Part 1
Economics 101
Page 1
Worksheet
Worksheet objectives
This worksheet contains a mix of short questions/problems, multiple choice
questions and mathematical and graphical problems. These are similar to the kinds
of questions you will encounter in tests and examinations.
A serious and systematic exercise of working through this worksheet consequently
represents excellent preparation for tests and examinations. Some of the questions
will also form the basis for class discussions.
Multiple Choice Questions
1.
If the principal concern of economics is the question of how best to use society’s
resources, then economics would be irrelevant if:
a)
b)
c)
d)
e)
2.
Which of the following would NOT be viewed by economists as a factor of production?
a)
b)
c)
d)
e)
3.
Your economics lecturer.
The lecture room in which your economics lectures are held.
The salary earned by your economics lecturer.
The N3 national road between Durban and Pietermaritzburg.
The Toyota car assembly plant in Prospecton.
A commercial forest planted to provide raw material inputs into a woodpulp mill would be
viewed by economists as:
a)
b)
c)
d)
e)
4.
we had unlimited wants.
economies were organised around command rather than market principles.
economies were organised around market rather than command principles.
resources were available in unlimited quantities.
incomes were distributed more equally.
part of the factor of production "land".
part of the factor of production labour, since labour has to be used to create and
maintain the commercial forest.
part of the capital stock of the economy.
an unproductive use of land, and therefore not as a factor of production.
an unproductive asset, since it may take several years before the forest is ready for
harvesting.
Opportunity cost is best defined as:
a)
b)
c)
d)
e)
the out-of-pocket money costs incurred when a decision is made.
the value of the best alternative sacrificed when a choice is made.
the value of all the alternatives given up when a choice is made.
the value of time lost when a choice is made.
both (b) and (c) above.
Part 1
5.
Page 2
In the first round of the cricket World Cup in the West Indies, Shoaib Akhtar receives a
fine of R5000 and a two-match suspension for ball tampering. Akhtar receives a match
fee of R10 000 per match from the Pakistani Cricket Board, plus additional appearance
money of R20 000 per match from his sponsors. He also pays R1000 per match for
comprehensive insurance against injury. In opportunity cost terms, the cost of this
incident for Shoaib Akhtar is:
a)
b)
c)
d)
e)
6.
Economics 101
R65 000
R63 000
R35 000
R33 000
R5 000
Read the following statements carefully, and then answer the question that follows.
1) Only 40 per cent of the students in the 2022 Economics 101 class will buy the
prescribed textbook by Parkin et al.
2) The national government should introduce a full roll out of anti-retroviral drugs to all
HIV/Aids patients in South Africa.
3) Napoleon suffered from severe nightmares.
4) When economists make policy recommendations, they are making normative
statements.
Which of these are normative (as opposed to positive) statements?
a)
b)
c)
d)
e)
7.
Which of the following will bring about an inward shift of the production possibility
frontier?
a)
b)
c)
d)
e)
8.
All except (1).
Only (2).
Only (2) and (4).
All of them.
None of them.
An increase in the level of unemployment.
A decrease in the demand for goods and services.
An increase in the allocation of resources to the production of capital goods.
An increase in the number of skilled people emigrating.
(a), (b) and (d) above could all be associated with an inward shift of the ppf.
Which of the following pairs of commodities could most plausibly be associated with a
straight-line production possibility frontier?
a)
b)
c)
d)
e)
Guns and roses.
Daffodils and roses.
Guns and butter.
Motor cars and economics textbooks.
None of them, because straight-line ppfs are never plausible.
Part 1
Economics 101
Page 3
9. The figures in the table below show maximum combinations of houses and steel that
can be produced per month from a given set of resources in a particular economy.
HOUSES (thousands)
STEEL (thousand tons)
100
50
0
0
75
X
If the resultant production possibility frontier has its normal bowed-out shape, then X will
be:
a)
b)
c)
d)
e)
less than 150 000 tons.
more than 150 000 tons.
150 000 tons.
50 000 tons.
impossible to estimate even in these broad terms from the information given.
10. The production possibility frontier illustrated below shows combinations of capital goods
per capita and consumption goods per capita that could be produced in Rwanda.
