Questions and Answers of Principles Of Economics

What is an isocost line?
What determines the slope of an isocost line?
Given the TC function PKK 1PLL 5TCKL , where the price of capital is 50 and the price of labour is 10, what would be the total cost of 12 units of capital and 8 units of labour?
What is the least-cost input combination?
What determines the slope of the isoquant curve?
If capital and labour were perfect substitutes, what would be the shape of an isoquant? Explain.
What is meant by the term ‘allocative efficiency’?
What is welfare economics?
What is efficiency and how might we measure it?
What is meant by a Pareto efficient outcome?
Why are issues relating to efficiency classed as positive? What are the normative issues we might want to be concerned with?
When the tickets for the Glastonbury Festival go on sale, the demand exceeds supply by a considerable margin. Many people who are willing to pay the price for tickets are excluded from the market.
How would you define the concept of welfare? If well-being is about happiness and satisfaction with life, how would you, as an economist, go about trying to define and quantify happiness and
An early freeze in Normandy ruins half of the apple harvest. What happens to consumer surplus in the market for apples? What happens to consumer surplus in the market for cider? Illustrate your
Maria owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as she pumps more. Here is the cost she incurs to
Consider a market in which Günter from Problem 4 is the buyer and Maria from Problem 5 is the seller.a. Use Maria’s supply schedule and Günter’s demand schedule to find the quantity supplied
Why might we want to think about market price as the outcome of a bargaining model?
The cost of producing smartphones has fallen over the past few years.a. Use a supply and demand diagram to show the effect of falling production costs on the price and quantity of smartphones sold.b.
Governments in many countries are acutely aware of the environmental problems that vehicle emissions can have.Many car manufacturers are exploring the production of electric vehicles, but production
a. Give an example of a price ceiling and an example of a price floor.b. Which causes a shortage of a good – a price ceiling or a price floor? Which causes a surplus?c. Under what circumstances is
Explain why there has been criticism of rent controls and whether this criticism needs revision in the light of new research.
How does a tax imposed on a good with a high price elasticity of demand affect the market equilibrium? Who bears most of the burden of the tax in this instance?
How might an economist decide whether the benefits of a subsidy outweigh the cost?
What are the two main reasons that governments levy taxes?
a. Draw a supply and demand diagram with a tax on the sale of the good. Show the deadweight loss. Show the tax revenue.b. How do the elasticities of supply and demand affect the deadweight loss of a
What are the four canons of taxation?
Lovers of opera persuade the government to impose a price ceiling of €50 per ticket at the country’s national opera house. Does this policy get more or fewer people to attend? What does the
A government wants to reduce the incidence of anti-social behaviour which can result from excess alcohol consumption by young people aged between 18 and 25. Which do you think leads to a fairer
The government decides to reduce air pollution by reducing the consumption of vehicle fuel. It imposes €0.50 tax for each litre of fuel sold.a. Should it impose this tax on fuel companies or
Unemployment among young people across a number of European countries is very high. Imagine that European Union ministers proposed a youth employment subsidy designed to help increase the number of
Suppose that the tax system had the following features. Explain how individuals’ behaviour is affected.a. Contributions to charity are tax deductible.b. Sales of beer are taxed.c. Realized capital
The tax on cigarettes and other smoking products is very high in many countries (in the UK it is over 80 per cent of the selling price) and has been rising over time. Discuss the merits of this
The ride hailing app, Uber, has had its challenges in recent years. In some countries, accusations that the company did not take its responsibilities seriously in looking after the welfare of
You do not have to look too far to find plenty of debate about the state of economics. There are books written which are heavily critical of mainstream economics, including ‘a chilling tale’ by
What is meant by empirical study in economics?
Should economic theories be developed as a result of observation or before observation? Explain.
Why do differences in values lead to disagreements among economists?
Terms like ‘investment’, ‘capital’, ‘interest’, ‘price’ and ‘cost’ have different meanings in economics than they do in normal everyday usage. Find out what the differences are
One common assumption in economics is that the products of different firms in the same industry are indistinguishable.For each of the following industries, discuss whether this is a reasonable
A researcher in a university notices that the price of flights to holiday destinations tends to be much higher outside semester dates. They formulate a theory to explain this phenomenon. Has the
A politician makes a speech which is critical of the government’s immigration policy, saying that it is too loose and encourages too many people to enter the country and take jobs away from local
If models are not capable of representing the real world in any detail and rely too much on assumptions, then what value can they be?
Does the fact that there are different schools of thought in economics reduce its validity as an academic discipline?
Rival political groups argue about the value and effectiveness of speed cameras as a means of influencing driver behaviour and improving safety on the roads. An economist is asked to conduct research
Would you expect economists to disagree less about public policy as time goes on? Why or why not? Can their differences be completely eliminated? Why or why not?
Consider a theory which states that an increase in interest rates will lead to an increase in savings. How would the principle of ceteris paribus be important in investigating the predictive power of
In 2016, Apple launched the latest version of its iPhone, the iPhone 7. Unlike previous versions, this new phone came without a socket for headphones. Needless to say, Apple had a solution for this
a. What are the demand schedule and the demand curve, and how are they related? Why does the demand curve slope downwards from left to right?b. What are the supply schedule and the supply curve, and
a. Does a change in consumers’ tastes lead to a movement along the demand curve or a shift in the demand curve?b. Does a change in price lead to a movement along the demand curve or a shift in the
Francine’s income declines and, as a result, she buys more cabbage. Are cabbages an inferior or a normal good? What happens to Francine’s demand curve for cabbages?
Define the equilibrium of a market. Describe the forces that move a market towards its equilibrium. Describe the role of prices in market economies.
