade.

4. a) Marco’s opportunity cost of producing pasta is 0.33 cups of pesto sauce, while
Giorgia’s opportunity cost of producing pasta is 0.267 cups of pesto sauce. Therefore,
Giorgia has the comparative advantage in cooking pasta because her opportunity cost of
a platter of pasta is lower than Marco’s opportunity cost.

b) Yes because Giorgia has a comparative advantage in producing pasta and Marco has
a comparative advantage in producing pesto sauce.

c) No. Marco, whose comparative advantage lies in producing pesto sauce, can produce
1 platter of pasta at an opportunity cost of only 0.33 cups of pesto sauce. So Marco will
be unwilling to pay any more than 0.33 cups of pesto sauce per platter of pasta.