Capital
goods
per capita
A
d
c
C
B
b
0
A
Consumption
goods per capita
If the subsistence level of per capita consumption in Rwanda is shown by the line AA,
then:
a)
b)
c)
d)
e)
Rwanda can choose any combination of capital goods and consumption goods on
the frontier without pushing current consumption below the subsistence level.
no capital accumulation and associated economic growth is possible.
Ob represents the maximum level of capital good production per capita that can be
achieved without pushing current consumption below the subsistence level.
at point d, all economic resources are devoted to the production of consumption
goods.
a level Oc of capital goods per capita can be produced without pushing current
consumption below the subsistence level.
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Economics 101
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11. Refer to the production possibility frontier below:
Good Y
20
15
a
10
5
0
b
c
d
Good X
As the output of Good Y increases along the frontier, which of the following changes
involves the largest opportunity cost?
a)
b)
c)
d)
e)
0 to 5 units.
5 to 10 units.
10 to 15 units.
15 to 20 units.
The opportunity cost is the same in each case.
12. In terms of Adam Smith's concept of the "invisible hand", an efficient overall allocation of
resources is likely to result from:
a)
b)
c)
d)
e)
the behaviour of public-spirited people, who always consider the benefits their
actions will have on others.
the regulation of markets by government.
the operation of command rather than market economies.
the behaviour of self-interested individuals striving to maximise their own wellbeing
the benevolence of butchers, brewers or bakers.
13. Read the following statements carefully, and then answer the question that follows:
1. An employer pays for his workers to receive regular winter vaccinations against flu.
2. A firm develops a new factory site, in the process building a series of access roads that
are usable by the public.
3. A resident in a housing complex buys a small but loud dog, whose barking disturbs the
sleep patterns of fellow residents.
4. A resident in a housing complex buys a large but quiet dog, whose fierce appearance
keeps intruders out of the whole complex.
Which of the situations described above could be seen as examples of NEGATIVE
economic externalities?
a)
b)
c)
d)
e)
All of them.
None of them.
Both (3) and (4).
Only situation (3).
All except (3).
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Economics 101
Page 5
14. Which of the following is least likely to be associated with market failure, and is
consequently least likely to require any form of state intervention or regulation?
a)
b)
c)
d)
e)
The provision of a national defence force.
The operation of a chain of fast food outlets.
The provision of streetlighting in an urban area.
The harvesting of deepsea fish resources in a country's territorial waters.
The provision of education services.
15. Which of the following is most likely to be a source of positive economic externalities?
a)
b)
c)
d)
e)
Heavy road vehicles whose licence charges do not fully compensate for the damage
they inflict on the country's national roads.
A lighthouse whose light is not fully shielded from the residential area in which it is
located, thereby disturbing the sleep of residents.
A firm which develops a new industrial site, in the process building a series of
access roads.
A paper mill which discharges polluting waste into a river system used by
commercial fishermen.
Both (b) and (c) above are examples of positive externalities.
16. “Because there is a shortage of student parking at the University of KwaZulu-Natal, all
students wanting to find a parking place should arrive 30 minutes earlier in the morning.”
This statement is an example of:
a)
b)
c)
d)
e)
the post hoc ergo propter hoc fallacy.
an application of the law of large numbers.
the fallacy of composition.
the clear thinking of lecturers, who wish to drive into work in the mornings without
encountering student drivers.
the fact that rational thought is not possible before 7 a.m.
17. A normative statement is a statement regarding:
a)
b)
c)
d)
e)
what is usually the case.
the assumptions of an economic model.
what ought to be.
the predictions of an economic model.
what is.
18. Which of the following statements is incorrect?
a)
b)
c)
d)
e)
The three major flows in the economy are total production, total income and total
spending.
There are two sets of markets in the economy: goods markets and factor markets.
Households are buyers in goods markets and sellers in factor markets, while firms
are buyers in factor markets and sellers in goods markets.
Firms are buyers in goods markets and sellers in factor markets, while households
are buyers in factor markets and sellers in goods markets.
Capital goods are purchased by firms.
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Economics 101
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19.
Year
1980
1981
1982
x
6.2
5.7
5.3
y
143
156
162
From the information in the above table, it appears that:
a)
b)
c)
d)
e)
x and y tend to exhibit a negative relationship.
x and y tend to exhibit a positive relationship.
there is no relationship between x and y.
there is first a negative and then a positive relationship between x and y.
there is first a positive and then a negative relationship between x and y.