Define the price elasticity of demand and the income elasticity of demand. How is the price elasticity of supply calculated? Explain what this measures.
a. List and explain some of the determinants of the price elasticity of demand. Think of some examples to use to illustrate the factors you cover.b. What are the main factors that affect the price
A business person reads that the price elasticity of demand for the product they sell is 1.25. If the person wishes to increase revenue, should they increase or reduce price? Explain.
What factors might affect the price elasticity of supply for a commodity such as rubber in the short run and the long run?Explain.
Explain each of the following statements using supply and demand diagrams.a. When there is a drought in southern Europe, the price of soft fruit rises in supermarkets throughout Europe.b. When a
Using supply and demand diagrams, show the effect of the following events on the market for sweatshirts.a. A drought in Egypt damages the cotton crop.b. The price of leather jackets falls.c. All
Think about the market for cigars.a. Are cigars substitutes or complements for cigarettes?b. Using a supply and demand diagram, show what happens in the markets for cigars if the tax on cigarettes is
Suppose that the price of tickets to see your local football team play at home is determined by market forces. Currently, the demand and supply schedules are as follows:a. Draw the demand and supply
Seafront properties along the south coast of France have a price inelastic supply, and cars have a price elastic supply.Suppose that a rise in population doubles the demand for both products (that
Explain why the following might be true: a drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in France reduces the total revenue that
There is no shortage of people, both economists and non-economists, who are keen to highlight how the standard theory as outlined in the first part of this chapter is ‘dead’ and should be
What are the main assumptions of the standard economic model?
Explain why the assumptions of the standard economic model might not hold.
What are heuristics and how might they affect consumer decision-making?
Jacqueline divides her income between coffee and croissants (both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in France.a. Show how this early
Surette buys only orange juice and yoghurt.a. In 2019, Surette earns €20,000, orange juice is priced at €2 a carton and yoghurt is priced at €4 a tub. Draw Surette’s budget constraint.b. Now
A consumer has an income of €30,000 a year and divides this income between buying food and spending on leisure.The average price of a unit of food is €15 and the average price of a unit of
Indifference curves are convex to the origin (i.e. bow inwards). Using your knowledge of the properties of indifference curves, explain why indifference curves cannot be concave to the origin (i.e.
Using an example, explain why the consumer optimum occurs where the ratio of the prices of two goods is equal to the marginal rate of substitution.
Sketch a diagram to show the effect on demand of a change in income on a good which has an income elastic demand.
Choose three products you purchased recently. Think about the reasons that you made the particular purchase decision in each case. To what extent do you think you made the purchase decision in each
Look at the following two statements:a. Which would you prefer: a 50 per cent chance of winning €150 or a 50 per cent chance of winning €100?b. Would you prefer a decision that guarantees a
In discussing the idea of perfectly competitive markets we have used the dairy industry as an example. Looking at the dairy industry in Europe provides some interesting background to the theories and
Why is the point of profit maximization where marginal cost equals marginal revenue?
Explain the difference between increasing, constant and decreasing returns to scale.
Manton Bakery is a company that bakes bread. Here is the relationship between the number of workers at the bakery and Manton’s output in a given day:a. Fill in the column of marginal product. What
Your aunt announces that she is thinking about opening a restaurant. She estimates that it would cost €500,000 per year to rent the premises, buy a licence to serve alcohol and to buy in food. In
Your cousin Mark owns a painting company with fixed costs of €200 and the following schedule for variable costs:Calculate average fixed cost, average variable cost and average total cost for each
What are the characteristics of a competitive market? Which of the following drinks do you think is best described by these characteristics? Why aren’t the others?a. tap waterb. bottled waterc.
A commercial fisherman charts the following relationship between hours spent and the quantity of fish caught per trip.a. What is the marginal product of each hour spent fishing?b. Using these data,
You go out to the best restaurant in town and order a steak dinner for €40. After eating half of the steak, you realize that you are quite full. Your partner wants you to finish your dinner,
Alejandro’s lawn mowing service is a profit-maximizing, competitive firm. Alejandro mows lawns for €27 each. His total cost each day is €280, of which €30 is a fixed cost. He mows 10 lawns a
Intuition might tell us that people respond to incentives. Economics deals with human beings, and what might seem to be a common sense statement reveals more complex relationships which make outcomes
What are the three economic questions which any society must answer?
Describe the main features of a capitalist economic system and explain why private property and a strong legal system are vital to the success of this system.
What is the opportunity cost of going to a restaurant for a meal?
Why can specialization and trade help improve standards of living?
What do you think are the main costs of inflation that is out of control on the population?
Describe some of the trade-offs faced by each of the following:a. A family deciding whether to buy a new car.b. A government deciding whether to build a high-speed rail link between two major cities
In 2019, the youth unemployment rate in Spain was 32.6 per cent. Does this mean that labour is not a scarce resource in Spain?
Many of the countries which had planned economic systems have transitioned to a more market-based economic system in the face of numerous problems. What do you think are the disadvantages of planned
You win €10,000 on the EuroMillions lottery draw. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5 per cent interest. What is the
Three managers of the van Heerven Coach Company are discussing a possible increase in production. Each suggests a way to make this decision.FIRST MANAGER: We need to decide how many additional
Economics is:a . an agricultural science b . a social sciencec . a physical science d . not a science, but a field of study
A producer is:a . a person who purchases a product b . the seller of a product c . the buyer of a product d . a good sow
A consumer is all of the following except:a . a buyer b . a household c . a customer d . a firm
A North Dakota wheat farmer is an example of:a . a producer b . a consumer c . both a and b d . neither a nor b
The study of growth in Mexico’s level of living is an example of:a . macroeconomics b . microeconomics c . political science d . consumer behavior
The study of how a single beef producer uses growth hormones is an example of:a . macroeconomics b . microeconomics c . biological science d . consumer behavior

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