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Scarcity and Opportunity Cost: Understanding Economic Concepts, Exercises of Microeconomics

Liceo de Cagayan University (LDCU)Microeconomics

The economic concepts of scarcity and opportunity cost through various examples. It discusses how scarcity arises due to limited resources and unlimited demands, and how individuals make decisions based on opportunity costs. Topics include specialization of labor, production possibilities frontier, and the impact of technology on resource allocation. The document also covers supply and demand analysis, including the effects of price changes, consumer preferences, and external factors on market equilibrium.

Typology: Exercises

2020/2021

Uploaded on 04/10/2021

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OPENSTAX MICROECONOMICS
Chapters Answer Key
Chapter 1:
1. Scarcity means human wants for goods and services exceed the available
supply. Supply is limited because resources are limited. Demand, however, is
virtually unlimited. Whatever the supply, it seems human nature to want
more.
2. 100 people / 10 people per ham = a maximum of 10 hams per month if all
residents produce ham. Since consumption is limited by production, the
maximum number of hams residents could consume per month is 10.
3. She is very productive at her consulting job, but not very productive
growing vegetables. Time spent consulting would produce far more income
than it what she could save growing her vegetables using the same amount
of time. So on purely economic grounds, it makes more sense for her to
maximize her income by applying her labor to what she does best (i.e.
specialization of labor).
4. The engineer is better at computer science than at painting. Thus, his time
is better spent working for pay at his job and paying a painter to paint his
house. Of course, this assumes he does not paint his house for fun!
5. There are many physical systems that would work, for example, the study
of planets (micro) in the solar system (macro), or solar systems (micro) in
the galaxy (macro).
6. Draw a box outside the original circular flow to represent the foreign
country. Draw an arrow from the foreign country to firms, to represents
imports. Draw an arrow in the reverse direction representing payments for
imports. Draw an arrow from firms to the foreign country to represent
exports. Draw an arrow in the reverse direction to represent payments for
imports.
7. There are many such problems. Consider the AIDS epidemic. Why are so
few AIDS patients in Africa and Southeast Asia treated with the same drugs
that are effective in the United States and Europe? It is because neither
those patients nor the countries in which they live have the resources to
purchase the same drugs.
8. Public enterprise means the factors of production (resources and
businesses) are owned and operated by the government.
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OPENSTAX MICROECONOMICS

Chapters Answer Key Chapter 1:

  1. Scarcity means human wants for goods and services exceed the available supply. Supply is limited because resources are limited. Demand, however, is virtually unlimited. Whatever the supply, it seems human nature to want more.
  2. 100 people / 10 people per ham = a maximum of 10 hams per month if all residents produce ham. Since consumption is limited by production, the maximum number of hams residents could consume per month is 10.
  3. She is very productive at her consulting job, but not very productive growing vegetables. Time spent consulting would produce far more income than it what she could save growing her vegetables using the same amount of time. So on purely economic grounds, it makes more sense for her to maximize her income by applying her labor to what she does best (i.e. specialization of labor).
  4. The engineer is better at computer science than at painting. Thus, his time is better spent working for pay at his job and paying a painter to paint his house. Of course, this assumes he does not paint his house for fun!
  5. There are many physical systems that would work, for example, the study of planets (micro) in the solar system (macro), or solar systems (micro) in the galaxy (macro).
  6. Draw a box outside the original circular flow to represent the foreign country. Draw an arrow from the foreign country to firms, to represents imports. Draw an arrow in the reverse direction representing payments for imports. Draw an arrow from firms to the foreign country to represent exports. Draw an arrow in the reverse direction to represent payments for imports.
  7. There are many such problems. Consider the AIDS epidemic. Why are so few AIDS patients in Africa and Southeast Asia treated with the same drugs that are effective in the United States and Europe? It is because neither those patients nor the countries in which they live have the resources to purchase the same drugs.
  8. Public enterprise means the factors of production (resources and businesses) are owned and operated by the government.
  1. The United States is a large country economically speaking, so it has less need to trade internationally than the other countries mentioned. (This is the same reason that France and Italy have lower ratios than Belgium or Sweden.) One additional reason is that each of the other countries is a member of the European Union, where trade between members occurs without barriers to trade, like tariffs and quotas. Chapter 2:
  2. The opportunity cost of bus tickets is the number of burgers that must be given up to obtain one more bus ticket. Originally, when the price of bus tickets was 50 cents per trip, this opportunity cost was 0.50/2 = .25 burgers. The reason for this is that at the original prices, one burger ($2) costs the same as four bus tickets ($0.50), so the opportunity cost of a burger is four bus tickets, and the opportunity cost of a bus ticket is .25 (the inverse of the opportunity cost of a burger). With the new, higher price of bus tickets, the opportunity cost rises to $1/$2 or 0.50. You can see this graphically since the slope of the new budget constraint is flatter than the original one. If Alphonso spends all of his budget on burgers, the higher price of bus tickets has no impact so the horizontal intercept of the budget constraint is the same. If he spends all of his budget on bus tickets, he can now afford only half as many, so the vertical intercept is half as much. In short, the budget constraint rotates clockwise around the horizontal intercept, flattening as it goes and the opportunity cost of bus tickets increases. The graph shows how opportunity cost is affected by the purchase of either burgers or bus tickets. The opportunity cost of bus tickets is the number of burgers that must be given up to obtain one more bus ticket.
  3. Because of the improvement in technology, the vertical intercept of the PPF would be at a higher level of healthcare. In other words, the PPF would rotate clockwise around the horizontal intercept. This would make the PPF steeper, corresponding to an increase in the opportunity cost of education, since resources devoted to education would now mean forgoing a greater quantity of healthcare.
  4. No. Allocative efficiency requires productive efficiency, because it pertains to choices along the production possibilities frontier.
  5. Both the budget constraint and the PPF show the constraint that each operates under. Both show a tradeoff between having more of one good but less of the other. Both show the opportunity cost graphically as the slope of the constraint (budget or PPF).

