Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

ECONOMICS REVIEW QUESTIONS
By Yoftahe H
In Addis Ababa University
Unit one review questions
1
...
Which
definition more suits for economics? Why?
Wealth perspective
• Economics is accumulation of valuable economic resource by producing
goods and services to generate income
...

Scarcity Perspective
• Economics studies about how people ese limited resources efficiently to
satisfy unlimited human want
...

✓ More suit for Economics is scarcity, because Economics study, about efficient
allocation of scarce resource to attain maximum unlimited human wants
...
Why we study economics? Have you gained anything from this chapter? Would you
discuss them please?
• We study economics to know how to manage and efficiently allocate our
scarce resources to get the maximum satisfaction of our unlimited want
...
Define scarcity, choice and opportunity cost
...

• Choice: is an alternative (option) we choose because of scarcity or limitation
of resource
...

4
...


5
...


7
...


9
...
It is leaded with
judgments about what is good or what is bad
...

In recent years, especially around big cities, there is the problem of air pollution and
the likelihood of poisoning is high
...

• Air is a free resource because we are not paying any price to breath it
...

Describe the four categories of economic resources
...
Land: - a free gift of nature
...
Labour: - physical and mental effort of human beings
...
Capital: - all manufactured inputs that can be used to produce another
goods and services
...
Entrepreneurship: - special type of human talent that helps to organize
and manage other factor of production
...

What is a production possibility curve?
• Production possibility curve (PPC) shows the various possible combinations
of goods and services that can be produced in given resource and technology
...

• Economic system of Ethiopia in Derg regime
✓ Ethiopia during the Derg regime followed command economic system
which means the means of production was largely state owned or the
private sector was not allowed
...


10
...

• The enteral problems of economy are: ✓ What to produce: - problem of allocation of resource
...

✓ For whom to produce: - problem of distribution of national product
...
A
...
What
law does the trend in those values exhibit?
Oc at point A = 0
Oc at point B =

90−100
2−0
−10

=|

2

Gives up 5 Good Y
to produce 1 Good X

|

= |-5|
=5
Oc at point C =

60−90
4−2
−30

=|

2

Gives up 15 Good Y
to produce 1 Good X

|

= |-15|
= 15
Oc at point D =

20−60
6−4
−40

=|

2

Gives up 20 Good Y
to produce 1 Good X

|

= |-20|
= 20
B
...
Increase in the quantity or / and quality of economic resources
...
Advancement in technology
...
Normal goods and inferior goods
Normal goods
• A normal good is a good that experiences an increase in its demand due to a
rise in consumers' income
...

• A normal good has an elastic relationship between income and demand for
the good
...

• A normal good is a good that experiences an increase in its demand due to a
rise in consumers' income
...

• Examples of normal goods include food staples, clothing, and household
appliances
...
Inferior goods are goods
that see their demand drop as consumers' incomes rise
...
However, the term "inferior" doesn't
refer to quality, but rather, affordability
...
When this happens, consumers will be more willing
to spend on more costly substitutes
...

• Conversely, demand for inferior goods increases when incomes fall or
the economy contracts
...
Most often than not, there
is not a quality difference
...
Complementary goods and Substitute goods
Complementary goods
• Complementary good a product that is used or consumed jointly with another
product
...

• In other words, an object that is paired with another item; they are usually
purchased together rather than separately
...
Two goods (A and B) are complementary if using
more of good A requires the use of more of good B
...
Substitute goods may be used in place of one another
...

• Substitute goods or substitutes are at least two products that could be
used for the same purpose by the same consumers
...

• Substitute goods can either fully or partly satisfy the same needs of the
customers
...

• Pepsi-Cola is a substitute good for Coca-Cola, and vice-versa
...

3
...
In
other words, it represents the aggregate of all individual demands
...

• Primary demand is the total demand for all of the brands that represent a
given product or service, such as all phones or all high-end watches
...

• Market demand is an important economic marker because it reflects the
competitiveness of a marketplace, a consumer’s willingness to buy certain
products and the ability of a company to leverage itself in a competitive
landscape
...

Individual demand
• The individual demand is the demand of one individual or firm
...


