METU
Department of Economics
Econ 210: Principles of Economics
Section All
Fall 2022-2023
Problem Set I
TOOLKIT
Direct and Inverse Relationships
Direct Relationship: This is where two variables do the same thing. If one
increases, the other increases. If one decreases, the other decreases.
Inverse Relationship: This is where two variables do the opposite thing. If
one increases, the other decreases.
PART A: PROBLEMS
Q1: For the graphs below, indicate the ones that are
a) increasing for all x,
b) decreasing for all x,
c) increasing at a constant rate for all x,
d) decreasing at a constant rate for all x,
e) increasing at an increasing rate for all x,
f) increasing at a decreasing rate for all x,
g) decreasing at an increasing rate for all x,
h) decreasing at a decreasing rate for all x.
Solution:
a) a, b, c and d are increasing for all x.
b) e, g and h are decreasing for all x.
c) b is increasing at a constant rate for all x.
d) g is decreasing at a constant rate for all x.
e) a is increasing at an increasing rate for all x.
f) c is increasing at a decreasing rate for all x.
Q2: Write linear equations with x as the independent variable and y as the
dependent variable based on the following information:
a) Slope of the line is 3 and y-intercept is 7.
y = 7 + 3x
b) Slope of the line -5 and y-intercept is 0.
Y=-5x
c) Slope of the line is 7 and passes through point (1, 1)
y= -6 + 7x
Q3: For each of the following situations involving marginal cost (MC) and
marginal benefit (MB), indicate whether it would be best to produce more,
fewer, or the current number of units.
i. 3,000 units at which 𝑀𝐶 = $10 and 𝑀𝐵 = $13.
ii. 11 units at which 𝑀𝐶 = $4 and 𝑀𝐵 = $3.
iii. 43,277 units at which 𝑀𝐶 = $99and MB = $99.
iv. 82 units at which 𝑀𝐶 < 𝑀𝐵.
v. 5 units at which 𝑀𝐵 < 𝑀𝐶.
Any economic activity should be expanded as long as marginal benefit
exceeds marginal cost and should be reduced if marginal cost exceeds
marginal benefit. The optimal amount of the activity occurs where
𝑀𝐵 = 𝑀𝐶
i. more because 𝑀𝐵 > 𝑀𝐶
the benefit of consuming one more unit exceed the opportunity costs
(scarce resources used elsewhere) of producing that additional unit.
ii. fewer because 𝑀𝐶 > 𝑀𝐵
the opportunity costs (scarce resources used elsewhere) of producing
one more unit exceed the benefit of consuming that additional unit.
iii. current amount because 𝑀𝐵 = 𝑀𝐶
there is no net gain in using scarce resources in producing and
consuming one more unit.
iv. more because 𝑀𝐵 > 𝑀𝐶,
the benefit of consuming one more unit exceed the opportunity costs
(scarce resources used elsewhere) of producing that additional unit.
v. fewer because 𝑀𝐵 < 𝑀𝐶,
the opportunity costs (scarce resources used elsewhere) of producing
one more unit exceed the benefit of consuming that additional unit.
Q4: Define the following terms:
a. Economics
The study of the choices people make to attain their goals, given
their scarce resources
b. Microeconomics and Macroeconomics
Microeconomics is the study of individual choice, and how that
choice is influenced by economic forces.
Macroeconomics is the study of the economy as a whole.
c. Opportunity cost
The highest valued alternative that must be given up to engage in
that activity.
d. Marginal Cost/Benefit
Cost/Benefit obtained from producing 1 additional output/good
e. Sunk Cost
A sunk cost refers to money that has already been spent and cannot
be recovered
f. Market Force
the actions of buyers and sellers that cause the prices of goods and
services to change without being controlled by the government
g. Positive and Normative Economics
Positive economics is the study of what is the economy works
Normative economics is the study of what the goals of economy
should be.
h. Invisible hand Theorem
The invisible hand is a metaphor for the unseen forces that move
the free market economy. The invisible hand is part of laissez-faire,
meaning the "let do/let go," approach to the market. In other words,
the approach holds that the market will find equilibrium without
government or other interventions forcing it into unnatural patterns.
Demand increase (decrease) moves prices up (down).
Supply increase (decrease) moves prices down (up).
Q5: Write down the equation of the line passes through the point (1, 1) and
parallel to the graph of 6x-3y+4=0.
Being parallel implies that the graphs have the same slope.
The standard form of the line function is given: 6x – 3y + 4 = 0. For
simplicity, I will change this into the slope-intercept form => y=4/3+2x,
so the slope of the function is 2.
Therefore, the form of the equation we need should look like y = 𝑏 +
2x, and we know that the line passes through the point (1,1)
at x = 1 and y = 1 we have 1 = b + 2 => 𝑏 = −1
Then the equation for the asked line is Y = 2x – 1
PART B: MULTIPLE CHOICES
Q1: Microeconomics is the study of
A) how households and firms make choices.
B) the economy as a whole.
C) the global economy.
D) topics such as unemployment, inflation, and economic growth.
Q2: The concept of scarcity implies ________.
a) Unlimited human resources and limited producer wants
b) Unlimited human wants and limited resources
c) Limited human wants and unlimited resources
d) That we can have everything we want
Q3: If the equation 𝑦 = 3𝑥 + 9 was plotted:
a. the vertical intercept would be 9.
b. the slope would be 3.
c. it would look like an upward sloping line.
d. the horizontal intercept would be – 3.
e. all of the above would be true.
Q4: Assume a household would consume $150 worth of goods and
services per week if its weekly income were zero and would spend an
additional $80 per week for each $100 additional income. Letting 𝐶
represent consumption and 𝑌 represent income, the equation that
summarizes this relationship is:
a. 𝐶 = 150 + 80𝑌
b. 𝐶 = 80 + 1.5𝑌
c. 𝐶 = 80 + 150𝑌
d. 𝐶 = 150 + 0.8𝑌
e. 𝐶 = 100 + 0.8𝑌
Q5: If price (𝑃) and quantity (𝑄) are directly related, this means that:
a. a change in 𝑄 will alter 𝑃, but a change in 𝑃 will not alter 𝑄.
b. if 𝑃 increases, 𝑄 will decrease.
c. if 𝑃 increases, 𝑄 will also increase.
d. an increase in 𝑃 will cause 𝑄 to change, but the direction in which 𝑄
changes cannot be predicted.
Q6: In the figure, the point where the 𝑠𝑙𝑜𝑝𝑒 = 0 is
a. A
b. B
c. C
d. D
e. E
Q7: Refer to the figure. The movement from line A to line B
(parallel lines) represents a change in:
a. The slope only
b. The intercept only
c. Both the slope and the intercept
d. Neither the slope nor the intercept
