Problem 2
Communist Russia used prices to allocate production among different consumers. Central planners set production targets but then put output in shops, fixed prices and gave workers money to spend. Why not plan the allocation of particular goods to particular people as well?
Problem 3
Which of the following statements are positive and which are normative? (a) Annual inflation is belowpercent. (b) Because inflation is low, the government should cut taxes. (c) Income is higher in the UK than in Poland. (d) Brits are happier than Poles.
Problem 4
Why are these statements wrong? (a) Since some economists are Conservative but others Labour, economics can justify anything. (b) Efficiency gains cannot increase the production of some commodities without sacrificing others, and therefore there is no such thing as a 'free lunch'. Economics is about people, and thus cannot be a science.
Problem 5
Which of the following statements refer to microeconomics and which to macroeconomics? (a) Inflation is lower than in the 1980 s. (b) The price of a tin of beans fell this month. (c) Good weather means a good harvest. (d) Unemployment in London is below the UK average.
Problem 6
OPEC made a fortune for its members by organizing production cutbacks and forcing up prices. (a) Why have coffee producers not managed to do the same? (b) Could UK textile firms force up textile prices by cutting back UK textile production?
Problem 7
Suppose it becomes possible in 5 years' time to make as much energy as we want from biofuels provided the price is the equivalent of at least $$\$ 50 /$$ barrel for oil. (a) What does this imply about the eventual price of oil in, say, 10 years' time? (b) Is it possible for oil prices to be substantially above \(\$ 50 /\) barrel for the next few years? (c) Do higher oil prices in the short run increase or reduce the incentive to look for alternative energy technologies?
Problem 8
An economy has 5 workers. Each worker can make 4 cakes or 3 shirts. (a) Draw the production possibility frontier. (b) How many cakes can society get if it does without shirts? (c) What points in your diagram are inefficient? (d) Can the economy produce an output combination which lies above the production possibility frontier? (e) What is the opportunity cost of making a shirt and making a cake? (f) Does the law of diminishing returns hold in this economy?
Problem 9
Suppose that a country can produce two goods: food and clothing. To produce one unit of food, it requires one worker. To produce one unit of clothing, it requires two workers. The total amount of workers available in the economy is fixed and equal to 100 . Denoting with \(L\) the total amount of workers, with \(F\) the units of food produced and with \(C\) the units of clothing produced, the resource constraint for this economy can be written as: \(L=a_{F} F+a_{C} \mathrm{C}\), where \(a_{F}\) is the amount of workers needed to produce one unit of food and \(a_{C}\) the amount of workers needed to produce one unit of clothing. Show how to construct the production possibility frontier from that resource constraint. In a graph with \(C\) on the vertical axis and \(F\) on the horizontal axis, plot the PPF of this economy. What is the slope of the PPF?
Problem 10
Suppose a farmer is planning to grow cabbages on his land. The cost of growing cabbages is \(£ 50\) per acre and he earns \(£ 100\) from the produce in the market. There is another option for him, to grow pumpkins, which could yield him \(£ 110\) if he spent \(£ 70\) on it. (a) What is the opportunity cost of growing cabbages? Is it rational for the farmer to grow cabbages instead of pumpkins? (c) Suppose the only other option for him to earn from his farmland is to rent it to another farmer. How will the farmer arrive at a rational decision?
Problem 11
Two similar countries take the decision to try to increase the health of their poorest people. One country raises taxes on the rich and gives more money to the poor. The other country raises taxes on the rich and provides more health care, free to patients, through its national health service. Which country do you think is more likely to meet its objective? Why?
