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dr Adrian Solek, Department of Microeconomics, Cracow University of Economics
1. Identify each of the following as either a positive or normative statement:
a) The general price level rose by 4 percent last year.
b) The government should put more emphasis on reducing inflation.
c) People should be encouraged to save.
d) Raising interest rates encourages people to save.
e) When the income tax rate is high, people tend to work
harder.
f) Governments ought to arrange taxes so that people cannot
avoid paying them.
g) It’s desirable to raise wages to provide a just reward for hard
work.
h) Raising wage rates causes people to work harder.
b) Let’s suppose you decided to choose the concert. What is
the satisfaction you think the concert will give you (in terms
of money)?
c) Now let’s assume the ticket for the concert is not for free and
its price is 30 dollars. What is the full opportunity cost of
attending the concert?
d) The entrance fee for the concert is still 30 dollars. If you
would be willing to pay not more than 80 dollars for the
concert, what is your net satisfaction from the concert?
Would you rather choose the concert or the match? You may
use the table below to find your answers.
jazz concert
basketball match
willingness to pay
expenses
2. Below is a list of resources. Indicate whether each resource
is land, capital, labour, or entrepreneurship.
a) fishing grounds in the North Atlantic,
b) a cash register in a retail store,
c) uranium deposits in Canada,
d) a theatre performance,
e) the work performed by Steve Jobs,
f) the oxygen breathed by human beings,
g) a Sony factory in Japan,
h) the work done by a car mechanic.
net satisfaction
6. A student has 4 hours of leisure time (apart from sleep, rest
and lessons) and can devote it to work at the rate of £8 per hour
or study. Four hours of study guarantee obtaining 100% marks
at the exam, three hours – 90%, two – 75%, one hour – 45%, a
decision not to learn at all implies 0% at the exam.
a) What is the "production factor"? What is the "product"?
b) Complete the table.
time of work
3. George has €5000.
a) He is considering how to invest his money to earn highest
possible revenue (he does not care about risk involved in
some assets). There are following options available:
i. buying shares with interest rate 4%,
ii. lending money to his neighbor who promises to return
€5100 after a year,
iii. opening a deposit in a bank with 5% interest rate,
iv. buying security bonds with 3% interest.
All the above interest rates are for one year. If George
doesn’t want to split his money and does not care about the
risk involved in some forms of investment, what is the best
option for him? What is the opportunity cost of his choice?
b) What should his decision be if the interest on deposits in the
bank fell to 2.5%? What would be the opportunity cost?
4. There is a petrol station in the town where you can buy fuel at
a price lower by 0.50 € than elsewhere, but you have to wait in
line for about 20 minutes to get it. Drivers usually buy 30 litres
of petrol at this station. What is the opportunity cost of their time
in euros per hour?
0h
1h
2h
3h
4h
time of study
earnings
marks
c) What is the opportunity cost of spending the first hour on
work? And the second hour? The third one? The last one?
d) What is the opportunity cost of spending the first hour on
studying? And every other hour?
e) Why do you think every additional hour devoted to studying
gives a smaller increase of marks than preceding hours?
f) Graph the student’s production possibilities frontier. What is
its shape and why?
g) Analyse the situation in which the student earns £16 and
gets 60% points at the exam? What could be a possible reason?
h) Discuss the combination of £24 and 75% points. What can
be done to achieve it?
40
35
earnings
30
5. You won a ticket for a jazz concert (you did not pay for it). On
the same day there is a basketball match. You think that
watching the match would give you as much satisfaction as the
satisfaction from getting 100 dollars. The ticket for the match
costs 60 dollars. You cannot attend both events.
a) If you decide to go to the jazz concert, what will be the
opportunity cost of such a choice? Use the table below:
25
20
15
10
5
jazz concert
willingness to pay
expenses
net satisfaction
basketball match
0
0
10
20
30
40
50
marks
60
70
80
90 100
output of potatoes (kg)
0
100
200
300
good B
400
500
good B
output of honey (l)
8. Link the following events in the economy to graphs:
a) unemployment appears in the economy,
b) wear and tear of many capital goods without producing new
ones to replace them,
c) implementing a better technology of production,
d) facing a war, factories produce more military goods instead
of civil ones; all resources are fully employed,
e) new deposits of oil are discovered in the country,
f) all production factors have been employed in the economy,
g) unemployment rate falls from 15% to 10%,
h) due to a lower demand many factories stop working,
i) a disastrous earthquake ruins the country.
good B
7. The inhabitants of a small island in the Pacific Ocean grow
potatoes and produce honey. The production possibilities frontier of this economy is: QP = –0.005QH2 – 0.5QH + 1500, where
QP is the output of potatoes and QH is the output of honey.
a) In the table below show how many potatoes can be collected
at the maximum for different levels of the output of honey.
b) Draw the production possibilities frontier.
good A
good B
good A
4
good A
3
good B
2
good B
1
good A
good A
5
good A
6
9. Below is shown the circular flow model in a free market
economy.
Market of consumer
goods and services
5
4
c) Can the society produce 200 litres of honey and 500 kgs of
potatoes? Mark the appropriate point on the graph.
d) Can the society produce 400 litres of honey and 600 kgs of
potatoes? Mark the appropriate point on the graph.
e) What is the opportunity cost of increasing the output of
honey from 100 to 200 litres? Anf from 300 to 400 litres?
f) For every additional 100 litres of honey is the opportunity
cost rising, falling or constant? Why?
g) A new technology of growing potatoes has been implemented. It allows to increase the output by 500 kgs for every
amount of honey, as compared to the previous quantities.
Write a new equation of the production possibilitties frontier.
h) Complete the table and make a graph.
output of honey (l)
output of potatoes (kg)
0
100
200
Firms
1
2
Market of factors
of production
7
a) Match the following events to numbers in the graph.
– receiving income for services of land, labour and capital
– purchase of final goods and services
– using land, labour and capital for production
– receiving revenues from selling consumer goods
– renting away land, labour and capital for production
– offering consumer goods for sale
– payment for consumer goods
– payment for services of factors of production
b) Complete the following sentences with demand or supply:
In the market of consumer goods and services households represent the …………… side and enterprises – the ………………
side. In the market of factors of production households are on
the …………… side and enterprises on the ………………. side.
300
400
500
584.43
3
Households
8
6
0
© Adrian Solek