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Economics (MCR001)
Tutorial Homework Exercise for Lecture 1 (Introduction + PPF)

1.The most fundamental economic problem is _____________.

Ans: Scarcity

2. Resources
What are the “factors of production” and how are they related to the income for the owners of these
resources?

Ans: The four factors of production are _______, _________, _________ and __________.

Factors of Production Owner of resources Income

Land Landlord Rental income

Labour Owner of Labour (workers) Wages

Capital Owner of Capital (eg banks) Interests

Entrepreneurship Businessperson Profit

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3. An opportunity cost is the total cost of all other alternatives foregone whenever a choice is made.
(True or false).

Ans: False, an opportunity cost is the best alternative foregone

4. From 9A.M to 11 A.M., Candy can sleep in, go to her economics lecture, or go out with her
boyfriend. Suppose that Candy decides to go to the lecture but thinks that, if she hadn’t, she would
otherwise have slept in. What is the opportunity cost for Candy when she decided to go to the
economic lecture? (Ans: sleep in or go out with her boyfriend?)

Ans: The opportunity cost of going to the lecture is sleeping in (the best opportunity foregone).

5. Marginal benefits (MB) and Marginal costs (MC) of beer

No. Marginal Marginal MR - MC

of Benefit cost (MC) Sketch the marginal cost curve (MC) and the marginal
beer (MB, MR) of beer benefit (MB) curve. Indicate the quantity of beer that
of beer achieve the highest satisfaction for consumption or (uses
1 6 1.5 resources efficiently for production).
2 5 2
3 4 2.5
4 3 3 Ans: 4 beers
5 2 3.5
6 1 4

Ans: Allocative efficiency is achieved when MR = MC, ie when the consumption of beer is 4 units,
MR = MC; MR = 3, MC =3

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6. Production Possibility Frontier (PPF)

butter

A B C D
Cheese 0 35 55 60
Butter 50 40 20 0

Cheese

a. State the production levels for this economy at Point B and Point C.

Ans: Point B: 35 Cheese, 40 butter

Point C: 55 Cheese, 20 butter

***
b. If the economy is operating at point C, the opportunity cost of producing an additional 20 units of butter is:
(**Hints: Opportunity cost equals the quantity of goods you must give up divided by the quantity of
goods you will gain).

Ans:
Butter gained from 20 to 40 = + 20
Cheese forgone from 55 to 35 = - 20
Therefore the Opportunity Cost = cheese foregone ÷ butter gained = 20 ÷ 20 = 1
That means, 1 unit of butter for 1 unit of Chess

c. Point F represents inefficient / most efficient / unattainable.

Ans: Unattainable (because it’s outside the PPF)

d. As we move from point A to point D, the opportunity costs of cheese in terms of butter fall / remain
unchanged / rise.
Ans: The opportunity cost increases as we increase production of one goods.
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mango
7. Below is a production possibilities table for coffee and mangos:

A B C D E F
Coffee 0 1 2 3 4 5
mango 10 8 6 4 2 0

coffee
a. State the production levels for this economy at Point B and Point C.
Ans: Point B: 1 coffee, 8 mangos

Point C: 2 coffee, 6 mangos

b. Sketch the PPF with coffee on the x axis and mango on the y axis.

c. In the above PPF for Coffee and mangos, the opportunity cost of coffee when moving from A to B is:

(**Hints: Opportunity cost equals the quantity of goods you must give up divided by the quantity of
goods you will gain).

Ans: Quantity of mangos given up = (10 – 8) = 2

Increase in the Quanity of coffee = (1 – 0) = 1

Therefore, the opportunity cost = 2 ÷ 1 = 2

ie 1 coffe = 2 mangos

d. In the above PPF for Coffee and Mango, the opportunity cost of coffee when moving from E to C is:

Ans: Quantity of coffee given up = (4 – 2) = 2

Increase in the Quanity of mango = (6 – 2) = 4

Therfore the opportunity cost = 2 ÷ 4 = 0.5

ie 1 mango = 0.5 coffee

8. Why is this PPF (coffee & mango) a straight line compared to the previous PPF (butter and cheese)? What
does the shape of the PPF tell us?

Ans: If the PPF is a straight line, it means “constant opportunity costs”.

If the PPF is concave to the origin, it means “increasing opportunity costs”.
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