20. The relationship between two variables that move in opposite directions is shown
graphically by a line that is:
a)
b)
c)
d)
e)
positively sloped.
relatively steep.
relatively flat.
negatively sloped.
curved.
21. What is the slope of the line in the figure below?
y
8
5
2
1
a)
b)
c)
d)
e)
2
3
x
2.
½.
3.
1/3.
-3.
22. If the line in the above figure were to continue down to the x-axis, what would the value
of x be when y is zero?
a)
b)
c)
d)
e)
0.
2.
2/3.
-2/3.
-3/2.
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Economics 101
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Short problems and questions
1.
Write notes/short essays on the following questions.
a)
b)
c)
What do you understand by the term "market failure"?
Show, using an example, how positive externalities can be a potential source of
market failure.
What kind of policy intervention would you recommend to deal with cases of
negative economic externalities?
2.
Explain the difference between capital goods and consumer goods, and give three or
four good examples of each.
3.
Write a short paragraph explaining why the production possibility frontier (ppf) is
conventionally depicted as “bowed out” or concave to the origin. Under what
circumstances would a linear ppf be plausible?
4.
What do you understand by the three basic economic questions of WHAT, HOW and
FOR WHOM to produce goods and services, and to what extent can the “solutions” to
the WHAT and FOR WHOM questions be seen as interdependent?
5. “All points on a production possibility frontier may be seen as efficient production choices,
but there may be only one output combination that society prefers over all others.”
Discuss this statement.
6.
Explain how the price signalling mechanism functions as an allocator of scarce economic
resources in a pure market economy. To what extent (if at all) do the price signals
transmitted from consumers to producers differ from the price signals sent from
producers to consumers?
7.
What is the essential difference between a public good and a private good. Why is the
provision of public goods by unassisted market forces generally so difficult?
8.
Do you think that the reasons why economists disagree are more likely to be found in the
realms of positive economics or normative economics? Give reasons for your answer.
9.
What do you understand by the exclusion principle? To what extent could you apply this
principle to the activities of car guards on the Durban beachfront?
10. Why is the direction of the circular flow of goods and services opposite to that of the
circular flow of income and spending?
11. Use the general equation for a straight line y = a + bx to find the y- and x-intercepts for
the following equation: y = 4 - 2x. Connect the two points. What is the slope of this line?
12. Draw each of the following:
a)
b)
a straight line with slope -10 and passing through the point (2, 80).
a straight line with slope 2 and passing through the point (6, 10).
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Economics 101
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13. Use the graph in the figure below to compute the slope:
y
a
7
b
4
3
0
a)
b)
c)
d)
c
2
4
7
x
across the arc between points a and b.
at point b.
at point c.
Explain your answers.
14. Imagine that you are trying to depict graphically the performance of total output in the
South African economy (on the vertical axis) against time (on the horizontal axis). How
would you represent the following situations? (A rough free-hand sketch is quite
sufficient in each case.)
a)
b)
c)
d)
e)
Total output increases at an increasing rate.
Total output increases at a decreasing rate.
Total output remains constant over time.
Total output initially increases at a decreasing rate, but then later increases at an
increasing rate.
Total output initially increases at a decreasing rate, and then remains constant.
True/False questions
1.
Rich people don’t have to deal with scarcity.
2.
When economists talk about the factor of production “capital,” economists are
referring to stocks and bonds.
3.
A country using mainly labour to build a dam instead of using mainly machines is
answering the “how” question.
4.
Choices made in the pursuit of self-interest always turn out to be in the social interest.
5.
When I buy an R80-00 dinner rather than two paperback books, the opportunity cost
of the dinner is the two paperback books I did not buy.
Part 1
Economics 101
Page 9
6.
Keeping constant all but the two economic variables you are interested in is an
example of the post hoc fallacy.
7.
“Every time I buy stock, the stock market falls. So my buying decisions must be a
good forecast of the market's behaviour.” This statement is an example of the fallacy
of composition.
8.
If the stock market booms and some months later the economy expands, you know
that the stock market caused the economy to expand.
9.
If a country produces at a point on its PPF, it achieves production efficiency.
10.
