MICROECONOMICS

PROBLEM SET #1

Answer the following questions on a separate sheet of paper.

1.  Indicate whether each of the following statements pertains to microeconomics or macroeconomics:

a.  The unemployment rate in the U.S. was 5.9% in September of 1995.

b.  The Alpo dog food plant in Bowser, Iowa, laid off 15 workers last month.

c.  An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise.

d.  Our GDP, adjusted for inflation, grew by about 3.1% in 1993.

e.  Last week, Manhattan Chemical Bank lowered its interest rates by one-half of one percentage point.

f.  Inflation rose by 2.7% in 1993.

2.  Each of the following sentences appeared in the Wall Street Journal. Identify each as positive or normative.

a.  Personal income fell in November to a seasonally adjusted rate of $4.879 trillion.

b.  Deregulation of the airline industry has failed.

c.  Limitations on the number of terms a president may serve are a good idea.

d.  The Fed lowered the discount rate to 3.5%.

e.  Speaker Gingrich believes there should be a balanced budget amendment.

3.  Define opportunity cost. What is the opportunity cost of each of the following?

a.  Studying on the night of a big party.

b.  Going to a party the night before a big test.

c.  Taking an all-expense-paid trip to the Bahamas.

4.  Classify the following Microsoft resources as labor, land, capital, or entrepreneurial ability:

a.  code writers for software

b.  Bill Gates

c.  production facility for Windows CD-ROMs

d.  “campus” on which Microsoft buildings sit

e.  grounds crew at Microsoft campus

f.  Microsoft corporate jet

5.  Assume that the schedule below describes the production possibilities confronting an economy.

Pianos Stereos

A 10 0

B 9 1

C 7 2

D 4 3

E 0 4

Using the information from the table, do the following:

a.  Draw the production possibilities curve. Label each alternative output combination.

b.  Calculate and illustrate on your graph the opportunity cost of producing one stereo.

c.  What is the cost of producing a second stereo?

d.  What would happen to the production possibilities curve if additional factors of production became available? Illustrate.

6.  Contrast how a market system and a command economy try to cope with economic scarcity.

7.  Explain with reference to capital and consumer goods: “Affluence tomorrow requires sacrifice today.” Please use a production possibilities curve in your explanation.