1_Introduction to economics Test (Based on J.E. Stiglitz and C.E. Walsh; B. Czarny) 1. Scarcity of goods means that a) the available quantity of many goods continues to decrease, b) some people are very poor, while others are very rich, c) only few goods are free goods, d) the amount of goods in the economy does not allow all needs to be met. 2. The primary focus of economics is on a) the related problems of scarcity and choice. b) how to make money on the stock market. c) why there are no choices to be made. d) mathematical estimation of theoretical models. e) market economics, but not centrally planned ones. 3. Microeconomics is that branch of economics that focuses primarily on a) market economies. b) the behavior of individual units. c) centrally planned economies. d) economic aggregates such as unemployment and inflation. e) aggregate economic activity. 4. "Consumption in the economy has declined because – expecting a downturn – people have started saving more". This opinion: a) belongs to microeconomics, b) is an example of a value judgement, c) is an example of a descriptive statement, d) belongs to macroeconomics. 5. Which of the following is a normative economic statement? a) The typical doctor earns more than the typical blue-collar worker. b) There is too much inequality in the distribution of income. c) The inflation rate is measured as the change in the average price level. d) The price of a computer was $2,500 last year. e) There has been an increase in the inflation rate. 6. A variable is a) something that can be expressed mathematically. b) something that is correlated with something else. c) anything that can be measured and that changes. d) something that is not correlated with something else. e) anything that cannot be measured. 7. Markets in which firms sell their output are called a) capital markets. b) stock markets. c) labor markets. d) farmers' markets. e) product markets. 8. Economists with different values may agree about the ______ of a policy change but still disagree about the ______ of the change. a) normative aspects; positive aspects b) positive aspects; normative aspects c) theory; model d) theory; positive aspects e) normative aspects; model 9. Whenever two events occur simultaneously a) one event must have caused the other event. b) there is both correlation and causation. c) there is causation but not necessarily correlation. d) there is correlation but not necessarily causation. e) the two events are independent. Exercises (BVFD) 1. An economy has 5 workers. Each worker can make 4 cakes or 3 shirts however many others work in the same industry. (a) Draw the production possibility frontier. (b) How many cakes can society get if it does without shirts? (c) What points in your diagram are inefficient? (d) What is the opportunity cost of making a shirt? (e) Does the law of diminishing returns hold in this economy? 2. Which of the following statements are positive, and which are normative? (a) Annual inflation is below 2 per cent. (b) Because inflation is low the government should cut taxes. (c) Income is higher in the UK than in Poland. (d) Brits are happier than Poles. 3. Which statements refer to microeconomics, which to macroeconomics? (a) Inflation is lower than in the 1980s. (b) Food prices fell this month. (c) Good weather means a good harvest. (d) Unemployment in London is below the UK average. 4. Common fallacies Why are these statements wrong? (a) Since some economists are Tory but others Labour, economics can justify anything. (b) There is no such thing as a free lunch. To get more of one thing, you have to give up something else. (c) Economics is about people, and thus cannot be a science. 5. Suppose that a country can produce two goods: food and clothing. To produce one unit of food it requires one worker. To produce one unit of clothing it requires two workers. The total amount of workers available in the economy is fixed and equal to 100. Denote with L the total amount of workers. With F the units of food produced, and with C the units of clothing produced. Denote with aF the amount of workers needed to produce one unit of food and with a C the amount of workers needed to produce one unit of clothing. The resource constraint for this economy can be written as: L = a F F + a C C . Show how to construct the production possibility frontier from that resource constraint. In a graph with C on the vertical axis and F on the horizontal axis plot the PPF (production possibility frontier) of this economy. What is the slope of the PPF? 6. What is the opportunity cost of attending these tutorials? 7. What is the opportunity costs of your attending the university for: (a) you; (b) your parents; (c) the nation as a whole. Exercises (B. Czarny, 2017, Podstawy ekonomii. Wprowadzenie do ekonomii. Mikroekonomia, 4th ed., Oficyna Wydawnicza SGH, Warszawa, pp. 40-46) 8. The table below describes the productive capacity of a certain society.(a) Draw the production possibility frontier (PPF). What can you say about points A and B whose coordinates are equal to (1, 1) and (4, 4)? Is it possible to get a “free lunch” at point A? (b) What is the opportunity cost of increasing the production of good A from 2 to 3 (assume the economy is on the PPF)? (c) Does the law of diminishing returns (increasing costs) hold in this society? (d) Outline the impact of technological progress on production possibilities. Employment A 0 1 2 3 4 B 4 3 2 1 0 Production A 0 1 2 3 4 B 4 3 2 1 0 9. (a) What does it mean that Mercedes are a scarce good? (b) Is bread also a scarce good? After all, there is plenty of bread in the shops and everyone can buy as much bread as they want? (c) What about water and air? (d) What are the consequences of the scarcity of goods? 10. What determines "what, how and for whom" is produced? Perhaps the following questions will help you to formulate your answer: (a) What made the amount of apple juice produced in Poland this year? Al. Niepodległości in front of the Warsaw School of Economics? A mass in a certain church? (b) Why does Danone add pieces of tasty fruit to its yoghurts? Why doesn't anyone produce dynamite in the middle of a large housing estate? Who has decided that generals in Poland are almost exclusively men? (c) Why is Dariusz Miłek, the owner of CCC, the powerhouse of the Polish shoe industry, so rich? Whose merit is it that usually the income of the unemployed does not immediately drop dramatically? What does a beggar live on? 11. How do you imagine answering the question: (a) What is produced in the economy? (b) How is it produced in the economy? (c) For whom does the economy produce? Answer in detail. 12. Which of these statements are the opinions of a macroeconomist and which would you attribute to a microeconomist: (a) The inflation rate in Poland in January 1990 was 79.6%. (b) The demand for mountain bikes made by the Mountain Bike company will increase by approximately 35% in 2018. (c) Private agriculture in the south of Hypothetia provided more than 13% of the value of goods produced here in 2015? 13. Which of these statements are the opinions of a positive economist and which are those of a normative economist: (a) The inflation rate in Poland in January 1990 was 179.6%. (b) The elderly should be reimbursed by the state for part of their medical expenses. (c) To reduce unemployment, public works should be organised? Exercises (B. Czarny, 2018, Podstawy ekonomii. Makroekonomia, 4th ed., Oficyna Wydawnicza SGH, Warszawa, p. 326) 14. For one hour the stock market player is able to clean 1 room of their huge villa or earn $1,000. Her husband cleans twice as slowly and is only able to win $100 per hour on the stock market. Does it make sense to divide the labour in this case? (a) Compare her and his opportunity cost of cleaning the room. (b) Who has a comparative advantage in producing what? (c) Suggest a mutually beneficial division of labour. (d) Explain where the surplus comes from, which is a condition for profitable exchange. (Hint: How much does the one who exploits his comparative advantage lose? How much does his partner gain?). Exercises (PGG) 15. Let’s consider a student’s situation. He is fond of traveling by train. A rail pass costs 35 zł for a 5-hours trip. Alternatively, this student could walk his neighbour’s dogs for 10 zł an hour. (a) What is the opportunity cost of a train ride? (b) Will this student choose the train ride or rather will he walk the dogs of his neighbour?
