Department

Economics for Management StudiesCourse Code

MGEA02H3Professor

Gordon ClevelandStudy Guide

MidtermThis

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MGEA02

Introduction to Microeconomics

Exam Guide

PART I – Lecture Key Points Review

PART II – Exam Questions & Answers and Explanations

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1. What is Economics?

Economics is the study of the use of scarce resources to satisfy unlimited human wants.

2. What is Opportunity Cost?

Value of the alternative foregone (Value of giving up something).

Explicit Costs vs Implicit Costs

Both are parts of opportunity costs. Both are given up when the action is taken.

3. Production Possible Frontier (P.P.F)

P.P.F shows set of output possibilities such that the production of each good is the maximum

possible, given the efficient production of the other good.

Graph I:

A: All resources are used to produce Y

B: All resources are used to produce X

C: Certain amount of resources are used to produce Y, certain amount of resources are used to

produce X

Graph II:

XB

YA

Y

X

Y0

C

B

X0

A

Y

X

YB

C

B

XA

A

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1) Economically efficient (Point B)

Inefficient Allocation (Point A)

Therefore, A doesn’t use the maximum resources

2) XB > XA and YB > YA

Therefore, move from A to B has no opportunity cost

Move from B to C will give up some X for more Y, so will has some opportunity cost

3) Attainable Region: Along the P.P.F curve and under the P.P.F curve

Unattainable Region: Outside the P.P.F curve

4) Economically Efficient: Points along the P.P.F curve

Inefficient Allocations: Points within the P.P.F curve

EXAM Questions:

A country produces goods X and Y and has the following equation for its production possibilities frontier

(or production possibilities curve):

Y = 400 – 2.5X − .025X2

The point X = 40, Y = 250 is:

A) Attainable and efficient B) attainable and inefficient C) unattainable

D) unattainable and efficient E) imaginable and feasible F) unattainable and inefficient

G) none of the above

Answer:

Put X=40 into the equation, Y = 400 – 2.5(40) – 0.025(40^2) =260

Y = 250 < 260, Thus the point is inside the P.P.F curve, which is attainable and inefficient.

The answer is B.

4. Opportunity Cost of X = OCX = -

Opportunity Cost of Y = OCY = -

= - (

EXAM Questions:

A country produces goods X and Y and has the following equation for its production possibilities frontier

(or production possibilities curve):

Y = 400 – 2.5X − .025X2

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