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ECON 20A Exam Solutions Fall 2018: Savings Account, Forego, Potential OutputExam


Department
Economics
Course Code
ECON 20A
Professor
All
Study Guide
Solutions

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Exam Prep Problems on Introduction to Economics
Econ 20a
These problems are useful for preparing for the exam. One problem from
here will be chosen, at random, to be turned in during your discussion section.
You will have 20 minutes to work on the problem, with help from others and
the TA (if you choose).
1. While walking along the ring road you find a $100bill lying on the
ground. You have must make the following choice: spend the money
now, or put the money away for a year into your bank savings account
and earn a 2% annual interest rate. What is the opportunity cost of
spending the money now?
2. The company that you manage has invested $5 million in developing
a new product, but the development is not quite finished. At a recent
meeting, your sales people report that the introduction of competing
products has reduced the expected sales of your new product to $3
million. If it would cost $1 million to finish development and make the
product, should you go ahead and do so? What is the most that you
should pay to complete development?
3. In Professor Branchland, the economy produces two goods broccoli and
casinos.
(a) Using the concept of opportunity cost, explain why it most likely
has a bowed-out shape.
(b) Show a point that is impossible for the economy to achieve. Show
a point that is feasible but inefficient.
(c) Imagine that in Professor Branchland there are two political par-
ties, called the Brokesters (who want many casinos) and the Rich-
sters (who want fewer casinos). Show a point on your production
possibilities frontier that the Brokesters might choose and a point
that the Richsters might choose.
(d) Now suppose that a breakthrough in education leads to a widespread
understanding about the laws of probability, as a result both
Brokesters and Richsters desire fewer casinos. Which party will
reap the greater reward, measured by the increase in broccoli pro-
duction? Explain.
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4. The first principle of economics is that people face trade-offs. Use a
production possibilities frontier to illustrate society’s trade-off between
two “goods” – a clean environment and the quantity of industrial out-
put. What do you suppose determines the shape and position of the
frontier? Show what happens to the frontier if engineers develop a
newer way of producing electricity that emits fewer pollutants.
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