Economics 11: The Market and the State

Exercise Set No. 1 Deadline: September 2, 2014

A. Arcenas Adriano/Aranas/Libre/Morales

The table below shows the production possibilities for the country of Pandesalia for two commodities: pizzas and apartments.
All of Pandesalias resources are fully employed and all the available technological knowledge are being utilized in all of the
production points listed in the table.
Table 1. Pandesalias Production Possibilities
Point Pizza
(millions of slices)
Apartments
(thousands of units)
A 15 0
9 10
B 6 15
3 20
C 0 25
1. Use the figure below to draw Pandesalias production possibility curve. Appropriately label the points that correspond
to the ones in the table. (2pts.)

2. Provide the correct answer for each item.
a. Find the production point where Pandesalia is producing 11,000 apartments and 4 million slices of pizza. Label
this as point D in the graph. (1pt.)
b. What is the opportunity cost of producing one apartment unit? (1pt.) ____________
c. Is point D an efficient production point? (1pt.) ________
d. Is point D a feasible production point? (1pt.) _________
e. Find the point where Pandesalia is producing 15,000 apartments and 9 million slices of pizza. Label this as point E
in the graph. (1pt.)
f. Is point E an efficient production point? (1pt.) ________
g. Is point E a feasible production point? (1pt.) ___________

Indicate whether the following statements are positive (P) or normative (N):
__ 1. A society is fair when people with more income are taxed more.
__ 2. High taxes may discourage work effort.
__ 3. Inflation is less harmful than unemployment.
__ 4. Inflation tends to be high when unemployment is low.

Multiple choice.

1. Economics is primarily concerned with:
a. money
b. determining corporate profits and losses
c. the allocation of scarce resources
d. balancing your checkbook
e. all of the above
2. The concept of opportunity cost is:
a. useful only when discussing the production possibility frontier
b. used to measure costs in terms of the next-best alternative
c. measured in terms of peso value
d. used only by professional economists
e. none of the above
3. Which of the following cannot be considered as capital?
a. a screwdriver used by a carpenter
b. an oil refinery
c. a computer used by the university
d. stocks issued by a blue-chip company
e. none of the above
4. The post hoc fallacy occurs when
a. one problem follows another
b. you think what is true for one unit is true for all
c. many variables change at the same time and you fail to adjust for changes
d. you assume one event was caused by another simply because the other event occurred first
e. economists from different schools of thought try to solve the same economic problems
5. The fallacy of composition occurs when
a. one problem follows another
b. you think what is true for one unit is true for all
c. many variables change at the same time and you fail to adjust for changes
d. you assume one event was caused by another simply because the other event occurred first
e. economists from different schools of thought try to solve the same economic problems
6. Which of the following is not a factor of production?
a. land
b. money
c. natural resources
d. labor
e. human capital
7. Consumers cast their peso votes primarily in the
a. labor market
b. capital market
c. goods market
d. public market
e. stock market
8. A perfectly competitive market economy is able to solve all of the following except:
a. how to ensure that the prices of necessities remain affordable for everyone
b. whether firms should produce more tablets or desktop computers
c. what methods to use in order to produce as efficiently as possible
d. how much an employee gets paid for the labor he provides
e. the price of a kilo of beef
9. Your favorite business daily reported four events today:
i. A well-known company employing a lot of workers went bankrupt due to increasing competition.
ii. Factories near the Pasig river have been dumping toxic substances to the water.
iii. Daily cost of living in Metro Manila exceeds daily wages of an average worker.
iv. The trade department sues seven businessmen for fixing the price of rice.
In which instances can one say that the invisible hand has broken down?
a. i and ii only
b. ii and iv only
c. ii, iii, an iv only
d. i, ii, iii, and iv
e. none of the above
10. What determines which point a market economy will be on its PPF?
a. technology
b. prices
c. government
d. taste
e. central bank
11. Which of the following is the most necessary factor for specialization to work?
a. money as a medium of exchange
b. a highly educated workforce
c. government policies that support profitable industries
d. abundance of capital goods
e. altruistic individuals





Refer to the figure below for items 12 and 13:










12. Equilibrium is achieved when
a. price is equal to 15 and quantity demanded is 10
b. price is equal to 10 and quantity demanded is 15
c. price is equal to 10 and quantity supplied is 10
d. price is equal to 10 and quantity supplied is 15
e. price is equal to 15 and quantity supplied is 8
13. According to the figure above, at price 15
a. quantity supplied exceeds quantity demanded by 15
b. quantity supplied exceeds quantity demanded by 8
c. quantity demanded exceeds quantity supplied by 15
d. quantity demanded exceeds quantity supplied by 8
e. none of the above
14. Passengers on a mass transit system have to wait long queues and ride trains beyond recommended passenger capacity
especially during rush hours. Using what you have learned from the basic elements of supply and demand, you can say
that:
a. the market for mass transit system is currently in equilibrium
b. the price charged for a train ride is below the equilibrium price
c. the price charged for a train ride is above the equilibrium price
d. the mass transit system has too many trains during rush hours
e. the mass transit system is a public good
15. Researchers have found a way to make the production of computers much cheaper while maintaining the same quality.
Assuming that all concerned firms have access and are allowed to use the new production method, the discovery will
result in:
a. an increase in the demand for computers
b. an increase in the supply of computers
c. an increase in the equilibrium price of computers
d. an increase in both equilibrium price and quantity of computers
e. nothing will happen, the market will adjust to maintain the initial equilibrium price and quantity

Table 2 lists some factors that will shift either the demand curve or the supply curve. In each case, determine which curve will
shift, and write in demand or supply as appropriate; then write in whether the shift will be to the right or the left. In addition,
determine whether equilibrium price and output will be higher or lower. The first case has been completed as an example.

Table 2
Demand Left
or or Price Output
Shift Factor Supply Shifts Right Will Be Will Be
a. Population increases. demand shifts right higher higher

b. Input prices go up. _______ shifts _____ _______ _______

c. Average _______ shifts _____ _______ _______
income falls.

d. Technology improves. _______ shifts _____ _______ _______