• While the term is somewhat vague, individual demand can be represented by
the point of view of one person, a single family, or a single household
...
Individual supply and Market supply
Individual supply
• Individual supply describes the willingness of an individual firm to provide a
specific quantity of a good or service to the market over a given period of
time
...

• In most cases (i
...
for normal goods) supply increases as the price of a good
or service rises
...

Market Supply
• Supply is the quantity of a good or service that a producer is willing and able
to supply onto the market at a given price in a given time period
...

• A supply curve shows a relationship between market price and how much a
firm is willing and able to sell
...
Excess demand and Excess supply
Excess demand
• Excess demand is the situation where the price is below its equilibrium price
...

• When we have lower prices and excess demand, there will shortage of goods,
putting an upward pressure on the price as there will be more buyers chasing
the available goods
...
This will drive the price and quantity to its
equilibrium level
...

• The quantity willing supplied by the producers is higher than the quantity
demanded by the consumers
...

• As prices fall, the consumer demand will increase until it finally settles at
the equilibrium price
...
Why does the quantity of salt demanded tend to be unresponsive to changes in its

price?
• Because necessary or a luxury or a commodity of comfort demand for essential for
existence such as food items
...

• There goods are essential of existence on the other hand
...

2
...

• The smaller the proportion of income spent on a commodity the smaller will
be the elasticity of demand and vice versa
...
To get the market demand curve for a product, why do we add individual demand
curves horizontally rather than vertically?

• Because individual quantities are obtained on the horizontal axis of demand
curve
...
The market for lemon has 10 potential consumers, each having an individual demand
curve P = 101 - 10Qi, where P is price in dollars per cup and Qi is the number of cups
demanded per week by the ith consumer
...

Draw an individual demand curve and the market demand curve
...
1 - 0
...
1 – 0
...
1
Q;
O = 10
...
1P
=

0
...
1P
1⁄
10
0
...


P = 101
Market demand curve
MD = 101 – P
100

MD = 101 – 0
0 = 101
P = 101

100

5
...
If the price of tickets is 12 birrs, calculate price
elasticity of demand for tickets and draw the demand curve
Given
Qd = 200,000 -10,000P

Required
EDP drive curve

P = 12

EDP =

𝑄
P


...


𝑄;
P;

= -10,000 x

= 200,000 – 120,000
Qd = 80,000
If EDP > 1

𝑄

EDP =

=

12

80,000

−120,000
80,000

= 1
...
Given market demand Qd = 50 - P, and market supply P = Qs + 5
A) Find the market equilibrium price and quantity?
Given
Qd = 50 – P
Qs = P – 5

Required
Qd = Qs

Market equilibrium

Solution
Qd = 50 – p = Qs = p – 5
50 + 5 = P + P
55 = 2P
P = 27
...
5 & 27
...
5 = Qs = 22
...

𝑄

EPD =
=

P

𝑄;


...
5

22
...
5

22
...
5

=|
=

22
...
5

22
...
2

luxury product

7
...
10 )
Income
Quantity Demanded
( Br
...
10, 000 to
Br
...
40, 000 to Br
...

Ied =
=

𝑄

x

I

I
Q
60−50

x

20,000−10,000
10
10,000
=
x
10,000
50
10
=
50

= 0
...
5
B) Is this a normal or an inferior or a luxury good? Justify
...
2 increase to 0
...
When price of tea in local café rises from Br
...

A) Determine cross price elasticity
...
25

B) Based on the result, what kind of relation exists between the two goods?
• Direct relationship, because both are increase
Unit Three Review questions
Part One: Discussion questions
1
...

Utility
• Utility Definition – It is a measure of satisfaction an individual gets from the
consumption of the commodities
...
A utility is a measure of how much one enjoys
a movie, favorite food, or other goods
...

• It is basically of three types
✓ Total Utility: - The sum of the total satisfaction from the consumption of
specific goods or services
...


✓ Marginal Utility: - It is the additional satisfaction gained from each extra unit
of consumption
...

