INTRODUCTION TO MICROECONOMICS

TUTORIAL QUESTIONS I (Chapters 1 – 5, Case Fair Oster, 11e )

1. By using the production possibility curve, show and explain scarcity, choice, opportunity cost,
and inefficiency.

Good B
The opportunity cost of something is
the best alternative that we give up
when we make a choice or a decision.

Point F is the inefficiency point which is below

the PPF, means resources are either
.F unemployed or used inefficiently.

Good A

2. What determines the quantity demanded of a good? List the more important factors and explain
whether an increase in the factor increases or decreases the amount that consumers plan to buy.

Price of the product, the income available to the household,

accumulated wealth, prices of other products (substitute,
complementary), tastes and preferences, expectations.

3. Explain how the market supply curve can be derived. Does the law of supply apply to
the market supply curve?

The market supply curve for a good can be found by summing the
quantities supplied by all of the firms selling in the market for that
good. Since all firms’ supply curves are upward sloping (due to the
law of supply), the market supply curve will also be upward sloping.
Therefore, the law of supply does apply to the market supply curve as
well.

3. Explain why scarcity forces people to make choices

Human wants are unlimited but resources are not. So scarcity of resources forces people to make
choices.

4. Calculate price elasticity of demand for each good by using the price and quantity information given in
the following Table and comment on the coefficients of the elasticities for the each case.

Product Original New Original New

Quantity
Quantity Quantity
Quantity Price Price
Bread 480 520 220 180
Electricity 88 92 92 88
Tomatoes 140 160 300 200
ε = %ΔQ/%ΔP
Bread: [(520 – 480)/(520+480)]/[(180 - 220)/(180+220)] = -0.4
Electricity: [(92-88)/(92+88)]/[(88-92)/(88+92)]=-1 Tomatoes: -0.33

A 10 percent increase in price will lead to 4 percent decrease in quantity

demanded of bread, 10 % in electricity and 3.3% in tomatoes.
5. Define the opportunity cost

The opportunity cost of something is the best alternative that we give

up when we make a choice or a decision.

6. How can you distinguish between normative and positive economics?

Positive economics seeks to understand behavior and the operation

of systems without making judgments. It describes what exists and
how it works. Normative economics analyzes outcomes of economic
behavior, evaluates them as good or bad, and may prescribe courses
of action.

7. Define what economics is

Economics is the study of how individuals and societies choose to use the
scarce resources that nature and previous generations have provided.
8. How the equilibrium price and quantity level change in the market for cars if high taxes imposed on
the car manufacturers and at the same time there is an increase in the price of gasoline.

P S2 S1
Demand shifts left and supply shifts left at
the same time. Equilibrium quantity
decreases but we cannot say something
about the price definitely.
P1 Although the shift in demand decreases
the price, the shift in supply increases. So
it is not possible to say something
certainly about the new equilibrium
price.
D
D2 Q
1
Q2 Q
1
9. Name the three main economic decision makers

1. Firm
2. Entrepreneur
3. Household

10. Define demand and supply

Demand for instance quantity demanded is the amount of a product that household would buy in a
giving period if it could buy all it wanted at the current market price.

11. State the law of the demand and supply

The law of demand describes the inverse relationship between price

and quantity demanded.
The law of supply describes the positive relationship between price and
quantity supplied.
12. If a good is scarce, does that imply that there is a shortage of it

No. If a good is scarce, that means that it is limited in supply. All

resources in the economy are scarce.

13. Explain the difference between microeconomics and macroeconomics.

Microeconomics is the branch of economics that examines the

functioning of individual industries and the behavior of individual
decision-making units (such as households and firms).
Macroeconomics is the branch of economics that examines the
economic behavior of the entire economy, including aggregate
income, aggregate employment, and the average level of prices.

14. Explain very briefly the difference between change in quantity demanded and change in demand

A change in demand is represented by a shift in the demand curve. A

change in quantity demanded is represented by a movement along
the demand curve and is caused by a change in the price of the good.