As long as the marginal benefit from a good is greater than its marginal cost, an
economy is operating efficiently.
11.
When a nation is producing the allocatively efficient quantity of a product, the
marginal benefit of producing the good equals the marginal cost of producing that
good.
12.
Each point on the production possibilities frontier achieves allocative efficiency.
13.
We are using resources efficiently if we can produce more of one good without
producing less of some other good that we value more highly.
14.
To expand its PPF, a country can devote resources to accumulating capital.
15.
The circular flow diagram shows that households are buyers in resource markets and
sellers in goods markets.
16.
To graph a relationship that involves more than two variables, we use the “ceteris
paribus” assumption.
17.
If the x-axis variable increases while the y-axis variable decreases, the variables x
and y are negatively related.
18.
The slope of a curved line can be calculated as the slope at a point on the curve or
across an arc of the curve.
19.
If the change in the y-axis variable is 4 and the change in the x-axis variable is 2, the
slope of this line is 1/2.
20.
When graphed, variables that are unrelated are shown by either a horizontal or a
vertical line.
Part 1
Economics 101
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Questions for discussion in class
1.
In late 1998, the Cabinet approved in principle the acquisition for the South African
National Defence force of a substantial array of military hardware, including corvettes,
submarines, fighter aircraft and helicopters.
a)
b)
2.
As an economist, how would you attempt to compute the opportunity cost of these
defence purchases?
Could you use the production possibility frontier as a theoretical device to show the
choices the Cabinet had to grapple with in taking a final decision as to whether to
proceed with the military contracts or not? Give reasons for your answer.
In each of the following cases, do you believe that the provision of these goods or
economic activities could be associated with (elements of) market failure? Give reasons
for your answers.
a)
b)
c)
d)
e)
f)
National roads.
Private schools.
Public (government) schools.
I &J deepwater hake.
Nando’s flame-grilled chicken.
The new deepwater port to be built at Coega in the Eastern Cape.
Hint: In many (perhaps nearly all) of these cases, an unambiguous association with public or
private goods will not be possible.
3. The production possibility frontier below shows maximum combinations of consumer
goods and capital goods that can be produced in Namibia in 2022.
Consumer
goods
a
b
c
PPF2007
0
Capital goods
a) Give an example of a consumer good and a capital good.
b) What is the essential difference between these two categories of goods?
c) Explain why the choice between consumer good production and capital good production
is so important for economic growth.
d) Sketch (roughly) and indicate the likely shifts (if any) in the Namibian PPF from 2022 to
2008, if:
I.
II.
III.
Output combination a was chosen in 2022.
Output combination b was chosen in 2022.
Output combination c was chosen in 2022.
Part 1
Economics 101
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Multiple Choice Solutions
1.
d. Comments: none; this is straight book work, and a very easy one as a starter.
2.
c. This question explores the economist’s conception of factors of production. The basic
factors of production are land (natural resources), labour (human resources), capital
(produced resources that are capable of producing further goods or services) and
entrepreneurship. (a) is clearly a human resource, while (b) is part of capital, as are (d) infrastructural capital - and (e). Money and income are not viewed by economists as
factors of production, hence (b) is clearly not a factor of production.
3.
c. A commercial forest planted to provide raw material for a woodpulp mill is a produced
resource, and is therefore clearly part of capital. It is not a naturally-occurring resource,
like a natural forest, hence (a) is incorrect. It is clearly not a human resource, as in (b),
while statement (d) is a nonsense. Durability, and the necessity of “waiting” for output to
be produced are characteristics that we can associate with capital, hence such a forest
would not be an unproductive asset, as in (e).
4.
b. Comments: fairly easy. This reinforces the view of opportunity cost as the value of
the best alternative foregone, not simply direct money costs (a), nor all the alternatives
(c), nor simply time (d).
5.
b. The simple question to ask in these cases is: “how does the situation differ from what
it would have been if a particular decision or action were not taken”. In this case, the
“decision” is Akhtar’s “decision” to tamper with the ball. Had he not done so, he would
have: avoided the fine (R5 000); earned two match fees (R20 000); and earned two sets
of appearance money (R40 000). Because he is not playing in two matches, he avoids
paying R2 000 insurance. In opportunity cost terms, the net effect of his action is (R5
000 + R20 000 + R40 000) - R2 000 = R63 000.