✓ Average Utility: - One can obtain it by dividing the total unit of consumption
by the number of total units
...
Since all the combinations give the same amount of
satisfaction, the consumer prefers them equally
...

• An indifference curve depicts a line representing all the combinations of two goods
that consumers place equal value
...
The consumer has no preference for either combination of goods on the same
line because they are understood to provide the same level of utility to the
consumer
...
The marginal utility thus “diminishes” with increased levels of
consumption
...

• The gradient of the budget line reflects the relative prices of the two products
...

Consumer preference
• Consumer preference is crucial to Microeconomics
...
Let us understand Consumer Preference Theory to understand
consumer behavior and how consumers make choices
...

The entire consumer preference process results in an optimal choice
...

Marginal rate of substitution
•

the marginal rate of substitution (MRS) is the amount of a good that a consumer is
willing to consume in relation to another good, as long as the new good is equally

2
...


4
...


satisfying
...
The
marginal rate of substitution is calculated between two goods placed on
an indifference curve, displaying a frontier of utility for each combination of "good
X" and "good Y
...
Ordinal
utility states that the satisfaction which a consumer derives from the
consumption of product or service cannot be measured numerically
...

• Cardinal utility is less realistic, as quantitative measurement of utility is not
possible
...

• Cardinal utility, is based on marginal utility analysis
...

• The cardinal utility is measured in terms of utile, i
...
units of utility
...

• Cardinal utility approach propounded by Alfred Marshall and his followers
...

Elaborate the justifications for the negative slope and convexity of indifference
curve
...

• It are convex to the origin
...

Standard indifference curves cannot intersect each other
...
Similarity, holding soft drink constant an indifference curve
involving a grater amount of orange must give grater satisfaction
...

Does the change in income affect the slope of the budget line? Explain
...


Part Two: Workout
A person has $ 100 to spend on two goods X and Y whose respective prices are $3
and $5
...
Draw the budget line
...
3

X

✓ When the consumer spends all of her income on good Y intercept at (0
...
3,0)
B
...
15)
Y = 15 -

3

𝑥

5
3
0 = 15 - 𝑥
5
−5
3
-15 = 𝑥 X
5
3
−5
−3
−5
-15 y
=
𝑥X
3
5
3

X = 25 means
X intercept = (25
...
3

✓ The budget line is in word because original income is decrease or fall
C
...
66, 0)
16
...
3

✓ In this cause the budget line is shift to left or in word but Asymmetric
...


D
...
Y good price is changes
So, M = Pxx + Pyy
100 = 3x + 4y because $5 - $1 = $4 25
100 = 3x + 4y
20
4y = 100 – 3x
Y=

100

4

3

- 𝑥
4

Y intercept = (0, 25)
X intercept = (33
...
3

✓ In this cause budget line is shift to the right or out ward but Asymmetric
...
A rational consumer spends all of her income on two goods: Apple and Banana
...
If the price of a unit of Apple is 2 Birr, what is the price of a unit of Banana
at equilibrium?
𝑀𝑢𝑋

Px

=

𝑀𝑢𝑌

𝑀𝑢𝐴𝑝𝑝
...
Given utility function U= where PX = 12 Birr, Birr, PY = 4 Birr and the income of
the consumer is, M= 240 Birr
...
Find the utility maximizing combinations of X and Y
...
equation (1)
𝑀𝑢𝑋 𝑃𝑥

MuY Py

𝑑𝑢

= MuX =

dx

𝑥

x0
...
5 = d x0
...
5 = 0
...
5 – 1 y0
...
5 x0
...
5 =
𝑀𝑢𝑋

MuY

=

0
...
5 𝑦 0
...
5𝑥
𝑦

MURsxy =

0
...
5

𝑀𝑢𝑥

=

Muy

=

0
...
5 𝑦 0
...
5x

0
...
5

=

0
...
5 𝑦

0
...
Equation (2)
Substitute
12x + 4y = 240
Y = 3x
= 12x + 4y = 240
4
y – 3x = 0
8𝑦

8

=

240

8

Y = 30, X = 30 – 3x = 0
30

3

=

3𝑥

3

x = 10
B
...