15. Suppose that the market price and the quantity traded are determined supply and demand at
equilibrium price. Now illustrate and explain very briefly by using a graph for what happens to the
equilibrium when price of inputs decreases and households' income increases at the same time

S’

D
D’
Q
q q’

16. Explain what is meant by the term ceteris paribus. Why is this concept often used in economic
models?

Ceteris paribus means "all else equal". When used in economic

models, this concept helps us to simplify reality in order to focus on
the relationships we are most interested in.

17. Explain what is meant by allocative efficiency.

Allocative efficiency means producing the goods and services that

people most want at the lowest possible cost.
18. List the four criteria that are generally used to evaluate economic outcomes.

(1.) Efficiency.
(2.) Equity.
(3.) Growth.
(4.) Stability.

19. Explain the difference between economic growth and stability. Can a country experience both at the
same time? Why or why not?

Economic growth refers to an increase in the total output of the

economy. Stability occurs when output is steady or growing, with
low inflation and full employment of resources. Yes, a country can
experience both economic growth and stability at the same time, as
long as the increase in output is not accompanied by a rising price
level. The late 1990s were a period of growth for the U.S. economy
with low inflation.

20. Explain how to calculate the slope of a line. What does the slope measure?

The slope of a line is a measure that indicates whether the

relationship between the variables is positive or negative. It tells us
how much of a response there is in variable y (on the vertical axis)
when variable x (on the horizontal axis) changes. The slope is
calculated by taking the change in variable y and dividing by the
change in variable x.

21. What are resources? Describe two different types of resources

Resources are anything provided by nature or previous generations

that can be used directly or indirectly to satisfy human wants.
Capital resources include machinery, equipment, and structures
used to produce other goods and services. Human resources include
labor, skills, and knowledge. Products of nature can also be used as
resources.

22. List the three basic questions that all societies must answer.

(1.) What will be produced?

(2.) How will it be produced?
(3.) Who will get what is produced?

23. Suppose you have saved $300. You can spend it on a new stereo or on a weekend
skiing trip. What is the opportunity cost of going on the skiing trip?

The opportunity cost of the skiing trip is the value of the next best
alternative for using the $300 you have saved. If the nest best
alternative is purchasing the stereo, then the opportunity cost of
going skiing is the enjoyment foregone by not purchasing the stereo.

24. In economic terminology what is the meaning of investment.

Investment is the process of using resources to produce new capital.

The new capital produced can be physical (new machinery) or human
(education) in nature.
25. What is the difference between capital goods and consumer goods

Capital goods are goods that will be used to produce other goods in
the future. Consumer goods are goods that are used for current
consumption.

26. Define Marginal utility and total utility.

Utility is the satisfaction a product yields. Total utility is the total amount of
satisfaction obtained from consumption of a good or service.
Marginal utility is the additional satisfaction gained by the
consumption of one more unit of a good or service.

27. List two things that can cause economic growth to occur.

(1.) New resources are acquired.

(2.) Society learns to produce more with existing resources.

28. What happens to a country's production possibility frontier if it experiences a natural disaster such as a
hurricane or an earthquake? Explain.
Good B

The production possibility frontier

will shift in. This occurs because the
destruction from the hurricane or
earthquake likely destroys
resources such as capital and
natural resources that are used to
produce goods and services. Since
the quantity of resources in the
country is now lower, the country
will not be able to produce as much
output.

Good A

29. Explain the difference between a change in demand and a change in quantity demanded.

A change in demand is represented by a shift in the demand curve

and can be caused by changes in non-price determinants of demand
such as income, preferences, or prices of related goods. A change in
quantity demanded is represented by a movement along the demand
curve and is caused by a change in the price of the good in question.

30. Show graphically (in two separate graphs) the effects of an increase in the price of peanut butter on the
demand for peanut butter and on the demand for jelly.

An increase in the price of peanut butter causes a decrease in the

quantity of peanut butter demanded. This is shown by a movement
along the demand curve for peanut butter from point A to point B.
Since peanut butter and jelly are complements, an increase in the
price of peanut butter will cause a decrease in the demand for jelly.
This is shown by a shift in the demand curve for jelly to the left.
Price Price

A D1

Demand D2

Quantity of Quantity
peanut butter of jelly

32. Explain the difference between a change in supply and a change in quantity supplied.

A change in supply is represented by a shift in a supply curve. It can

be caused by changes in non-price determinants of supply such as the
cost of producing the product or the prices of related products. A
change in the quantity supplied is represented by a movement along a
supply curve. It is caused by a change in the price of the good itself.