6.
b. The statements can be categorised as: 1 (P), 2(N), 3(P, though difficult to test, but still
clearly a statement of alleged fact, concerning “what was”); & 4 (P, even though the
statement contains the word “normative”). Comments: more searching than many
comparable test bank questions.
7.
d. The ppf represents a locus of points showing the maximum combinations of goods
that can produced with full and efficient employment of all available resources, which are
fixed in supply. An increase in the level of unemployment, as in statement (a), will not
shift the ppf, but will simply be associated with a point further unside it. The ppf is a set
of production possibilities that are unaffected by demand considerations, hence (b) is a
nonsense. An increase in the production of capital goods, as in (c) will shift the ppf
outwards, while an increase in skilled emigration will lower the availability of skilled
labour inputs, and will clearly shift the frontier inwards. Since (a) and (b) are wrong, (e)
is doubly incorrect.
8.
b. Presumably we are looking for the kinds of goods that utilise the same kinds of inputs
in roughly the same proportions. The only plausible candidate is (b).
Part 1
9.
Economics 101
Page 12
a. This type of question frequently foxes students. The only sensible approach is to
draw an appropriate frontier reflecting the information given:
Houses
100
50
0
75
X
150
Steel
By inspection, X has to be less than 150, if the ppf is concave.
10. c. 0A represents the subsistence level of consumption good production per capita in
Rwanda. It is consequently not possible to reduce the level of output of consumption
below this level without pushing some members of the community below the subsistence
level. The maximum output of capital goods per capita that is consistent with this is
therefore 0b, making alternative (c) correct. Rwanda thus cannot choose any
combination of consumption goods and capital goods [alternative (a)], while some limited
capital formation is possible, making (b) incorrect. Dummy (d) is a nonsense, as at d, all
resources are devoted to capital good production. Finally 0c capital goods per capita
cannot be produced within the subsistence constraint.
11. d. An increase in Y production from 15 to 20 units clearly involves the greatest sacrifice
of X output. This is also sensible in terms of the notion of increasing opportunity cost.
12. d. Adam Smith’s concept of the “invisible hand” suggests that the self-interested pursuit
of consumers and producers seeking to maximise satisfaction and profits will unwittingly
produce an efficient overall allocation of resources. This is well captured by statement
(d). Smith stated quite explicitly that these market participants do not act altruistically or
in a public-spirited way, as in statements (a) and (e), while the “invisible hand” is
associated with free markets unfettered by government regulation (b) or command
mechanisms (c).
13. d. Statements 1,2 and 4 are all examples of positive externalities, in the sense that
others in the community who have not paid directly for the vaccinations, roads and dog
food, derive benefits from them. In the case of 3, other residents are negatively dogged.
14. b. This question explores the notion of market failure, arising inter alia from problems
associated with the provision of public goods, externalities, or a breakdown of
competitive forces. A national defence force (a) and streetlighting (c) are good examples
of public goods, which unassisted market forces would not easily provide. The provision
of education facilities has some of the features of a public good and also conveys
powerful externalities, while the unregulated harvesting of fish resources can easily lead
to over-exploitation and consequent negative externalities. The commercial fishing
industry is also organised on near-monopoly lines. Fast food outlets produce simple
consumer goods, where the exclusion principle readily applies, in a generally competitive
environment.
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Economics 101
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15. c. In (a), damage by road vehicles is a source of negative externalities, as are the
polluting activities of the paper mill in (d). In (b), although the lighthouse services have
the features of a public good, unwanted light spillovers are a clear negative externality.
This makes (e) incorrect also. In (c), the initiating firm provides benefits for subsequent
users of the infrastructure provided.
16. c. If all students arrived earlier, the parking bottlenecks would simply be encountered 30
minutes earlier. If a few students arrived earlier, they would find parking. This illustrates
the fallacy of composition: that what holds for some will not necessarily hold for all.
17. c. This question is a straightforward definitional one: positive statements are those
concerned with the facts of the matter, about what is the case, while normative
statements are those concerned with value judgements, ethical issues - with what
should, or ought to be the case.
