Economics 1 for IBA (2020)
Problem Set 1
Q1
Which of the following represents an example of positive analysis?
A) Would taxes on emissions be the best way to reduce pollution?
B) How can the government best design a tax cut?
C) How will the equilibrium price of corn be affected by a government subsidy?
D) What is the best way to assist low-income families with affordable housing?
Q2
Which of the following statements is true?
A) Markets are always efficient.
B) The relevant economic costs are the financial costs.
C) Choices at the margin are made by comparing total cost against total benefit.
D) Statements A, B and C are all not true.
Q3
Bert works at the local supermarket where he receives 8 euro per hour worked. He can work as
many hours as he likes. Bert’s bike has a flat tire. He can bring the bike to a mechanic who can
fix it for 15 euros. Bert decides to fix the bike himself and takes half an hour to do so.
What are Bert’s opportunity costs of fixing his bike?
A) 4 euros
B) 11 euros
C) 15 euros
D) 19 euros
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Q4
Consider a village of 200 farmers. 50 farmers produce pumpkins. Each of them grows 200 tons of
pumpkins per year. The remaining 150 farmers grow potatoes. Each of them grows 150 tons of
potatoes per year. They hire an expert on agriculture who informs them that the opportunity cost
of 1 additional ton of pumpkin is 2.5 tons of potatoes and that this is constant. He also informs
them that if all farmers in the village were to grow pumpkins efficiently they could produce 20,000
tons of pumpkin.
Consider the following two statements:
i)
The current production point of the village is efficient.
ii)
If all farmers were to produce potatoes efficiently they would grow 47500 tons of
potatoes.
Which of the statements are true?
A)
Both statements are true.
B)
Statement (i) is true and Statement (ii) is false.
C)
Statement (i) is false and Statement (ii) is true.
D)
Both statements are false.
E1 (KW2, Problem 1, p. 45)
Two important industries on the island of Bermuda are fishing and tourism. According to data
from the Food and Agriculture Organization of the United Nations and the Bermuda Department
of Statistics, in 2014 the 315 registered fishermen in Bermuda caught 497 metric tons of marine
fish. And the 2,446 people employed by hotels produced 580,209 hotel stays (measured by the
number of visitor arrivals). Suppose that this production point is efficient in production. Assume
also that the opportunity cost of 1 additional metric ton of fish is 2,000 hotel stays and that this
opportunity cost is constant (the opportunity cost does not change).
a. If all 315 registered fishermen were to be employed by hotels (in addition to the 2,446
people already working in hotels), how many hotel stays could Bermuda produce?
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b. If all 2,446 hotel employees were to become fishermen (in addition to the 315 fishermen
already working in the fishing industry), how many metric tons of fish could Bermuda
produce?
c. Draw a production possibility frontier for Bermuda, with fish on the horizontal axis and
hotel stays on the vertical axis, and label Bermuda’s actual production point for the year
2014.
E2 (KW2, Problem 3, p.46)
In the ancient country of Roma, only two goods, spaghetti and meatballs, are produced. There are
two tribes in Roma, the Tivoli and the Frivoli. By themselves, the Tivoli each month can produce
either 30 pounds of spaghetti and no meatballs, or 50 pounds of meatballs and no spaghetti, or any
combination in between. The Frivoli, by themselves, each month can produce 40 pounds of
spaghetti and no meatballs, or 30 pounds of meatballs and no spaghetti, or any combination in
between.
a. Assume that all production possibility frontiers are straight lines. Draw one diagram
showing the monthly production possibility frontier for the Tivoli and another showing the
monthly production possibility frontier for the Frivoli. Show how you calculated them.
b. Which tribe has the comparative advantage in spaghetti production? In meatball
production?
In A.D. 100 the Frivoli discover a new technique for making meatballs that doubles the quantity
of meatballs they can produce each month.
c. Draw the new monthly production possibility frontier for the Frivoli
d. After the innovation, which tribe now has an absolute advantage in producing meatballs?
In producing spaghetti? Which has the comparative advantage in meatball production? In
spaghetti production?
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E3
Consider Fred and Paul. They both produce nuts and bolts in their 1-person factories. They can
sell nuts and bolt only in combinations of one nut and one bolt; otherwise the items are worthless
to them. Consider different cases of productivity of Fred and Paul, and the potential benefits of
exchange.
Case 1: On a day, Fred can produce a maximum 100 nuts. If he produces one nut less, he can
produce exactly one bolt more. The ratio of substitution between nuts and bolts is always 1:1. In
contrast, Paul can produce a maximum of 20 nuts. If he produces one nut less, he can produce
exactly two bolts more. His ratio of substitution between nuts and bolts is always 1:2.
a. What is the maximum number of nut-bolt sets that Fred and Paul can produce together if
there is no possibility for exchange? What is the maximum number of nut-bolt sets that
Fred and Paul can potentially produce together if there is a possibility for exchange? What
are their respective production combinations? Discuss how the trade might be implemented
and how the benefits from trade might be distributed.
Case 2: As in case 1, but now Paul can produce a maximum of 26 nuts. If he produces one nut less,
he can produce exactly one bolt more. Thus, now his ratio of substitution between nuts and bolts
is always 1:1.
b. Are there benefits to trade in Case 2? Discuss and give numerical results along the lines in
part a.
E4
a. Sketch the graph of the function y=f(x)=(x-10)2 in the range (0, 10).
b. Derive the derivative function.
c. Calculate the derivative in x = 5, x=10, and x= 15. Discuss your findings with reference to
the graph.
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