MURSxy =

𝑌

=

30

=3

X
10
𝑃𝑥
12
MURSxy =
=
=3
Py
4

at equilibrium

3
...
The
unit price of good A is 2 birr and the unit price of B is 1 birr
...

Quantity

MuA

MuB

1
2
3
4
5
6

36
24
20
18
16
10

30
22
16
12
10
4

A) Based on the cardinal analysis, what is the combination of the two goods that
gives maximum utility to the consumer?
𝑀𝑢𝐴

=

𝑀𝑢𝐵

PA
PB
24
12
=
2
1

12 = 12
Check
PxX + PyY = M
4+4=8
8 = 8 it is true
But
𝑀𝑢𝐴

=

𝑀𝑢𝐵

PA
PB
20
10
=
2
1

10 = 10
Check
PxX + PyY = M
3x2 + 5y1 = M
6 + 5 = 11
11 ≠ 8 it is false
✓ The utility is maximum Mp at
𝑀𝑢𝐴

PA

=

𝑀𝑢𝐵

PB

=

24

2

=

12

1

12 = 12 at equilibrium
Quantity
1
2
3
4
5
6

MuA

𝑀𝑢𝐴

MuB

𝑀𝑢𝐵

30
22
16
12
10
4

30
22
16
12
10
4

PA
36
24
20
18
16
10

18
12
10
9
8
5

TuA

TuB

36
60
80
98
114
124

30
52
68
80
90
94

PB

B) What is the total utility at the utility maximization level?

Tu = TuA + TuB at equilibrium point or maximum an utility
...
Compare and contrast the following concepts
...
On the other hand, Implicit Cost, are just opposite to the explicit
cost, as the organization does not directly incur them, but they are implied in
nature which does not involve a cash payment
...

✓ Explicit Cost refers to the one paid to the factors outside the firm
...
There are a number of differences between explicit cost and implicit cost,
which has been explained in the article presented below, have a look
...

✓ Explicit Cost can be easily ascertained, but it is just opposite in the case of Implicit
Cost as it does not have any paper trial
...

b) Economic cost and accounting cost
✓ Economic costs include the same explicit costs that accounting costs use in
calculations, but economic costs also include implicit costs
...
The idea with implicit costs is that the business
could make more by using an asset in a different, more traditional fashion
...

✓ Accounting costs are the explicit costs, also known hard costs that are seen as
money out of your bank account that you need to run your business
...
In other
words, these are the real costs in manufacturing, marketing and delivering your
products
...
Accounting costs are generally real-time costs that are deducted from
revenues in any given accounting period
...
What is the main difference between fixed inputs and variable inputs?
✓ Fixed Inputs: - They are the inputs whose quantity is constant for some
period of time or constant for short run production function
...


✓ Variable Inputs: - These are inputting whose quantity can vary, even in the
short run or for short period of time
...

3
...

✓ The law of variable proportions states that as the quantity of one factor is
increased, keeping the other factors fixed, the marginal product of that factor will
eventually decline
...
When the variable factor becomes relatively abundant, the marginal
product may become negative
...
If there is improvement in the technology, then
the marginal product may rise instead of diminishing
...
It is only in this way that we can alter the factor
proportions and know its effects on output
...

❖ Possibility of Varying the Factor proportions: Thirdly, the law is based
upon the possibility of varying the proportions in which the various factors
can be combined to produce a product
...

4
...


5
...

✓ Show the relationship between sort run MC and MPC both mathematically and
graphically
MC =
MC =
Where

L

Q

=

MC =

TVC

When TVC = W
...
L)
W L
W
=
=
(Q)
Q
MPL
1

MPL
W

MPL

There for they have inverse relationship

This graph shows
AP

The inverse relationship between

Labour (L)
MPL

1
...
MP and MC

MC
AVC

Inverse cost
and
product
relationship

Out put

6
...

