John

Workshop 1
Introducing Economics

1. Which of the following are macroeconomic topics/issues and which are microeconomic ones?
(a) The level of consumer spending........................................................................Micro / Macro
(b) Subsidies paid to farmers ..................................................................................Micro / Macro
(c) The level of Malaysia exports............................................................................Micro / Macro
(d) The price of TVs................................................................................................Micro / Macro
(e) The rate of unemployment ................................................................................Micro / Macro
(f) The average wage rate paid to textile workers ..................................................Micro / Macro
(g) The total amount spent by Malaysian consumers on clothing and footwear ......Micro / Macro
(h) The amount saved last year by Malaysian households ......................................Micro / Macro

2. Economists assume that economic decisions are made rationally. In the case of consumers, rational
decision making means:
(a) That consumers will not buy goods which increase their satisfaction by only a small amount.
True / False
(b) That consumers will attempt to maximise their individual satisfaction for the income they
earn.
True / False
(c) That consumers buy the sorts of goods that the average person buys.....................True / False
(d) That consumers seek to get the best value for money from the goods they buy.....True / False

3. How will the market demand curve for a 'normal' good shift (i.e. left, right or no shift) in each of
the following cases?

(a) The price of a substitute good falls.............................................................left / right / no shift

(b) Population rises..........................................................................................left / right / no shift

(c) Tastes shift away from the good.................................................................left / right / no shift

(d) The price of a complementary good falls...................................................left / right / no shift

(e) The good becomes more expensive............................................................left / right / no shift

(f) good is about to fall……………………………………………………….left / right / no shift

4. How will the market supply curve of a good shift (i.e. left, right or no shift) in each of the
following cases?

(a) Costs of producing the good fall.................................................................left / right / no shift

(b) Alternative products (in supply) become more profitable...........................left / right / no shift

(c) The price of the good rises.........................................................................left / right / no shift

(d) Firms anticipate that the price of the good is about to fall…………………left / right / no
shift

5. A country is capable of producing the following combinations of goods and services per period of time,
assuming that it makes full use of its resources of land, labour and capital.

Goods (units) 100 80 60 40 20 0

Services (units) 0 50 90 120 140 150

(a) Draw the production possibility curve for this country on the following diagram.

120

100

80
Goods

60

40

20

0
0 20 40 60 80 100 120 140 160
Services

(b) Is it possible for this country to produce the following combinations of goods and services?
(i) 80 units of goods and 50 units of services..............................................................Yes / No
(ii) 70 units of goods and 90 units of services.............................................................Yes / No
(iii) 40 units of goods and 100 units of services...........................................................Yes / No
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 (c) What is the opportunity cost (in terms of services) of producing 20 extra units of goods when
this country is initially producing:
(i) 60 units of goods 40 units of services (90–50)

(ii) 20 units of goods 20 units of services (140–120)

Here, the opportunity cost of producing more goods is the reduction in the production of services that
this entails. In the case of (i), producing an extra 20 units of goods would mean that production was
now at 80 units. From the table, and the curve, you can see that this will allow a maximum of 50 units
of services to be produced. Thus production of services has fallen from a maximum of 90 to a
maximum of 50 units: a fall of 40 units. Thus 40 units of services is the opportunity cost. In the case of
(ii), moving from producing 20 units of goods to 40 units means moving from 140 units of services to
120 units: an opportunity cost of 20 units of services.
6. (a) Referring back to question 4, assume now that technological progress allows a four-fold
increase in the output of goods and double the amount of services for any given amount of resources.
Assuming that the country’s total amount of resources stays the same, fill in the new figures on the
following table to show the new production possibilities.

Goods (units) 400 320 240 160 80 0

Services (units) 0 100 180 240 280 300

(b) Draw the new production possibility curve on the following diagram.

480

400

320
Goods

240

160

80

0
0 50 100 150 200 250 300 350 400 450 500
Services

(c) How has this technological progress affected the opportunity cost of a unit of goods. (Tick the
correct one of the following answers.)

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 A. Stays the same.

B. Doubles.

C. Halves.

D. Increases four times.

E. Decreases four times.

If you can produce four times as many units of goods and twice as many units of services with

a given amount of resources, then, as production moves from services to goods, only half as

many units of services will need to be sacrificed for each extra unit of goods (compared with

the situation before the technological progress).

