I The basic economic problem, markets and efficiency
1) The founder of modern day economics
and author of The Wealth of Nations (1776) is:
a) Adam Smith
b) Alfred Nobel
c) Bill Clinton
d) Alfred Marshall
e) None of the above
2) What is dominant in a market
economy?
a) Markets, state ownership
b) Markets, private ownership
c) Central planning entity, state
ownership
d) Central planning entity, private
ownership
Name a couple of socialist states. Are their economies doing well? Which is the fastest
growing of them all?
3) The three essential markets in an economy are the:_____ market ______ market and
_______ market.
4) Explain the following terms in relation to the transformation curve.
guns
A
C
∙D
B
butter
Basic economic problem _____________________________________________________
___________________________________________________________________________
Opportunity costs ___________________________________________________________
___________________________________________________________________________
Trade offs _________________________________________________________________
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Slope of the transformation curve______________________________________________
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Advantages from trade and specialization_______________________________________
___________________________________________________________________________
Allocative efficiency__________________________________________________________
___________________________________________________________________________
Technical (productive) efficiency ______________________________________________
___________________________________________________________________________
5) Imagine a two-person society which needs two goods to sustain bare existence. Tony can
catch 3 fish or cut 6 trees in one day. His neighbor Mark can catch 6 fish or cut 2 trees in one
day. Each needs at least three fish per day.
a) Draw each person’s transformation curve (the MRT is constant). What are their
opportunity costs? Are they equal?
b) Should they start dividing labor between each other? How?
c) Assuming they need to catch 3 fish individually, what is the maximum number of
trees they could cut together in one day? How many trees could they cut if they catch
6 fish together?
d) What is the shape of their joint transformation curve? Why?
Mark
Tony
Suppose we have two goods but can only choose one. We choose what we rank first,
foregoing the second best. What is another name for this second best alternative?
6) Fill in the blanks.
_____________
Market
__________
What?
How much?
How?
For whom?
______________
Market
_________
The circular flow model shows received ________ and executed __________for each sector.
The three main sectors in the circular flow model (two of which are shown in the picture) are:
___________, __________ and _________. The interactions between economic subjects are
shown through the _______ market, ________ market and the __________ market. Increased
production in the _________market will cause an increase in (supply/demand) for labor, thus
_______unemployment. Firms issue stocks or bonds on _______markets so they can lend
money to fund investments. The price of loans is ____________.
What are opportunity costs? What are the opportunity costs of a student who attends
lectures/exercises on a regular basis?