UNIVERSITY OF THE PHILIPPINES SCHOOL OF ECONOMICS ECONOMICS 100.1 Introduction to Macroeconomic Theory and Policy Problem Set No.

1 Prof. W. Monsod/Adriano/Andal/Patagan 2 Semester AY 2011-2012

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Submission is on Tuesday, during the discussion class on Nov. 22, 2011. Please use yellow paper for your answers. A. Mutiple Choice: Choose the letter of the best answer. 1. Which of the following is the most basic of the subjects with which the study of economics must try to deal? A. Markets. B. Money. C. Profit seeking. D. The price mechanism. E. Scarcity. 2. What is the fundamental difference between macroeconomics and microeconomics? A. Macroeconomics involves studying the economy as a whole, while microeconomics involves studying the behaviour of individual industries, firms, and households. B. Macroeconomics concentrates on those parts of the economy involving very large amounts of money, while microeconomics concentrates on those parts of the economy involving small sums of money. C. Macroeconomics studies the behaviour of large firms, while microeconomics studies the behaviour of small firms. D. There is no difference; basically macroeconomics and microeconomics are one and the same. E. None of the above. 3. Which of the following has nothing to do with the three basic problems of economic organization? A. Spain deciding whether to let go of the Philippines as a colony or not. B. Trying to generate plutonium in a lab. C. Implementing the major tenets of the Reproductive Health Bill, assuming the latter is passed. D. Determining the cause of death of Tamerlane. E. All of the above. 4. The following shows the concept of opportunity cost except A. Walking to class B. Going to Boracay C. Taking an Economics 100.1 exam on a Sunday D. Writing a paper on a Friday evening E. None of the above 5. Which of the following can not be considered as capital? A. Oil refinery B. Screwdriver used by a carpenter C. Money borrowed by a business firm from a bank to expand its operations D. Computer used to model an economic phenomena E. All of the above. 6. The fallacy of composition occurs when: A. one problem follows another. B. you think something that is true for one unit is true for all. C. many variables may change at the same time and you fail to adjust for the changes. D. you assume one event was caused by another simply because the other event occurred first.

E. economists from different schools of thought approach the same economic problem. 7. A market economy is: A. one in which a government makes all the important production and consumption decisions. B. one in which individuals and private firms make the major production and consumption decisions. C. one in which only one person makes all the important production and consumption decisions. D. None of the above. E. All of the above. Figure 1

AI

BI B CI C F G H I E EI D D
I

Consumption Goods

A J

Capital Goods
8. The production possibilities frontier between two goods and services is typically bowed out or concave to the origin because: A. society must give up one good to get more of the other. B. consumers do not want too much of either good. C. government restrictions place limits on the production of certain goods. D. the resources used to produce goods and services are not equally suited to the production of both goods. E. consumers want as much of both goods as possible. 9. Which of the following points on the production-possibility frontiers drawn in Figure 1 indicates no consumption goods being produced? A. G B. B I C. B D. E I E. A 10. Of the following points, which point reflects the most efficient use of available resources in relation to frontier AE in Figure 1? A. F B. G C. C D. H E. Cannot tell from the information provided. 11. Markets can occur: A. whenever buyers and sellers of the same product can communicate with one another. B. only if buyers and sellers have some form of currency to use for exchange. C. only if the government steps in and regulates the behavior of buyers and sellers. D. all of the above. E. none of the above 12. If a commodity such as peanuts becomes overstocked, sellers will: A. raise their prices in order to make up for the fact that sales are lower.

B. C. D. E.

raise their prices in order to increase the demand for peanuts. lower their prices hoping to lure additional buyers into the marketplace. lower their prices in order to encourage competition from rival firms. grow more peanuts next year to make up for losses this year.