18. d. Rather unusually this question called for you to identify the statement amongst the
alternatives which is incorrect. We drew your attention to this by capitalising the word
“incorrect” in the preamble to the question. Alternative (a) is straight bookwork - there
are traditionally only two major markets considered in basic economic models:
households and firms. Although financial and government institutions may be argued to
constitute markets, they are better viewed as sectors through which the primary markets
are deemed to operate. Capital goods are defined as those being bought by firms,
alternative (e), which leaves the choice between (c) and (d). With (d) being incorrect, the
correct answer is (d).
19. a. Very straightforward: as x falls, y rises.
20. d. If discussing this, maybe use the price-quantity demanded example.
21. c. Slope must be positive, hence (e) is immediately eliminated. Slope is calculated as
y/x = +3.
22. d. The intercept must be negative, hence only (d) or (e) make any sense at all. Answer
(d), using the same method as in 21, above.
Solutions to Short Answer and Paragraph Questions
1 (a) What do you understand by the term “market failure”?
In general, market failure is the potential inability of unregulated markets to achieve
efficient solutions under certain circumstances. The basis upon which markets work is
the transmission and receipt of price signals: signals of willingness to pay from
consumers to producers, and signals of scarcity (based on cost) from producers to
consumers. On this basis, market failure can most usefully be seen as a breakdown of
this price signalling mechanism. This breakdown may either be total (as in the case of
public goods, where no price signals exist), or it may be partial (as in the cases of
externalities or imperfect competition), where prices are distorted to a point where they
no longer reflect true costs incurred by producers, or full benefits enjoyed by consumers.
(b) Show, using an example, how positive externalities can be a potential source of market
failure.
Economic externalities (or spillover effects) occur where firms or people impose costs or
benefits on others without those others receiving the proper compensation or paying the
Part 1
Economics 101
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proper cost. Externalities are therefore interactions that take place outside markets, and
which impose costs on outside parties or generate benefits for outside parties in a
situation when these costs or benefits are not captured by the market prices that
consumers actually pay.
Positive externalities are associated with economic activity or economic decisions that
produce benefits for specific individuals or members of the wider community, when
these outside persons took no part in the original activity and therefore bore none of the
associated costs. There are many examples of positive externalities. An industrialist
developing a new site, in the process financing and building a series of access roads,
would generate positive externalities if this improved road infrastructure was then used
by other members of the community. External benefits could include shorter transport
times for general road users, or there could be very much more specific benefits if a
subsequent industrialist decided to develop a site in the same area, but could then do so
without having to incur any road development costs. In this way, a decision taken by
one economic decision-maker, for entirely private reasons, generates benefits for a
whole series of potential beneficiaries, who do not recompense the original
developer. Another example, similar to one of the cases outlined by Samuelson, would
be where a property owner installs a security system or hires a security guard. Although
the costs are borne entirely by the first property owner, her action is likely also to
improve the security of neighbouring properties, but these neighbouring property owners
bear none of the direct costs.
The key to why positive externalities are an example of partial market failure is that
benefits are generated without the beneficiaries paying for these external benefits.
Market prices are consequently distorted somewhat, because they do not fully reflect all
benefits enjoyed by consumers.
Positive externalities do not lead to the collapse of markets, nor do they constitute a
pressing case for government intervention (although many rather more serious cases of
negative externalities may well do so), but they do represent a source of partial market
failure, since they distort market prices from true costs/benefits.
(c) What kind of policy intervention would you recommend to deal with negative
externalities?
Negative externalities arise when the private actions of some economic decision-makers
impose external costs on outside parties who are uninvolved in the original economic
activity. The actions of a factory polluting a river system would constitute a classic case
of a negative externality, if the pollutants negatively affect the behaviour of other users of
the river system. In such a case, a distortion of the price signalling mechanism clearly
occurs, since perpetrators avoid bearing certain costs, such as the cost of avoiding the
discharge of polluting waste, while those costs are imposed on others who had nothing
to do with the production of the pollutants.