Cold weather increases the need for heating oil. This causes a rightward shift in the demand for heating oil and thus oil. Since the demand curve is shifting up the supply curve, the equilibrium price and quantity both rise. A discovery of new oil will make oil more abundant. This can be shown as a rightward shift in the supply curve, which will cause a decrease in the equilibrium price along with an increase in the equilibrium quantity. (The supply curve shifts down the demand curve so price and quantity follow the law of demand. If price goes down, then the quantity goes up.) When an economy slows down, it produces less output and demands less input, including energy, which is used in the production of virtually everything. A decrease in demand for energy will be reflected as a decrease in the demand for oil, or a leftward shift in demand for oil. Since the demand curve is shifting down the supply curve, both the equilibrium price and quantity of oil will fall. Disruption of oil pumping will reduce the supply of oil. This leftward shift in the supply curve will show a movement up the demand curve, resulting in an increase in the equilibrium price of oil and a decrease in the equilibrium quantity. Increased insulation will decrease the demand for heating. This leftward shift in the demand for oil causes a movement down the supply curve, resulting in a decrease in the equilibrium price and quantity of oil. Solar energy is a substitute for oil-based energy. So if solar energy becomes cheaper, the demand for oil will decrease as consumers switch from oil to solar. The decrease in demand for oil will be shown as a leftward shift in the demand curve. As the demand curve shifts down the supply curve, both equilibrium price and quantity for oil will fall. A new, popular kind of plastic will increase the demand for oil. The increase in demand will be shown as a rightward shift in demand, raising the equilibrium price and quantity of oil.

  1. Step 1. Draw the graph with the initial supply and demand curves. Label the initial equilibrium price and quantity. Step 2. Did the economic event affect supply or demand? Jet fuel is a cost of producing air travel, so an increase in jet fuel price affects supply. Step 3. An increase in the price of jet fuel caused a decrease in the cost of air travel. We show this as a downward or rightward shift in supply.Step 4. A rightward shift in supply causes a movement down the demand curve, lowering the equilibrium price of air travel and increasing the equilibrium quantity.
  2. Step 1. Draw the graph with the initial supply and demand curves. Label the initial equilibrium price and quantity. Step 2. Did the economic event affect supply or demand? A tariff is treated like a cost of production, so this affects supply. Step 3. A tariff reduction is equivalent to a decrease in the cost of production, which we can show as a rightward (or downward) shift in supply. Step 4. A rightward shift in supply causes a movement down the

demand curve, lowering the equilibrium price and raising the equilibrium quantity.

  1. A price ceiling (which is below the equilibrium price) will cause the quantity demanded to rise and the quantity supplied to fall. This is why a price ceiling creates a shortage.
  2. A price ceiling is just a legal restriction. Equilibrium is an economic condition. People may or may not obey the price ceiling, so the actual price may be at or above the price ceiling, but the price ceiling does not change the equilibrium price.
  3. A price ceiling is a legal maximum price, but a price floor is a legal minimum price and, consequently, it would leave room for the price to rise to its equilibrium level. In other words, a price floor below equilibrium will not be binding and will have no effect.
  4. Assuming that people obey the price ceiling, the market price will be below equilibrium, which means that Qd will be more than Qs. Buyers can only buy what is offered for sale, so the number of transactions will fall to Qs. This is easy to see graphically. By analogous reasoning, with a price floor the market price will be above the equilibrium price, so Qd will be less than Qs. Since the limit on transactions here is demand, the number of transactions will fall to Qd. Note that because both price floors and price ceilings reduce the number of transactions, social surplus is less.
  5. Because the losses to consumers are greater than the benefits to producers, so the net effect is negative. Since the lost consumer surplus is greater than the additional producer surplus, social surplus falls.