BUS109 Introduction to Microeconomics

SolBridge International School of Business

Problem Set for Lecture 2

Xiangcai Meng

Multiple Choice
1. c. a simplified representation of some aspect of the economy
2. a. households are sellers, and firms are buyers.
3. b. feasible, but not efficient.
4. c. move the economy along the production possibilities frontier.
5. d. the influence of the government budget deficit on economic growth.
6. a. Law X will reduce national income.

Problems and Applications

mowing lawns washing cars
A 40 0
B 0 40
C 20 20
D 25 25

b.

c. Explain why the production possibilities frontier has the shape it does.
Because opportunity cost changes.
d. Are any of the allocations calculated in part (a) inefficient? Explain.

C is inefficient, because the workers could be more effective.

8.

a. Society faces a short-run trade-off between inflation and unemployment.

Positive. Because it does not offer an action to be taken. It is stating facts on the
relationship between inflation and unemployment.
b. A reduction in the rate of money growth will reduce the rate of inflation.
Positive. This statement is not trying to offer a solution based on a pre-
determined agenda. It is simply stating economic theory. An increase in money
growth increases aggregate demand and brings about an increase in inflation.
c. The Federal Reserve should reduce the rate of money growth.
Normative. The author of this particular statement is offering an opinion and a
policy she believes the bank of Ghana should undertake. This statement is not
just a statement of fact, it goes beyond that.
d. Society ought to require welfare recipients to look for jobs.
Normative. This is offering an opinion of an action that the author of the
statement believes should be taken.
e. Lower tax rates encourage more work and more saving.
Positive. A statement of widely accepted economic theory is being made. The
author of the statement is not offering an opinion, or stating an action that should
be taken. He or she is simply stating what the prevailing economic thought on
this subject is.