Question

1.While you do not have to state any of the definitions, you should have a conceptual understanding of each key term and key concept. For example, how are marginal benefits and marginal costs related to making decisions at the margin? How can we compare marginal benefits and marginal costs to determine efficiency? What is an unintended effect? What does “ceteris paribus” thinking mean?

2.What is a production possibilities frontier (PPF)? Which points on the frontier illustrate production that is efficient? How does the PPF illustrate the principle that people face tradeoffs? Between two producers, how do you determine who has the absolute advantage? How do you determine who has the comparative advantage, and how do you calculate it using opportunity costs? If two people were to trade, how do you determine who should specialize in what?

3.Why is the demand curve downward sloping? Why is the supply curve upward sloping? What is the difference between a change in demand and a change in quantity demanded? What factors shift the demand curve? What factors shift the supply curve? Given an event that shifts either the supply curve or demand curve or both, be able to determine how price and quantity change in the new equilibrium. What is consumer surplus? What is producer surplus?

4.What two major roles do prices have in the market? What is a price ceiling? What is a price floor? When is a price ceiling or a price floor binding? Give examples of each. Know why government policies may result in outcomes less optimal than outcomes from free market allocations (surpluses/shortages). Given absolute prices of two goods, know how to find the relative prices and how taxes may change relative prices.

5.What is the Consumer Price Index (CPI) and why is it useful? How is it calculated? (Why do you fix a basket of goods and keep the quantities fixed rather than allowing the quantities to fluctuate from year to year?) How is the real interest rate different from the nominal interest rate? How is real income different from nominal income? How is unemployment measured? Why do the unemployment rate and the employment rate not equal 100 percent? How do discouraged workers affect the unemployment rate? What is frictional versus structural unemployment? When is the economy at a level of full employment?

Answer 1

Answer 1:

While making decisions at the margin, we compare the marginal cost and marginal benefit derived from the good. The decision regarding the quantity is taken at the point where the marginal benefit from the decision is equal to marginal cost from the decision. An economy is said to be operating efficiently if the marginal benefit is equal to marginal cost of production. Thus, equalization of marginal benefit and marginal cost is an important condition to determine efficiency.

Unintended consequences in social sciences are the the outcomes of an actions that are not foreseen by the analysts beforehand. The meaning of ceteris paribus is that keeping all other things constant and concentrating only on the variable which is changing. This is an assumption made in economics to see the change that a variable will cause on the area of study where all other variables are kept fixed.