13. A market equilibrium is defined as occurring when: A. government has balanced the forces of demand and supply B. the price is such that the quantity that buyers want to buy is equal to the quantity that sellers want to sell. C. price and quantity are equal. D. prices are rising. E. prices are falling. 14. The three economic problems of what, how, and for whom goods shall be produced apply: A. mainly to totalitarian or centrally planned societies, in which the problem of planning arises directly. B. only (or principally) to free enterprise or capitalist societies, in which the problem of choice is most acute. C. only (or principally) to less developed societies, since development alone is largely a question of dealing with these three problems. D. to all societies, regardless of stage of development or form of political organization. E. to none of the above necessarily, since they are problems for the individual business firm or family not for society. 15. There cannot be a problem of what goods to produce if: A. the supply of a productive resource is very small, so it must be devoted to the production of goods selected from a set of essential necessities. B. production has not yet reached the stage at which the law of diminishing returns begins to operate. C. the supply of productive resources is sufficiently large to make possible the production of some luxury goods. D. each productive input is so specialized that it can be used only in the production of one good and no other. E. production can be carried on under conditions of decreasing or constant cost, rather than increasing cost. 16. The philosophy of laissez-faire means that: A. government controls the economy through a central planning board. B. firms are allowed to monopolize industries in the economy to make greater profits. C. barter is used instead of money to make all transactions. D. the government uses taxing and spending policies to redistribute income and wealth. E. government interferes as little as possible in economic affairs. 17. Governments role in a modern economy is to: A. ensure efficiency. B. correct an unfair distribution of income. C. promote economic growth and stability. D. all of the above. E. none of the above. 18. Many governments subsidize primary research because it often benefits all citizens, even those who are not actively involved in research. This makes primary research a(n): A. negative externality. B. private good. C. public good. D. efficient good. E. equity good. 19. A government policy that aims to provide a more equitable distribution of resources might involve: A. decreasing transfer payments. B abolishing progressive taxation. C. providing national health insurance. D. subsidizing housing for low-income families.

E.

any of the above, depending on the definition of equity used by the economy.

20. Pollution control policy is directed at improving: A. equity. B. efficiency. C. distribution of income. D. stability. E. none of the above. 1. Consider the demand of rice in the Philippines. a. Suppose price of rice increases given other things constant, what will happen to the demand curve (draw the demand curve and make sure to specify the changes)? In theory, what will happen to quantity demanded?

This is a movement along the demand curve. Price increases while quantity demanded decreases. b. Assuming that bread is a substitute for rice, what will happen to the demand of rice if the price of bread decreases given other things remain constant? Draw the demand curve of rice.

Demand of rice will shift to the left. c. Explain why the demand on rice is downward sloping. Demand curve is downward sloping because of: (1) substitution effect and (2) income effect

2.

Consider the supply of cars in the Philippines a. Suppose the price of cars increases given other things constant, what will happen to the supply curve (draw the supply curve and make sure to specify the changes)? In theory, what will happen to quantity supplied by firms?

This is a movement along the supply curve. Price increases while quantity supplied increases b. Suppose price of oil increases given other things constant, what will happen to the supply curve of cars? Draw the new supply curve.

Supply will shift to the left (complement goods)

c.

What is the difference between movement on the supply curve and a shift of the supply curve? When does a movement on the supply curve occur? When does a shift of the supply curve occur? Movement along supply curve occurs when the price of the good changes given other things constant. On the other hand, shift of the supply curve occurs when one of the other factors that affect the supply curve (as discuss in the book, i.e. other goods, technology, prices of inputs, etc) changes given other things constant.

3.

Determine the consequences of the following market changes on the demand and supply of chicken eggs by completing the table below. The first one is done for you. a. Minimum wage increases by 50%. b. Omelets became the most popular breakfast food. c. A disease made half of the chickens unable to lay eggs. d. Price of turkey eggs became more affordable for consumers. e. Scientists developed an egg without cholesterol. f. Brown eggs became more popular than white eggs. g. Households received receipts from their relatives abroad. h. The government imposed a tariff on chicken eggs imported from India and China. i. The government imposed a tariff on ostrich eggs imported from Kenya and Tanzania. It also ceased the local production of ostrich eggs. j. New machines were developed for the production of chicken feeds using corn. k. After reading a health magazine, egg-haters were convinced with the health benefits of eggs. Market Change (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) Demand or Supply Supply Demand Supply Demand Demand Neither Demand Supply Supply Supply Demand Shift left or right Left Right Left Left Right None Right Left Right Right Right Shift Factor Input prices Tastes Special factor Price of related goods Tastes None Income Government Policy Government Policy Input prices Size of Market / Tastes Price will be Higher Higher Higher Lower Higher the same Higher Higher Lower Lower Higher Output will be Lower Higher Lower Lower Higher the same Higher Lower Higher Higher Higher