Economics 101
Solutions to Study Questions

These Solutions to Study Questions have been reproduced for the exclusive use of the students registered in Economics 101 with Eva Lau at the University of Waterloo. These materials may not be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, either in whole or in part, without first obtaining written permission of the above professor.

Solutions to Study Questions #1 - Scarcity and Choice

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Economics 101 - Solutions to Study Questions #1
E. Lau
PART A - Short Answer
1.

An economic topic usually includes discussion on various aspects of scarcity (may include the scarcity of money, time, energy . . . or other intangible resources) in relation to (unlimited) human wants. 2.

Positive economics: an approach to economics which establishes cause and effect relationships among economic variables; formulates hypotheses that can be checked against facts.
Normative economics: an approach to economics which is based on value judgements about desirability and desirable outcomes.
Positive economics involves statements of cause and effect; how things are.
Normative economics involves statements which embody value judgements; how things ought to be. 3.

Opportunity Cost can be expressed in terms of the value of the best forgone alternative(s), i.e. the cost of giving up one thing in order to have another. For example, the opportunity cost of working is the value of leisure time that you no longer consume. The opportunity cost of buying a
CD may include the foregone consumption of other forms of entertainment, such as a night at the movies plus a magazine (do match the forgone value).

4.

The negative of the slope of the production possibility curve (ppc) is the MRT, which is the rate at which the economy can transform one output into another by shifting its resources. If the ppc is a straight line, the MRT is constant. This means that there is perfect factor substitution between good x and good y.

If the ppc is bowed, this means that the MRT between x and y is increasing as you move down the ppc towards the y axis. This result arises when perfect factor substitution does not exist.
Case 1:

Depletion of resources, better technology affect
X,Y equally.

X0Y0: better technology less than offsets depletion of resources.
X1Y1: better technology exactly offsets depletion of resources.
X2Y2: better technology more than offsets depletion of resources.
Y1 , Y1 are 1996 values of X,Y

Solutions to Study Questions #1 - Scarcity and Choice

Case 2:

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Depletion of resources affect X, Y the same, better technology affects Y more than X.

X1Y2: better technology exactly offsets the effect of resource depletion on
X.

X0Y1: better technology exactly offsets the effect of resource depletion on Y.
Case 3:

Depletion of resources affects X,Y the same, better technology affects X more than Y.

X2Y1: better technology exactly offsets the effect of resource depletion on Y.

X1Y0: better technology exactly offsets the effect of