7. In Country A, which has full employment of its resources, a large increase in the production of
goods and services provided by the public sector (such as health, education and new roads) would only
be possible if there were a reduction in the production of other goods and services, such as consumer
goods. In Country B, however, which is suffering from economic recession, it is argued that an
increase in public expenditure on such things as health, education and roads, would result in the
production of more consumer goods.

(a) Explain briefly why the effect of an increase in public expenditure on the production of
consumer goods would be different in the two countries.
In Country A, with resources fully employed, there could only be an increase in the
production of certain goods and services (in this case health, education, new roads, etc.) by
diverting resources away from the production of other goods. In Country B, however, by
using resources more fully, there could be an increase in production of all goods. In fact, an
increase in expenditure on public services, by increasing the incomes of those employed in
the public sector, could lead to more expenditure on consumer goods, and this would
stimulate firms to produce more of them to meet the extra demand.

..................................................................................................................................................

..................................................................................................................................................

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 ..................................................................................................................................................
..................................................................................................................................................

..................................................................................................................................................

(b) The following diagrams show the production possibility curves for the Countries A and B.
Mark the current production point on each diagram at a point consistent with the statement
above. Then mark a new position on each diagram that would result from an increase in
public expenditure.
(c) Explain your answer to (b).
Country A Country B
in each case there is a movement from point a to point b. In the case of Country A, which is
already producing on the production possibility curve, there is a movement along the curve,
showing that the opportunity cost of producing more public-sector goods and services is the
amount of private-sector goods and services that have to be sacrificed. In the case of
Country B, production was inside the production possibility curve. By making a fuller use of
resources, more of both categories of goods and services can be produced: point b is closer
to the production possibility curve than is a.

..................................................................................................................................................

..................................................................................................................................................

..................................................................................................................................................

..................................................................................................................................................

8. The following diagram shows two demand curves that cross at a price of P0.

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 Price

P0

P1

D2

D1
Q0 Q1 Q2 Quantity

Which of the following statements are true?

(a) Curve D1 is inelastic and curve D2 elastic..............................................................True / False

(b) Demand is more elastic between P0 and P1 along curve D2 than along curve D1...True / False

(c) The price elasticity of demand between P0 and P1 in the case of curve D2 is equal to:

Q2  Q0 P 0  P1
 .............................................................................. True / False
mid Q mid P

(d) For any given change in price there will be a larger proportionate change in quantity along
curve D1 than along curve D2.
........................................................................................True / False

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9. How will the following changes affect the market price of wheat flour (assuming that the market is
initially in equilibrium)? In each case, sketch what happens to the demand and/or supply curves
and, as result, what happens to the equilibrium price.

(a) People consume more bread. (b) The discovery of a new cheaper way of
milling flour.

(c) The prices of other grains rise. (d) Rice and potatoes fall in price.

If people consume more bread, then the demand and price of wheat flour will increase.
(b) The discovery of a new cheaper way of milling flour will increase the supply and decrease the
price of wheat flour.
(c) If the prices of other grains rise, then the demand and price of wheat flour will increase.
(d) If rice and potatoes fall in price, then the demand and as a result the market price of wheat flour
will decrease.

10. The diagram below shows the demand for and supply of petrol. The market is initially in
equilibrium at point x.

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 There is then a shift in the demand and/or supply curves, with a resulting change in equilibrium
price and quantity.

To which equilibrium point (a, b, c, d, e, f, g or h) will the market move from point x after each
of the following changes?

S2
S0
S1
a
h b
Price

g x c

f d

D1

D0
D2

Quantity

The market for petrol

(a) A rise in the cost of refining petrol.h........................................................................................

(b) A fall in bus and train fares.f....................................................................................................

(c) A fall in the price of crude oil and an increase in the price of cars.e........................................

(d) A rise in tax on petrol and a reduction in tax on cars.a.............................................................