✓ No, because accounting cost is only considered direct expanse, whereas
economic cost includes both implicitly cost and accounting cost
...
The short run AVC, AC and MC are all U-shaped
...
Suppose the production function is given by Q(L,K) = L4 K 4 Assuming capital is
fixed, find APL and MPL
...
APL =
APL =

TP

=

L
3
L4


...
K4

APL = L
...
MPL =
MPL =
MPL =
MPL =

L
3
4
3
4

= MPL =

3
−1
4

L

−1
4


...
K

1
4

1
4

1

1

3 K4

3K 4
=( )
4L

4

1

L4

1

(L4
...
K4 )

dL

2
...
4L3
a) Find the value of L that maximizes output
• Output is maximize when MPL = 0
d(TP)

MPL =

dL

=

d(6L2 − 0
...
2L = 0
L(12 – 1
...
2L = 0
L = 0 or L = 10
• The answer is only 10
...

b) Find the value of L that maximizes marginal product
MPL = 12L – 1
...
2L2) = 0
12 – 2
...
4L
12

2
...
4L

2
...
4

L=5

c) Find the value of L that maximizes average product
APL =

6L2 − 0
...
4L2

d(6L− 0
...
8L = 0
APmax = 6 = 0
...
5
3
...

AVC =

1

3

Q3 – 2Q2 + 60Q + 100, find the minimum

1⁄ 𝑄 3 − 2𝑄 2 +60𝑄
3
Q

AVC = 1⁄3Q2 – 2Q + 60
AVCmin =
AVCmin =

d(AVC)

=0

dQ
d(1⁄3Q2 − 2Q + 60)
dQ

=0

AVCmin = 2⁄3Q – 2 = 0
2⁄ Q = 2
3
2
3
Q= 2 2
...
Discuss the main assumptions of perfectly competitive market
...

✓ Homogenous product
...
Describe the feature of monopolistic competition that resembles perfect competitive
and the monopolistic market structure
...

✓ Product deafferentations
...
What is the difference between real and fancied differentiation
...

✓ It is real when there are slight differences in the product of the firm as
in taste if it is a foodstuff, or in quality etc
...
Firms in

such markets engage in active advertising to attract customers and to market
their products
...
What are the similarities and differences between oligopoly and monopolistically
competitive market structure?
❖ The similarities between oligopoly and monopoly competition are:
✓ They both exhibit imperfect competition in that oligopoly has few sellers while
monopoly has many sellers
...

❖ The major differences between the two include:
✓ In monopolistic competitive structures the products and services are highly
differentiated as compared to oligopoly competitive structures
...
For
example, the wireless communication industry in the U
...
has a number of
entities but only a few dominate the market exhibiting an oligopoly
competitive structure
...
For
example, in an oligopoly, the barrier to entry may be presented through the
government where policies are enacted to limit the number of entities in that
particular industry
...
A firm operates in a perfectly competitive market
...

a) What level of output should the firm produce to maximize its profit?
1

The derivative

3
3
3

Q3 – 5Q2 + 20Q + 50
Q2 – 10Q + 20 – 4 = 0

Q2 – 10Q + 16 = 0 factorize of this
Q2 – 8Q -20 + 16 = 0
Q(Q - 8) – 2 (Q + 10) = 0
8 = 0 or Q – 2 = 0
Q = 8 or Q = 2
MC = Q2 – 10 +20 = 2Q – 10
= 2 x 8 – 10 = 6
When Q = 8
= 2(2) – 10 = 4 – 10
= -6
When Q = 2
✓ Then the equilibrium output level is Q = 8units
b) Determine the level of profit at equilibrium
...
Tc
𝜋 = 32 (1⁄3Q3 – 5Q2 + 20Q + 50)
𝜋 = 32 - 1⁄3Q3 5Q2 – 20Q – 50

= 32 - 1⁄3(8)3 5(8)2 – 20(8) – 50
= 32 – 172 + 320 – 160 – 50
= 32 + 320 – 210 – 171
= 352 – 381
= - 29 Which indicate loss
c) What minimum price is required by the firm to stay in the market?
TC = 1⁄3Q3 – 5Q2 + 20Q + 50

𝜋
𝜋
𝜋
𝜋
𝜋

AVC =

𝑇𝑉𝐶
𝑄

=

1⁄ Q3
3
𝑄

-

5Q2
𝑄

+

20𝑄
𝑄

= 1⁄3Q3 – 5Q + 20
= 2⁄3Q – 5 = 0
=

3
3
2Q
3

=

5
2
3

=

15
2

= 7
...
5
✓ Average variable cost if minimum when output is equal to 7
...
What is the difference between GDP and GNP? Which one is a better measure
of the economic performance of a country?