33. Calculate income elasticity of demand for each good by using the income and quantity information
given in the following table and comment on the coefficients of income elasticity of demand for each case.

Product Original New Original New

Income Income Quantity Quantity
Bread 180 220 116 124
Margarine 120 200 84 76
Movie 80 100 80 120

ε = %ΔQ / %ΔI
Bread: [(124 - 116)/(116+124)]/[(220 – 180)/(180+220)] = 0.33
Margarine: -0.2 →Inferior good!!
Movie: 1.8
10% increase in income will cause to 18% increase in movie consumption…

34. List three things that can cause a decrease in supply. Be specific.

Student responses will vary but may include:

(1.) An increase in input prices.
(2.) A decrease in the number of suppliers.
(3.) An increase in a tax on the product.
(4.) A decrease in a subsidy for the product.
(5.) Sellers expect the price of the good to rise in the future.

35. Define inferior goods, substitute goods and complementary goods.

 Inferior Goods are goods for which demand falls when income rises.
Substitutes are goods that can serve as replacements for one another; when
the price of one increases, demand for the other goes up.
Complements are goods that “go together”; a decrease in the price of one
results in an increase in demand for the other, and vice versa

MULTIPLE CHOICE QUESTIONS

1. which of the following causes the demand curve to shift to the right
a) increase in income b) increase in the supply of good
c) decrease in the income d) decrease in input prices
2. Which of the following does not cause the demand curve to shift?
a) the price of inputs b) income c) prices of related goods d) expectations
3. When the price of good A rises and the demand for good B rises as a result, we can say that A
and B are
a) substitutes b) not related goods c) complements d) free goods
4.The slope of the production possibility curve shows:
a) marginal rate of substitution b) inefficiency c) marginal rate of transformation d) marginal utility
5. Total revenue will decrease when price increases, if price elasticity of demand:
a) is bigger than 1 b)is smaller than 1 c) is equal to one d) is perfectly elastic is
6. It always rains about an hour after you finish washing your car. Concluding that washing your
car caused it to rain is an example of the
a) fallacy of composition. b) fallacy of inductive reasoning.
c) post hoc, ergo prompter hoc fallacy. d) ceteris paribus conditions.
7. Production is the process by which
a) products are used by consumers b) resources are transformed into useful forms
c) products are converted into capital d) resources are allocated and distributed
8. Price is currently below equilibrium. There is a situation of excess ________. We would expect
price to _______.
a) demand; fall b) supply; rise c) supply; fall d) demand; rise
9. Any point under the production possibility curve shows:
a) efficient use of resources b) inefficient use of resources c) scarce resource d) economic growth
10. If a 5% increase in the price of chicken increases the quantity of beef demanded by 10%, then
we can say that the cross elasticity of demand between chicken and beef is:
a) 4 b) 1 c) -2 d) 2
11. The process of using _______ to produce new capital is known as _________.
a) resources; investment b) specialization; absolute advantage
c) comparative advantage; inefficient production d) money; specialization
12. The income elasticity of demand for bread is greater than 0 but less than +1 and the income
elasticity of demand for potato is less than 0. This implies that potato:
a) and bread are complements
b) is an inferior good and bread is a necessary good
c) is a necessary good and bread is an inferior good
d) is an luxury good and bread is necessary good
13. The difference between the maximum amount a person is willing to pay for a good and its
current market price is known as
a) producer surplus. b) profits.
c) consumer surplus. d) revealed preferences.
14. The cost involved when choosing between alternatives is known as the
a. marginal cost. b. sunk cost. c. opportunity cost. d. normative cost.
15. Which of the following is the best definition of economics?
a.The study of how individuals and societies choose to use the scarce resources that nature and previous
generations have provided
b. The study of how consumers spend their income
c. The study of how business firms decide what inputs to hire and what outputs to produce
d. The study of how the federal government allocates tax dollars
16. Which of the following is held constant along the demand curve?
a) price of the good b) income
c) quantity d) both a and b