# Introduction to Economics: Revision Questions

Pages: 12 (3641 words) Published: May 7, 2012
STRICTLY FOR STUDENTS OF GROUPS 4, 5, 6 & 7 ONLY

Revision 1(2012) Questions In addition to the questions below, can you bring along the 2011ZB question and examiners’ commentary. From the 2011ZB paper -- Would like to quickly run through the long question 4; long Question 3 is included in this set of question. Question 2 and some of the short questions have already been covered in the Extra lesson we had. From the 2011ZA Paper – note o that Question 3 on perfect competition is rather identical to a question in our tutorial 4(question 8). I have included the long question 2 in this set of revision questions. Short Questions 1(a) The production of a unit of x requires half a unit of labour and a quarter of a unit of capital; the production of a unit of y requires one unit of labour and one unit of capital. There are 100 units of labour and 100 units of capital. As the economy needs less labour and less capital per unit of x than it requires for y, it will never specialise in the production of y. True or false? Explain. Cross Refer: A. To produce one unit of commodity x requires only half a unit of labour (no capital is needed). Each unit of x needs storage space during the production process which is limited to up to 180 units of x. Commodity y, on the other hand, requires a quarter of a unit of labour and half a unit of capital for the production of one unit. There are 100 units of labour and 100 units of capital. (i) Draw the production possibility frontier. (ii) What will be the opportunity cost of y when we produce 30 units of it? (iii) What will be the opportunity cost of x when we produce 80 units of it? (iv) Had we produce 120 units of x efficiently and the international price of x was 1y for 1x, what would now be produced in the economy? B. An economy produces two goods (x and y). There are two types of means of production: labour and a special type of machines (capital). One unit of labour can either produce two units of x or two units of y or any linear combination of the two. There are 100 units of labour in the economy. Capital, however, can only be effective in the production of x. One unit of capital can produce 1 unit of x and there are 50 units of capital in the economy. Therefore the opportunity cost of a unit of x when the economy produces over 50 x will be 1 unit of y per x and 0 units of y per x when the economy produces less than 50 x. True or false, explain. C. Two economies produce only two goods, x and y. Economy 1 can produce either 80 units of y or 20 units of x (or any linear combination of the two). Economy 2 can produce either 40 units of y or 20 units of x (or any linear combination of the two). Therefore, there exists no price for which economy 1 will gain from trading with economy 2. True or false, explain. 1(b) A rational agent will never respond to a fall in the price of a commodity by reducing the quantity of that commodity unless it is an inferior good. True or false? Explain. Page 1

TCC Introduction to Economics (2011/12)

STRICTLY FOR STUDENTS OF GROUPS 4, 5, 6 & 7 ONLY

Cross refer to: B. C. When a good is a normal good but income and substitution effects work in opposite directions, price elasticity of demand will necessarily be positive. True or false, explain. Two demand schedules intersect at the price po and quantity xo. If the price elasticity of the steeper demand schedule is greater than unity, so must be the price elasticity of the flatter demand. True or false? Explain. When price elasticity of demand is -0.5, it means that an increase in price would decrease consumers’ spending. True or false? Explain. In a world of two goods when one of the goods is considered inferior and the two goods are complements, the price elasticity of demand for the normal good will be greater than unity. True or false, explain. Whether or not the substitution effect under Slutsky’s definition of real income is greater or smaller than the equivalent effect under the Hicksian definition of...