Exercises for Microeconomics

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EXERCISES FOR MICROECONOMICS

TOPIC 1

Economics: An Introduction

(Chapters 1 & 2 in the Textbook)

EXPLAIN THE FOLLOWINGTERMS
◎ Average benefit
◎ Average cost
◎ Economic surplus
◎ Economics
◎ Microeconomics
◎ Macroeconomics
◎ Marginal benefit
◎ Marginal cost
◎ Normative economics
◎ Positive economics
◎ Rational person
◎ Sunk cost
◎ Opportunity cost
◎ Absolute advantage
◎ Comparative advantage
◎ Attainable point
◎ Unattainable point
◎ Efficient point
◎ Inefficient point
◎ Production possibilities curve

REVIEW QUESTIONS
1. The most you would be willing to pay for having a freshly washed car before going out on a date is $6. The smallest amount for which you would be willing to wash someone else’s car is $3.50. You are going out this evening, and your car is dirty. How much economic surplus would you receive from washing it? 2. Residents of your city are charged a fixed weekly fee of $6 for garbage collection. They are allowed to put out as many cans as they wish. The average household disposes of three cans of garbage per week under this plan. Now suppose that your city changes to a “tag” system. Each can of refuse to be collected must have a tag affixed to it. The tags cost $2 each and are not reusable. What effect do you think the introduction of the tag system will have on the total quantity of garbage collected in your city? Explain briefly. 3. Tom is a mushroom farmer. He invests all his spare cash in additional mushrooms, which grow on otherwise useless land behind his barn. The mushrooms double in weight during their first year, after which time they are harvested and sold at a constant price per pound. Tom’s friend Dick asks Tom for a loan of $200, which he promises to repay after 1 year. How much interest will Dick have to pay Tom in order for Tom to recover his opportunity cost of making the loan? Explain briefly. 4. Consider a society consisting only of Helen, who allocates her time between sewing dresses and baking bread. Each hour she devotes to sewing dresses yields 4 dresses, and each hour she devotes to baking bread yields 8 loaves of bread. If Helen works a total of 8 hours per day, graph her production possibilities curve and explain what is meant by the following statement: “An increase in productivity with respect to any one good increases our options for producing and consuming all other goods.” 5. Toby can produce 5 gallons of apple cider or 2.5 ounces of feta cheese per hour. Kyle can produce 3 gallons of apple cider or 1.5 ounces of feta cheese per hour. Can Toby and Kyle benefit from specialization and trade? Explain.

TOPIC 2

The Basics Of Supply And Demand

(Chapters 3 & 4 in the Textbook)

EXPLAIN THE FOLLOWINGTERMS
Buyer’s reservation price
Seller’s reservation price
Change in demand
Change in quantity demanded
Change in supply
Change in quantity supplied
Complements
Substitutes
Demand curve
Supply curve
Economic efficiency
Equilibrium
Equilibrium price
Equilibrium quantity
Excess demand
Excess supply
Income effect
Substitution effect
Inferior good
Normal good
Market
Market equilibrium
Price ceiling
Price floor
Buyer’s surplus
Seller’s surplus
Total surplus
Socially optimal quantity
Price elasticity of demand
Price elasticity of supply
Elastic
Inelastic
Unit elastic
Perfectly elastic demand
Perfectly inelastic demand
Perfectly elastic supply
Perfectly inelastic supply
Cross-price elasticity of demand
Income elasticity of demand
Total expenditure

REVIEW QUESTIONS
Indicate how you think each of the following would shift demand in the indicated market: Incomes of buyers in the market for vacations increase.
Buyers in the market for pizza read a study linking hamburger consumption to heart disease. Buyers in the market for CDs learn of an increase in the price of audiocassettes (a substitute for CDs). Buyers in the market for CDs learn of an increase in the...
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