ANDREWS UNIVERSITY
SCHOOL OF BUSINESS ADMINISTRATION
ECON225-001: PRINCIPLES OF MACROECONOMICS
FALL SEMESTER 2021 – September 8
ASSIGNMENT/PRACTICE RELATED TO CHAPTER 1
1. Understanding opportunity cost
Before you started applying for college, a job recruiter offered you a full-time position at a billing
office earning an after-tax salary of $30,000 per year. However, you turn down this offer and attend
your first year of college. The additional monetary cost of college to you, including tuition, supplies,
and additional housing expenses, is $35,000.
You decide to go to college, probably because
a. You value a year of college at $35,000
b. You value a year of college at less than $35,000
c. You value a year of college at more than $65,000
d. You value a year of college at $30,000
2. Determining opportunity cost
Juanita is deciding whether to buy a suit that she wants, as well as where to buy it. Three stores carry
the same suit, but it is more convenient for Juanita to get to some stores than others. For example, she
can go to her local store, located 15 minutes away from where she works, and pay a marked-up price
of $105 for the suit:
Travel Time Each Way Price of a Suit
(Minutes)
(Dollars per suit)
Local Department Store
15
105
Across Town
30
80
Neighboring City
60
65
Juanita makes $20 an hour at work. She has to take time off work to purchase her suit, so each hour
away from work costs her $20 in lost income. Assume that returning to work takes Juanita the same
amount of time as getting to a store and that it takes her 30 minutes to shop. As you answer the
following questions, ignore the cost of gasoline and depreciation of her car when traveling.
Store
Complete the following table by computing the opportunity cost of Juanita's time and the total cost of
shopping at each location.
Opportunity Cost of Time Price of a Suit
Total Cost
Store
(Dollars)
(Dollars per suit)
(Dollars)
Local Department Store
105
Across Town
80
Neighboring City
65
$20 + $105= $125
$30 + $80 = $110
$20 + $20+ $10 = $50 + $65 =$115
Assume that Juanita takes opportunity costs and the price of the suit into consideration when she
shops. Juanita will minimize the cost of the suit if she buys it from
a. The Local Department Store
b. Across Town
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c. The Neighboring City
3. A decision at the margin
Jake is a hard-working college sophomore. One Saturday, he decides to work nonstop until he has
answered 110 practice problems for his math course. He starts work at 8:00 AM and uses a table to
keep track of his progress throughout the day. He notices that as he gets tired, it takes him longer to
solve each problem.
Time
Total Problems Answered
8:00 AM
0
9:00 AM
50
10:00 AM
85
11:00 AM
105
Noon
110
Use the table to answer the following questions.
The marginal, or additional, gain from Jake’s first hour of work, from 8:00 AM to 9:00 AM, is …..
problems.
The marginal gain from Jake’s third hour of work, from 10:00 AM to 11:00 AM, is …….. problems.
Later, the teaching assistant in Jake’s math course gives him some advice. “Based on past
experience,” the teaching assistant says, “working on 15 problems raises a student’s exam score by
about the same amount as reading the textbook for 1 hour.” For simplicity, assume students always
cover the same number of pages during each hour they spend reading.
Given this information, in order to use his 4 hours of study time to get the best exam score possible,
how many hours should he have spent working on problems, and how many should he have spent
reading?
a. 1 hour working on problems, 3 hours reading
b. 2 hours working on problems, 2 hours reading
c. 3 hours working on problems, 1 hour reading (because the outcome since he is getting tired
and is only able to solve more problem as the time increases)
d. 4 hours working on problems, 0 hours reading
4. Distribution systems and incentives
Suppose that in the hypothetical country of Trashland, garbage cans are distributed based on
government policy.
This distribution rule gives the residents of Trashland an incentive to spend time …………….
a. Earning money
b. Lobbying government officials (garbage cans are distributed based on government policy in
order to get more garbage cans)
c. Maintain their place in line
5. Inflation and unemployment
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d. Suppose that, in an attempt to boost the economy, the government decides to increase the
amount of money in circulation in the economy. Inflation (eg. Stimulus checks) Inflation is
the rate of increase in prices overtime)
e. This monetary policy generates inflation/deflation. It increases/decreases the economy's
demand for goods and services, leading to higher/lower product prices. In the short run, the
change in prices induces firms to produce more/fewer goods and services. This, in turn, leads
to a lower/higher level of unemployment.
f. In other words, the economy faces a trade-off between inflation and unemployment: higher
inflation leads to lower/higher unemployment. Higher inflation leads to lower employment
Quick Check Multiple Choice
Economics is best defined as the study of
1. how society manages its scarce resources.
2. how to run a business most profitably.
3. how to predict inflation, unemployment, and stock prices.
4. how the government can stop the harm from unchecked self-interest.
Your opportunity cost of going to a movie is
1. the price of the ticket.
2. the price of the ticket plus the cost of any soda and popcorn you buy at the theater.
3. the total cash expenditure needed to go to the movie plus the value of your time.
4. zero, as long as you enjoy the movie and consider it a worthwhile use of time and money.
A marginal change is one that
1. is not important for public policy.
2. incrementally alters an existing plan.
3. makes an outcome inefficient.
4. does not influence incentives.
Adam Smith’s “invisible hand” refers to
1. the subtle and often hidden methods that businesses use to profit at consumers’ expense.
2. the ability of free markets to reach desirable outcomes, despite the self-interest of market
participants.
3. the ability of government regulation to benefit consumers, even if the consumers are unaware
of the regulations.
4. the way in which producers or consumers in unregulated markets impose costs on innocent
bystanders.
Governments may intervene in a market economy in order to
1. protect property rights.
2. correct a market failure due to externalities.
3. achieve a more equal distribution of income.
4. All of the above.
If a nation has high and persistent inflation, the most likely explanation is
1. the central bank creating excessive amounts of money.
2. unions bargaining for excessively high wages.
3. the government imposing excessive levels of taxation.
4. firms using their monopoly power to enforce excessive price hikes.
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