11. The demand and supply schedules for wheat in a free market are as follows:
Price per tonne ($) 120 160 200 240 280 320 360 400
Tonnes demanded per 725 700 675 650 600 550 500 425
week
Tonnes supplied per week 225 300 400 500 600 750 1000 1300

(a) Draw the demand and supply curves on the following diagram:

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 400

360

320
Price (£ per tonne)

280

240

200

160

120
0 200 400 600 800 1000 1200 1400 1600

Quantity (tonnes per w eek)

What is the equilibrium price? £280 per tonne(where D = S= 600 tonnes)

(a) .................................................................................................................................................
(b) Suppose the government fixes a maximum price of $200 per tonne. What will be the effect?
Shortage of 275 tonnes (675 –400)

(c) Suppose that supply now increases by 150 tonnes at all prices. Enter the new figures.
Price per tonne ($) 120 160 200 240 280 320 360 400
Tonnes demanded per week 725 700 675 650 600 550 500 425
(old) Tonnes supplied per week 225 300 400 500 600 750 1000 1300
(new) Tonnes supplied per week 375 450 550 650 750 900 1150 1450

(d) How much will price change from the original equilibrium (assuming that the government
no longer fixes a maximum price)? How much more will be sold?

Change in price Fall by £40 to £240

Change in quantity Rise by 50 from 600 to 650(i.e. less than the 150 increase in supply)
S
D

12. The following table shows the total utility that Eleanor derives from visits to the cinema per week.

Visits 1 2 3 4 5 6 7 8

TU ($) 12 20 25 28 30 31 31 29

MU ($) ___ ___ ___ ___ ___ ___ ___ ___

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 (a) Fill in the figures for marginal utility.

(b) Draw a graph of the figures for total and marginal utility on the following diagram.

35

30
Total and marginal utility (£)

25

20

15

10

-5
0 1 2 3 4 5 6 7 8
Weekly visits to the cinema

(c) How many visits to the cinema will she make per week if the price of a ticket is:

(i) $4.00..................................................... (ii) $2.50........................................................

13. The following diagram shows the marginal utility (MU) that a consumer gets from consuming
different quantities of a product. Assume that the current market price of the product is P.

Marginal utility,
Price ($)

(1)
P

(2)
(3)
MU
Q Quantity purchased

(a) Why is the optimum consumption point at Q?.........................................................................

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 (b) What area(s) represent(s) total utility at Q?..............................................................................

(c) What area(s) represent(s) the consumer’s total expenditure at Q?............................................

(d) What area(s) represent(s) the consumer’s total consumer surplus at Q?...................................

14. How much of a good will people buy? If they wish to maximise their self-interest (what is
known as ‘rational’ behaviour), they will compare the marginal utility they expect to get from
consuming the good with the price they have to pay. This will involve perceiving marginal utility in
money terms (i.e. how much an extra unit of the good is worth to them).
The table below shows marginal utility a person gets from consuming different quantities of
a good. Assume that the good sells for $10.

Marginal utility for person Y from good X

Quantity Consumed 0 1 2 3 4 5 6

Marginal Utility ($s) 25 20 16 12 8 4

(a) What is the person’s total utility from consuming 4 units?.......................................................

(b) What is the person’s total expenditure from consuming 6 units?..............................................

(c) What is the person’s marginal consumer surplus from consuming a second unit?...................

(d) What is the person’s total consumer surplus from consuming 2 units?....................................

(e) At what level of consumption is the person’s total consumer surplus maximised?..................

(f) What is the relationship between price and marginal utility at this level?................................

Clive’s total utility from his income

800
15. The figure opposite shows the total utility
that Clive, a first-year degree student, 700
would get from different levels of annual 600
income. Assume at the moment that his
annual income (from an allowance from 500
his parents and some part-time work in a
Utils

400
burger bar) is $4000. Spending this
300
rationally gives him a total utility of 500
‘utils’. 200
Assume that he is offered the 100
chance to gamble the whole $4000 on the
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toss of a coin at odds of 2:1 (i.e. if he TU
wins, he doubles his money; if he loses, 0 2000 4000 6000 8000

he loses the lot). Income (£)

(a) If he takes the gamble, what will be

his utility this year if he wins? ........................................................................................

(b) If he takes the gamble, what will be his utility this year if he loses?........................................

(c) What would be his average expected utility from the gamble?.................................................

