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2009/2010 1  

EC1301 Principles of Economics

Semester

TUTORIAL 1 24-28 August 2009 Short Answer Questions
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One tradeoff that society faces is between efficiency and equity. Define each term and explain this tradeoff. ANSWER: Efficiency is the property of society getting the most it can from its scarce resources. Equity is defined as the property of distributing economic prosperity fairly among the members of society. Often, these two goals conflict. When the government redistributes income from the rich to the poor, it reduces the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. When the government tries to cut the economic pie into more equal slices, the pie gets smaller. Most analysts believe that the failure of communism can be blamed on the failure of central planning to allocate resources efficiently. Why is it difficult for central planners to allocate resources efficiently? ANSWER: Efficient allocation of resources depends on information which reflects the true marginal benefit to society of consuming products and the true marginal cost to society of producing products. Market prices contain this information. These prices are determined automatically in a market economy through the interactions of the decisions of millions of households and firms. Since the central planners do not have access to all of the information the market uses in determining prices, it is impossible for the planners to set prices which reflect marginal benefit and marginal cost. Therefore, it is impossible for the central planners to allocate resources efficiently. How important are prices in allocating resources in a market economy? ANSWER: Prices play the key role in the allocation of resources in a market economy, providing the signals to which buyers and sellers respond. In turn, the combined actions of buyers and sellers determine the forces of supply and demand which move prices toward equilibrium in the market. In the end, the buyers who are willing to pay the most obtain the scarce goods and services, and the sellers who are able to produce the goods and services at the lowest cost obtain the sales. Prices play a similar role in the allocation of resources to the production of alternative goods and services, with those producers who are willing to pay the most obtaining the scarce resources.

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Connie CHUNG

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goes out with a boat and a net early each morning. Under those circumstances. Multiple Choice Questions 6. Her opportunity cost of working is A. 5.m. the $8 she earns. since she would have received less than $8 of enjoyment from the video. a Singaporean fisherman. But it’s harder to find a good substitute for coffee. Why do you think that the demand for coffee is less elastic than the demand for restaurant meals? ANSWER: It probably has to do with the availability of good substitutes. B. there would be no automatic mechanism to guide the allocation of resources. In the former Soviet Union. How will Jack's supply of fish respond to the increased demand and higher price for his product in the short run and in the long run? ANSWER: In the very short run. 4. since his supply is perfectly inelastic. C. the more elastic will be Jack's supply of fish. The longer the time horizon. what were the economic incentives for producers? Connie CHUNG 2 7. a period of one day. Jack cannot respond at all to the increased price of fish. nothing. the enjoyment she would have received had she watched the video.. As a result of new information about the beneficial effects on health of a fish-rich diet. People can always eat at home. Jack can respond to the higher price by using more labor and nets to catch more fish. . the $8 minus the enjoyment she would have received from watching the video. not for selling products. producers were paid for meeting output targets. Jack can also add more boats to the production process and catch even more fish. the demand for fish increases. She earns $8 for her hour’s work.2009/2010 EC1301 Principles of Economics Semester 1 Without the allocative role of prices in rationing scarce goods and services. At 7:00 a. In the long run. In the short run. D. Jack Neo Ah Teck. Jack takes his day's catch to the fish market and sells it at the market price. so people are less sensitive to coffee price changes than to restaurant meal price changes. Carolyn decides to spend an additional hour working overtime rather than watching a video with her friends.

Equity D. A. On the production possibilities frontier shown above. Which of the following concepts is NOT illustrated by the production possibilities frontier? A. to produce enough to meet the output target. without regard for quality or cost 8. Opportunity cost C. to conserve on costs.2009/2010 1   EC1301 Principles of Economics Semester to produce good quality products so that society benefits from the resources used B. to produce those products that society desires most D. the opportunity cost of getting 5 additional bikes by moving from point A to point C is Connie CHUNG 3 . Efficiency B. Tradeoffs 9. so as to maintain efficiency in the economy C.

B. C. 10 roller blades. 10. There is insufficient information given to answer the question. D. D. 4 Connie CHUNG . What is Joe’s opportunity cost of running a business? A. will shift the demand curve to the left. you notice that the price of bananas is higher. the dress manufacturer to supply fewer dresses now. will shift the demand curve to the right. Suppose you like banana cream pie made with vanilla pudding.000 $41. $12.000 per year on supplies. will shift the supply curve to the left.800 per year and his personal bills are an extra $1. It is impossible for the economy to move from point A to point C. It would decrease.000 $35. Joe quit his job as a salesman where he made $35. 14.000 per year on part-time help. B. B. D.2009/2010 EC1301 Principles of Economics Semester 1 A. It would be unaffected. will shift the supply curve to the right. 13. his apartment costs him $4. A dress manufacturer is expecting higher prices for dresses in the near future. 5 roller blades. the demand for this manufacturer’s dresses to fall. A technological advancement A. C. Assuming all other things are constant. Which of the following would NOT shift the demand curve for a good or service? A. a change in the price of a related good C.200 per year.000 11. C. D. C.000 $57. His business expenses are $6. How would your demand for vanilla pudding be affected by this? A. a change in expectations about the price of the good or service D. B. C.000 per year on rent. We would expect the dress manufacturer to supply more dresses now. It would increase. $63. 15 roller blades. a change in the price of the good or service 12. A. B.000 per year to start his own T-shirt making business. and $4. a change in income B. As for his personal expenses.

4. If the price elasticity of demand for a good is 4. 15. A. reduce costs. if demand shifts substantially when the price of the good changes. he should A. The local pizza restaurant makes such great bread sticks that consumers do not respond much to a change in the price. B. the demand for flour to decrease. the supply of flour to increase. we would expect the supply of flour to be unaffected. sellers are producing more than buyers wish to buy. the supply of flour to decrease. A. the market could still be in equilibrium. 17. if the price of the good responds substantially to changes in demand. If the price of wheat increases. 10 percent decrease in the quantity demanded. B. Wheat is the main input in the production of flour. B. lower the price of the bread sticks. at the current price. B. leave the price of the bread sticks alone. 19. 20. if buyers don't respond much to changes in the price of the good. all else equal. there are too many buyers chasing too few goods. If the owner is only interested in increasing revenue. there is upward pressure on price. the price is below the equilibrium price. 16. there is downward pressure on price. there is a shortage of a good. C. D.0. C. if the quantity demanded responds substantially to changes in the price of the good. When there is a surplus in a market. 400 percent decrease in the quantity demanded.2009/2010 1   D. D. C. C. 18. All of the above answers are correct. then a 10 percent increase in price would result in a A. If. C. the market can be in equilibrium. EC1301 Principles of Economics Semester the demand for this manufacturer’s dresses to rise. C. D. A. B.0 percent decrease in the quantity demanded. Demand is said to be elastic A. raise the price of the bread sticks. D. B. D. Connie CHUNG 5 . 40 percent decrease in the quantity demanded. D.

2009/2010 EC1301 Principles of Economics Semester 1 Connie CHUNG 6 .