Unlike the case of positive externalities, negative externalities can have serious impacts
on markets, and can even threaten the livelihood of economic actors who suffer external
costs. Negative externalities consequently often do provide a basis for government
intervention in the markets concerned. This intervention usually involves the regulation
of the relevant markets, and could take the form of the establishment of appropriate
environmental quality standards, such as water quality, air quality, minimum acceptable
noise levels etc to which all economic actors must adhere. In this way, the costs are
shifted back on to the perpetrators, by forcing factories to process any waste products
prior to discharge, or to clean up immediately any damage to the environment, before it
impacts on other users. A second and rather less elegant type of regulation would be to
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force the producers of negative externalities to recompense the victims for the additional
costs that are imposed upon them. A third and very common form of intervention is the
establishment of the appropriate user charges for the use of infrastructural or
environmental assets: for example, systems of licence fees or road user charges for
different categories of vehicles should be fixed at levels that capture the extent to which
such vehicles damage the country’s road network.
The main point of such intervention is not further to interfere with or disrupt market
mechanisms, but rather to restore the correct price signals - that is, to reassert the
“right” prices that fully reflect all associated costs and benefits.
2.
Essentially definitional book work. The defining characteristic of capital goods is their
ability to produce other goods and services, while consumer goods are themselves used
up in consumption. Capital goods generally also have the characteristic of durability,
although some consumer durables also last for some time.
3.
Technical book work. See in particular the additional coverage of the ppf in the course
pack. This question requires some discussion of the law of increasing opportunity cost
and, more importantly, some explanation of why this law makes sense. The basis for
this is the fact that different types of output require factors of production (scarce
economic resources) in different proportions, together with the associated proposition
that not all factors of production are equally suited to the production of all commodities.
You might give some examples to illustrate this. A linear ppf reflects constant
opportunity costs, and indicates a situation where it is always equally easy to transform
one type of output into another. This unlikely state of affairs only makes sense where
different goods are using the same kinds of inputs in the same proportions. See, for
example, MCQ question 8.
4.
This question explores the interdependence of the WHAT (allocation) and FOR WHOM
(distribution) questions, insofar as a different pattern of distribution of purchasing power,
wealth or income would generate different patterns of demand, and would therefore call
for different “mixes” of goods and services: that is, different answers to the WHAT
question.
5.
Although mainly technical textbook work (see in particular Parkin pp, 38-42), this
question tackles the important distinction between productive efficiency and allocative
efficiency. Despite the bowed out shape of the ppf, based on increasing relative
opportunity costs, ALL points on the ppf (even those on or close to the axes) may be
associated with efficiency in production, since all are associated with the full and efficient
use of scarce resources. In all cases, there are no unused resources, and no greater
output could be sustained. Not all points that are efficient in production may necessarily
be viewed as equally desirable in terms of consumers’ (society’s) preferences. Instead,
one particular ALLOCATION of resources across the two types of output may be seen
as the most preferred combination. This results from the twin associations of increasing
marginal cost as output of a particular output increases, and decreasing marginal benefit
as that same level of output increases.
6.
Mainly straight book work. To some extent, the price signals sent by consumers to
producers do differ from the signals passing from producers to consumers. The former
are signals of WILLINGNESS TO PAY (presumably based on the utility gained from
consumption), while the latter are signals of SCARCITY (based on costs of production).
6.
Straight book work. A discussion of the applicability of the exclusion principle to private
goods and its non applicability to public goods is required.
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8.
Up to you. Read carefully p. 16 in Chapter 1 of Parkin, and consider also some of the
areas of claimed broad agreement and disagreement between mainstream economists
discussed there. Do you necessarily agree with his characterisations?
9.
The first part is definitional book work. There is not necessarily an unambiguously “right”
answer to the second part. To the extent that the activities of the guards render an
entire parking area crime free, or at least lower the probability of car theft, the benefits of
their services may well be enjoyed by those who do not pay. This example is, however,
not as “clean” as that of, say, a lighthouse, since car guards clearly concentrate their
services on payers, and there may well be less of the service available to free
riders/parkers.
10. Basic book work. The notion of the circular flow of economic activity is dealt with quite
skimpily in Parkin (mainly p. 50 – 51)
11 y-intercept +4; x-intercept +2; slope -2.
12. Up to you.
13. (a)-1.5 (b)-0.75 (c) 0
14.
TP
(a)
TP
(b)
Time
Time
TP
(c)
TP
Time
(d)
Time
Part 1
Economics 101
TP
(e)
Time
Solutions to True/False questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
False
False
True
False
True
False
False
False
True
False
True
False
False
True
False
True
False
True
False
True
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