Supplemental Instruction
Iowa State University
Leader:
Course:
Instructor:
Date:
Shealyn
Econ 101
Peter Orazem
February 7, 2012
Exam Review Answer Key
1) Definitions
a) Microeconomics: Decisions of individuals (people, firms) based on scarce resources
b) Macroeconomics: Decisions made based on scarce resources on an aggregate level (large
body ex: entire country or state or city)
c) Scarcity: Caused by unlimited wants, but limited resources
d) Opportunity Cost: Highest valued alternative given up to take part in an activity (think of
allocating your time between two activities you obviously cannot do both at the same time)
e) Market Economy: Decentralized body, decisions made by prices
f) Command Economy: Centralized body, decisions are made by central authority (government)
*Mixed economy pulls from both of the above economies, what the US is
g) Principle of Increasing Opportunity Costs: States that the more you engage in one activity
(produce one good) the more you are giving up of the alternative (the second good)
*is reason for bowed out/concave shape of PPF
h) Tariff: A tax on imports (he gave to example of these occurring at a loading dock)
i) Quota: Limitation on the number of units of a good that can be imported
j) Technical Restriction: Regulations or laws placed on imports and exports (ex: regulations on
labor, safety, packaging, shipping, etc.)
k) Market: System of buyers and sellers (a “gathering” of them)
l) Inferior Good: A good that as the income of consumers increases, the quantity demanded of
the good decreases
m) Normal Good: A good that as the income of consumers increases, the quantity demanded of
the good increases as well
*have some examples of each in mind
Multiple Choice Questions
2) B
3) D
4) A
5) A
6) D
7) B
8) A
Supplemental Instruction
1060 Hixson-Lied Student Success Center  294-6624  www.si.iastate.edu
9) D
10) All
11) B
12) C
13) A
14) C
15) C
16) A
17) C
18) B
19) D
20) A
21) C
22) A
23) D
If you need any of the answers explained please come to the session tomorrow, 2-9-12 from
5:10-6, with your question(s) I’ll be more than happy to help 
On Board Exercises
Positive or Normative Statements
1) Big foot does exist. -Positive
2) All other things held constant, as price increases the quantity demanded decreases. –Positive
3) There should not be a tax on food. –Normative
4) People who own a dig live longer. –Positive
5) Spring break should be longer. –Normative
PPF
Person wants to spend free time, 4 hours, doing a mind building activity; either Sudokus or
puzzles. They can do 5 Sudoku puzzles in an hour or 3 regular puzzles in an hour. Calculate the
opportunity cost of each and draw the PPF for the 4 hours.
Opp Cost: Sudoku: 3/5 Puzzle: 5/3
On PPF intersect puzzle axis at 12 and intersect Sudoku axis at 20
Comparative Advantage  Specialization
Two friends, Laura and Haley, want to start a jewelry store. Production per hour of the two
jewelry items is given. Laura can produce 10 pearl necklaces in an hour and 10 opal rings in an
hour. Haley can produce 9 pearl necklaces in an hour and 7 opal rings in an hour.
Calculate the opportunity cost of each, show who has comparative advantage in each (and
absolute just for fun), make a table of what it would look like if each spent half an hour
producing each good, and a table of what production would be if each specialized.
Opp Cost: Laura; PN: 1 ; OR: 1 Haley; PN: 7/9 OR: 9/7
Comp. Advan. : Haley: OR Haley: PN
50/50
Specialize
*They are better off by specializing
PN
OR
PN
OR
L
5
5
L 1
9
H
4.5
3.5
H 9
0
Total 9.5
8.5
Total 10
9
Input Requirements  Specialization  Trade
There are two contracting firms, Mike’s Men and Heavy Lifting. They each build kitchens and
bathrooms. Mike’s men require 4 days to build a kitchen and 3 days to build a bathroom. Heavy
Lifting requires 2 days to build a kitchen and 4 days to build a bathroom.
Calculate their opportunity cost of production (remember this deals with inputs and is different
than regular opportunity cost), how many of each they would build if they spent half of their
allotted time on each (12 days), what the production of each would be each firm specialized for
the total time allotted (24 days), and what a trade would be between the two.
Opp Cost of Production
50/50
Specialization
MM
HL
MM
HL
Total
MM HL
Total
Kitchen
4/3
2/4 Kitchen
3
6
9 Kitchen 0
12
12
Bathroom
3/4
2
Bathroom 4
3
7 Bathroom 8
0
8
So we can see that they are better off if they specialize.
Trade
MM
HL
There other options for the trade of the kitchens, like 4 and
Kitchen
6
6
8 or 5 and 7. But there is only the one option for the trade
Bathroom 4
4
of the bathrooms.