✓ The key difference between GDP and GNP is that GNP considers the output
of a country’s citizens regardless of where that economic activity occurred
...

✓ Consider the following situations, which GDP and GNP treat quite
differently—the way they treat these situations forms the core of their
difference from one another
...
Since
GNP only considers citizens of a country and their economic output, it
does not include such companies in its measurement
...

Companies owned by domestic residents producing goods for
global consumption
...
Since GNP
considers any and all output of domestic residents, it includes these
companies and their economic activity occurs outside the country
...

Similarly, GNP will always include net income receipts from the
international investments made by its residents whereas GDP
will not
...


✓ Economists and investors are more concerned with GDP than with GNP
because it provides a more accurate picture of a nation’s total economic
activity regardless of country-of-origin, and thus offers a better indicator of
an economy’s overall health
...

2
...
In an economy, the labor force is the actual number of
people available for work
...

✓ Unemployment can be broken down into three types of unemployment:
❖ Cyclical unemployment: occurs when there is not enough aggregate
demand in the economy to provide jobs for everyone who wants to work
...
There is a mismatch
between the skills of the unemployed workers and the skills necessary
for the jobs available
...

✓ Unemployment is measured in order to determine the unemployment
rate
...

3
...
When the general price level
rises, each unit of currency buys fewer goods and services; consequently,
inflation reflects a reduction in the purchasing power per unit of money – a
loss of real value in the medium of exchange and unit of account within the
economy
...
The common measure of inflation
is the inflation rate, the annualized percentage change in a general price
index, usually the consumer price index, over time
...
Rising prices, known as inflation,
impact the cost of living, the cost of doing business, borrowing money,

mortgages, corporate and government bond yields, and every other facet of
the economy
...
Discuss the three major differences between CPI and GDP deflator
...
Thus, an increase in the price
of goods bought by firms or the government will show up in the GDP deflator
but not in the CPI or RPI
...
Imported goods are not part of GDP and do not show
up in the GDP deflator
...
K
...
K
...

✓ The third difference concerns how the two measures aggregate the many

prices in the economy
...
In other
words, the CPI or RPI is computed using a fixed basket of goods, whereas
the GDP deflator allows the basket of goods to change over time as the
composition of GDP changes
...

5
...


Total population = 60 million
Number of employed = 30 million
Total labor force = 40 million
Natural rate of unemployment = 12%
a) Find the total unemployment rate
Unemployment rate =

𝑡𝑜𝑡𝑎𝑙 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
𝑡𝑜𝑡𝑎𝑙 𝑙𝑎𝑏𝑜𝑢𝑟 𝑓𝑜𝑟𝑐𝑒

Number of unemployed = total labour force – employed
= 40m – 30m
= 10million
Unemployment =
=
=

𝑁𝑜 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑒𝑑
𝑡𝑜𝑡𝑎𝑙 𝑙𝑎𝑛𝑜𝑢𝑟 𝑓𝑜𝑟𝑐𝑒
10 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
40 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
100
4

x 100

= 25%
b) Calculate the cyclical unemployment rate
Rate – Natural Unemployment rate
= 25% - 12% = 13%

x 100

6
...

Data for two different years 2005 and 2010 is given in the following table
...

Nominal GDP = (120 x 6,000) + (400,000 x 20)
= 720,000 + 8,000,000
= 8,720,000
Real GDP 2010 = (120 x 5,000) + (400,000 x 10)
= 600,000 + 4,000,000
= 4,600,000
b) Find the value of GDP Deflator for the year 2010 and interpret
...
56
✓ Shows the price in 2010 was 89,156 higher than the price in previous
year
...

CPs 2005 = 5,500,000
CPs 2010 = 10,600,000
Inf
...
72%

It`s all about unit 1 – 6 review questions!!
Thank you!!



---