(d) Why is it likely that he will not take the gamble, and thus be risk averse?...............................
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16. Sally, a first-year degree student, lives in lodgings and pays a fixed amount for food and
accommodation. The money she has left over she spends on books and compact discs. Her
preferences between various combinations of books and CDs are shown in the following table.
She is indifferent between the combinations in each of the five sets shown, but has preferences
between sets.

Set 1 Books 40 30 23 16 12 10 6 4 2
CDs 3 5 8 14 19 22 30 37 46
Set 2 Books 33 22 16 13 7 4
CDs 7 14 20 25 37 45
Set 3 Books 40 30 22 20 17 14 11 6 2 1
CDs 1 2 4 5 7 10 13 20 30 37
Set 4 Books 27 20 11 5
CDs 6 10 20 33
Set 5 Books 30 20 16 12 6 3 1
CDs 1 3 4 6 10 14 20

(a) Plot indifference curves on the following diagram corresponding to each of the five sets
above.

40
N u m b er o f b o o ks

30

20

10

0
0 10 20 30 40 50
Number of CDs

(b) Which set would Sally like best?........................................Set 1 / Set 2 / Set 3 / Set 4 / Set 5

(c) Between which two sets is Sally indifferent?.....................Set 1 / Set 2 / Set 3 / Set 4 / Set 5

(d) Which set does Sally like the best? ....................................Set 1 / Set 2 / Set 3 / Set 4 / Set 5

(e) Given the information in the table, why would Sally not be indifferent between the
combinations in the following set: 36 books & 5 CDs. 23 books & 8 CDs, 12 books & 13
CDs, 3 books & 20 CDs?

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 (f) What is Sally’s marginal rate of substitution of books for CDs in set 5 for
(i) the fourth CD?....................................................................................................................
(ii) the sixth CD?.......................................................................................................................
(iii) the tenth CD?......................................................................................................................

Now assume that Sally has $300 per year to spend on a combination of books and CDs, and
assume that all the books and CDs she wants cost $10 each.
(g) Draw in her budget line on the diagram on the previous page.
(h) What is the optimum amount of books and CDs for her to buy with this $300?

. . . . . . . . . . . books ........... CDs

(i) Assume now that the price of CDs rises to $20. Draw in her new budget line.
(j) What is the optimum amount of books and CDs per year for her now to buy?

. . . . . . . . . . . books ........... CDs

17.(a) Complete the following table of costs for a firm. (Note: enter the figures in the MC
column between outputs of 0 and 1, 1 and 2, 2 and 3, etc.)

Output TC ($) AC ($) MC ($)

0 55 –
…….
1 85 …….
…….
2 110 …….
…….
3 130 …….
…….
4 ……. 40
…….
5 ……. 42
…….
6 280 …….
90
7 ……. …….
110
8 ……. …….
…….
9 610 …….
150
10 ……. …….

(b) How much is total fixed cost at:

(i) an output of 0?.................................................................................................................

(ii) an output of 6?.................................................................................................................

(c) How much is average fixed cost at:

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 (i) an output of 5?.................................................................................................................

(ii) an output of 10?...............................................................................................................

(d) How much is total variable cost at an output of 5?.................................................................

(e) How much is average variable cost at an output of 10?

18. (a) Referring to the data from question 1, draw the firm’s average and marginal cost curves on
the following diagram. (Remember to plot MC mid-way between the quantity figures.)

140

120

100
Costs (£)

80

60

40

20

0
0 1 2 3 4 5 6 7 8 9 10
Output

(b) Mark on the diagram the output at which diminishing returns set in.

(c) Assume that the firm is a price taker and faces a market price of $60 per unit.

Draw the firm’s AR and MR curves on the above diagram.

(d) How much will it produce in order to maximise profit?.........................................................

(e) Shade in the amount of profit it makes.

(f)
Calculate how much profit this is. .........................................................................................
.................................................................................................................................................
19. The following is a list of various types of economies of scale:

(i) The firm can benefit from the specialisation and division of labour.
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 (ii) It can overcome the problem of indivisibilities.
(iii) It can obtain inputs at a lower price.
(iv) Large containers/machines have a greater capacity relative to their surface area.
(v) The firm may be able to obtain finance at lower cost.
(vi) It becomes economical to sell by-products.
(vii) Production can take place in integrated plants.
(viii) Risks can be spread with a larger number of products or plants.

