ECO 101

MID-TERM 1 Syllabus
Topic-1 (Chapter 1): Problems & Solutions
Section: 5, 10 & 18
Faculty: Mahjabeen Mamoon (Mhj)
1. Give an example to illustrate how a change in opportunity cost can affect
behavior?
Opportunity cost is the most highly valued opportunity or alternative given
up/forgone when a choice is made.
Lets first discuss an example of opportunity cost. Suppose person A can either
attend classes at NSU or work in firm X. If he attends classes then he cant
work in firm X & if he works in firm X then he cannot attend classes in NSU.
So the opportunity cost of attending classes is giving up on the salary that person
A could earn if he was working in firm X. Whereas the opportunity cost of
working is not being able to attend classes. Here changes in opportunity cost can
change behavior. Suppose by working in firm X, person A can earn $10/hour. In
this situation person A decides to attend classes & not work. The hourly wage is
not high enough to give up attending classes. Now suppose firm X offers
$50/hour to person A. Previously opportunity cost of attending classes was
$10/hr & now it has increased to $50/hr. The question is what will person A do?
An economist would predict that as the opportunity cost of attending classes
increases relative to the benefit of attending classes, person A is less likely to
attend class.
An economic way of thinking: the higher the opportunity cost of doing something,
the less likely it will be done.
2. There are both costs & benefits of studying. If you continue to study as long as
the marginal benefits of studying are greater than the marginal costs & stop when
the two are equal, will your action be consistent with having maximized the net
benefits of studying? Explain your answer.
Yes such action of studying till marginal benefit is greater than marginal cost
(MB>MC) & stopping where the two are equal (MB=MC) is consistent with having
maximized the net benefit of studying.
Please read pg8-pg10 (right before unintended effects) for explanation. You must
include the figure in exhibit 2 for this answer.
3. The United States is considered a rich country because Americans can choose
from an abundance of goods & services. How can there be scarcity in a land of
abundance?
The economist says that everyone in the world no matter how rich has to face
scarcity. When we are talking about abundance of goods & services, we are
talking about materialistic wants but Americans may want beyond materialistic
things. They may look for peace, leisure, happiness, friendship, a disease free
nation etc. For this reason despite such abundance of goods & services in USA,
there may still be scarcity.

4. Is it possible for a person to incur an opportunity cost without spending any

money? Explain.
Yes it is possible for a person to incur an opportunity cost without spending
money.
Suppose there is an art exhibition going on in NSU & at the same time NSU cine &
drama club is showing a play. Both the exhibition & the play have got free entry (no
tickets required). But you cannot enjoy both the play & the exhibition since they will
be held at the same time. If you watch the play, you miss the exhibition. If you want
to enjoy the exhibition, we cannot watch the play. So opportunity cost of watching the
play is not being able to enjoy the exhibition & vice versa. So here the students are
incurring an opportunity cost without spending any money.
5. Smith says that we should eliminate all greenhouse gases in the world. Jone
disagrees. Who is more likely to be an economist, Smith or Jones? Explain your
answer.
There is no doubt that eliminating all greenhouse gases in the world is certainly
beneficial for us. However benefits rarely come without cost. We cannot eliminate
all greenhouse gases for free. There are costs attached to it. What distinguishes
economists from non-economists is that economist thinks in terms of both costs
& benefits. For this reason Jones is more likely to be an economist.
6. Define positive & normative economics with examples.
Positive Statements
Positive statements are objective statements that can be tested or rejected by referring
to the available evidence. They focus on value-free descriptions of and predictions about
economic relationships.
For example:
A rise in consumer incomes will lead to a rise in the demand for new cars.
If the government raises the tax on beer, this will lead to a fall in profits of the
brewers.
A reduction in income tax will improve the incentives of the unemployed to
search for work.
Normative Statements
Normative statements express an opinion about what ought to be. They are
subjective statements rather than objective statements i.e. they carry value
judgments. Normative statements often contain the prescriptive words should or
ought. For example:
The level of duty on petrol is too unfair and unfairly penalizes motorists.
The London congestion charge for drivers of petrol-guzzling cars should increase
to 25 - three times the current charge.
The government should increase the national minimum wage to 6 per hour in
order to reduce relative poverty.
The government is right to introduce a ban on smoking in public places.
The retirement age should be raised to 75 to combat the effects of our ageing
population.

 The government ought to provide financial subsidies to companies manufacturing

and developing wind farm technology.
The distinction between positive and normative statements can be easily shown via
examples. The statement

The unemployment rate is currently at 9 percent.

is a positive statement, since it conveys factual, testable information about the world.
Statements such as

The unemployment rate is too high.

The government must take action in order to reduce the unemployment rate.
are normative statements, since they include value judgments and are of a
prescriptive nature.
7. Question: The mayor of Gotham City, worried about a potential epidemic of deadly
influenza this winter, asks an economic adviser the following series of questions.
Determine whether a question requires the economic adviser to make a positive
assessment or a normative assessment.
a. How much vaccine will be in stock in the city by the end of November?
b. If we offer to pay 10% more per dose to the pharmaceutical companies providing the
vaccines, will they provide additional doses?
c. If there is a shortage of vaccine in the city, whom should we vaccinate firstthe
elderly or the very young? (Assume that a person from one group has an equal
likelihood of dying from influenza as a person from the other group.)
d. If the city charges $25 per shot, how many people will pay?
e. If the city charges $25 per shot, it will make a profit of $10 per shot, money that can
go to pay for inoculating poor people. Should the city engage in such a scheme?
Answer to Question:
a. Positive
b. Positive
c. Normative
d. Positive
e. Normative
8. Question: A representative of the American clothing industry recently made the
following statement: Workers in Asia often work in sweatshop conditions earning only
pennies an hour. American workers are more productive and as a result earn higher
wages. In order to preserve the dignity of the American workplace, the government
should enact legislation banning imports of low-wage Asian clothing.
a. Which parts of this quote are positive statements? Which parts are normative
statements?
Answer
a. The positive statements are:
workers in Asia . . . [are] earning only pennies an hour
American workers are more productive
American workers are more productive and as a result earn higher wages
The normative statement is:
the government should enact legislation banning imports of low-wage Asian clothing