ECO 202 Microeconomic Principles Fall 2019 Paul Natke Answers to Review Questions for Examination
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ECO 202 Microeconomic Principles
Fall 2019 / Paul Natke
Answers to Review Questions for Examination 1
1. A. List some examples of marginal costs and marginal benefits
B. What decision did you make: Go to college MB > MC
C. Roles time and information: more information results in a better decision but gathering more
information requires more time (and higher opportunity costs)
D. rational self-interest: do what is best for me (i.e. which school is best for me?)
E. marginal analysis: only look at additional costs and additional benefits, i.e. ignore sunk costs.
2. A. Value of the next best alternative foregone.
B. The next best alternative changes over time as does its value to the decision-maker.
C. Sunk costs are irrelevant since they cannot be recovered – i.e. they are unavoidable.
3. A. absolute advantage goes to the producer that uses the fewest resources to produce
something (i.e. the highest productivity).
B. Comparative advantage goes to the producer with the lower opportunity cost of production.
C. Specialization focuses work effort on producing a particular good or service, or on a specific task.
D. Specialization increases productivity or resources (e.g. labor) by:
1) taking advantage of individual preferences and natural abilities
2) allowing workers to develop more experience at specific tasks (i.e. learning by doing)
3) reduces the time spent in moving between tasks or work stations
4) permits the introduction of labor-saving machinery.
4. A.
nation Opportunity cost oil Opportunity cost wheat
Argentina 30/40 = 0.75 units wheat for 40/30 = 1.25 units of oil for
every 1 unit of oil every 1 unit of wheat
Brazil 10/20 = 0.5 units wheat for 20/10 = 2 units of oil for
every 1 unit of oil every 1 unit of wheat
B. absolute advantage in crude oil = Argentina
C. absolute advantage in wheat = Argentina
D. comparative advantage in crude oil = Brazil
E. comparative advantage in wheat = Argentina
F. 1) Argentina should specialize in wheat production.
2) Brazil should specialize in crude oil production.
G. Specialization is based on comparative advantage (i.e. lowest opportunity cost of production).
5. A.
Income Taxes Taxes as % of Marginal tax rate
income
$2000 $400 20%
$4000 $900 22.5% $500/$2000 = 25%
$6000 $1500 25% $600/$2000 = 30%
$8000 $2200 27.5% $700/$2000 = 35%
B. Progressive: tax/income increases as income increases
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