Match each of the following examples for a particular firm to one of these types of economy of
scale.

(a) Delivery vans can carry full loads to single destinations. ...............

(b) It can more easily make a public issue of shares. ...............

(c) It can diversify into other markets. ...............

(d) Workers spend less time having to train for a wide variety of different tasks,
and less time moving from task to task. ...............

(e) It negotiates bulk discount with a supplier of raw materials. ...............

(f) It uses large warehouses to store its raw materials and finished goods. ...............

(g) A clothing manufacturer does a deal to supply a soft toy manufacturer with
offcuts for stuffing toys. ...............

(h) Conveyor belts transfer the product through several stages of the manufacturing
process. ...............

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20. Profit equals revenue minus cost. We have looked at costs. We now turn to revenue.
Let us assume that firm S is a price taker.
(a) In other words it faces a (i) downward-sloping / horizontal (ii) demand curve / supply
curve
(Delete as appropriate.)
Let us assume that it faces a market price of $2 per unit for its product.
(b) What is its total revenue from selling:
(i) 5 units? ..........................................
(ii) 8 units? ..........................................
(c) What shape is its total revenue curve?.......................................................................................
(d) What will be its marginal revenue from selling:
(i) the fifth unit? ..........................................
(ii) the eighth unit? ..........................................
(e) What shape is its marginal revenue curve?................................................................................

21. Now assume that firm T faces a downward-sloping (straight-line) demand curve.
(a) Fill in the columns for TR and MR in the table below. (Note that the figures for MR are
entered between 0 and 1, 1 and 2, 2 and 3, etc.)
The demand curve for the product of firm T
Price (AR) Quantity Total Revenue (TR) Marginal Revenue (MR)
($) (Units) ($) ($)

20 0 ………
………
18 1 ………
………
16 2 ………
………
14 3 ………
………
12 4 ………
………
10 5 ………
………
8 6 ………
………
6 7 ………

(b) What is the price elasticity of demand at P  $10?...................................................................

(c) Over what price range is demand price elastic?........................................................................
(d) Over what price range is demand price inelastic?.................................................................................

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22. There are two methods of showing the profit-maximising position for a firm. The first uses total
revenue and total cost curves.

The figure below shows the total cost and revenue curves for a firm on the same diagram.

TC
60

50
Costs and Revenues (£).

40
TR

30

20

10

0
0 10 20 30 40 50 60 70 80 90
Quantity

(a) At what output is the firm’s profit maximised?.................................................................................

(b) How much profit is made at this output?...........................................................................................

(c) Draw the total profit TΠ curve over the range of output where positive profit is made.

(d) How much is total fixed cost?............................................................................................................

(e) At what output is the price elasticity of demand equal to 1?...........................................................

(f) At what outputs does the firm break even?........................................................................................

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23. The second method of showing the profit-maximising position is to use AR, MR, AC and MC
curves. The following table gives a firm’s average and marginal cost and revenue schedules for
the production of good X.
Costs and revenues for the production of good X
Quantity Average Marginal Average Marginal
(Units) Cost ($s) Cost ($s) Revenue ($) Revenue ($)

100 4.80 1.40 3.20

3.20
200 3.60 0.80 3.20
3.20
300 2.90 0.85 3.20
3.20
400 2.45 1.30 3.20
3.20
500 2.30 2.30 3.20
3.20
600 2.55 4.00 3.20
3.20
700 3.05 6.30 3.20

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Costs and Revenues (£) .

0
0 100 200 300 400 500 600 700 800 900
Quantity

(a) Draw the AC, MC, AR and MR curves on the above diagram.
(b) Explain the shape of the AR curve....................................................................................................

(c) At what output is profit maximised? ............................

(d) How much is average cost at this output? ............................

(e) How much is average profit at this output? ............................

(f) Shade in the area representing maximum total profit in the above diagram.

(g) How much is the maximum total profit? ............................

(h) What is the lowest price the firm could receive if it were not to make a loss? ............................

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