METU

Department of Economics
ECON 101(4): Introduction to Economics I
2024-2025 Fall Semester

PROBLEM SET 1

Q.1
Define the following terms:
a. Economics

b. Microeconomics and Macroeconomics

c. Production Possibilities Frontier (PPF)

d. Opportunity cost

e. Comparative advantage

Q.2
The production possibilities curve below show the hypothetical relationship between the
production of food and clothing in an economy.

Combination Food Clothing

A 0 4
B 7 3
C 13 2
D 18 1
E 22 0

(a) What is the marginal opportunity cost of producing the second unit of clothing?
(b) What is the total opportunity cost of producing two unit of clothing?
(c) What is the marginal opportunity cost of producing the third unit of clothing?
(d) What is the total opportunity cost of producing three unit of clothing?
Q.3

Below is a production possibilities table for consumer goods (automobiles) and capital
goods (forklifts):

a) Show these data graphically. Upon what specific assumptions is this production
possibilities curve based?

b) If the economy is at point C, what is the opportunity cost of one more automobile? Of
one more forklift? Which characteristic of the production possibilities curve reflects
the law of increasing opportunity costs: its shape or its length?

c) If the economy characterized by this production possibilities table and curve were
producing 3 automobiles and 20 fork lifts, what could you conclude about its use of its
available resources?
Q.4
How do the following events affect the PPF of a country, which produces only two goods, 𝑋
and 𝑌?

i. A new law is passed which has decreased the retirement age from 65 to 55.
ii. An earthquake has destroyed most of the production facilities and has killed many
people.

iii. A technological advance has increased the efficiency of workers in the good X
industry.

iv. A large number of workers have immigrated into this country.

Q.5

The accompanying hypothetical production possibilities tables are for Portugal and Spain.
Each country can produce wine and cheese. Plot the production possibilities data for each of
the two countries separately. Referring to your graphs, answer the following questions.
Portugal
Product/Production A B C D
Alternatives
Wine 0 20 40 60

Cheese 15 10 5 0

Spain
Product/Production R S T U
Alternatives
Wine 0 20 40 60

Cheese 60 40 20 0

i) What is each country’s cost ratio of producing wine and cheese?

ii) Which nation should specialize in which product?

iii) Show the trading possibilities lines for each nation if the actual terms of trade are
one cheese for two wine. (Plot these lines on your graph.)
 iv) Suppose the optimum product mixes before specialization and trade were
alternative B in Portugal and alternative S in Spain. What would be the gains from
specialization and trade?

MULTIPLE CHOICE QUESTIONS

1) If the equation y = 3x + 9 was plotted:

A) the vertical intercept would be 9.
B) the slope would be 3.
C) it would look as an upward sloping line.
D) all of the above would be true.

2) Refer to the below figure the slope of the line between Points A and B is

A) 0.3
B) 2.3
C) 3.3
D) Indeterminate from this information
3) The slope of a vertical line is
A) Zero
B) Infinite
C) Continually changing
D) Negative
4) The slope of a curve
A) Is always positive
B) Must first increase then decrease
C) Is not constant
D) Is constant

5) The slope of a horizontal line is

A) Negative
B) Zero
C) Continually changing
D) Infinite
6) Refer to the figure below. The expression of the slope of the line between points A and
B equals:

A)

B)

C)

D)
7) In the figure above, the movement from line A to line A' (parallel lines) represents a
change in:
A) the slope only.
B) the intercept only.
C) both the slope and the intercept.
D) neither the slope nor the intercept.

8) Refer to the figure below. According to this graph, the relationship between hours of
study time and points in the exam is as follows:
Grade (points in exam)

Study time (hours)

A) Negative, because additional study time decreases points obtained in the exam.
B) Positive but diminishing.
C) The relationship between study time and points on the exam is first positive, and
then it turns negative.
D) Positive and increasing.
 E) Nonexistent. There appears to be no relationship between additional hours of study
time and a better grade on the exam.

9)Suppose you have a $20 iTunes gift card with which you can buy (download) songs or
videos. Songs cost $1.00 each and videos cost $2.00 each. The opportunity cost of one
video:
A) increases as more videos are purchased
B) is $1.00
C) is constant and equal to ½ song
D) is constant and equal to 2 songs

10) The negative slope of the production possibilities curve illustrates that:
A) some resources are always unemployed
B) when resources are fully employed, an economy can produce more of one thing only
by producing less of something else
C) opportunity costs are constant
D) businesses can sell more goods when their prices are low

11) Refer to the following production possibilities diagram:

Production of which of the points in the diagram is currently unattainable given the economy's
resources?
A) Point A
B) Point B
C) Point C
D) Point D

12) Which one of the following represents the concept of ''opportunity costs”?
A) a decision by your parents to put more of their savings to fund college
expenses and less to life insurance.
 B) public policy in the state of Washington to reduce timber production so that
more wildlife species will be preserved.
C) a decision by a company to increase advertising expense for a new board game
by decreasing its budget for telephone expenses.
D) all of the above DO represent the concept of “opportunity costs''
13) The concept of scarcity implies ________.
A) unlimited human resources and limited producer wants
B) unlimited human wants and limited resources
C) limited human wants and unlimited resources
D) that we can have everything we want

14) If the Production Possibility Frontier (curve) is a downward sloping straight line, then
________.
A) The opportunity cost is constant
B) Production is efficient
C) Technological changes have ceased
D) Resources are highly specialized, making it difficult to use for alternative uses

15) Which of the following will cause the production possibilities curve to shift outward?
A) An inefficiency that has been corrected
B) A decrease in the size of the capital stock
C) An increase in the size of the labor force
D) A decrease in the unemployment rate
16) England has a relatively cool and cloudy climate that is ill suited for grape growing. It
can produce 200 units of wine for every 400 units of cloth. Portugal, in contrast, has a
relatively warm and sunny climate that is good for growing grapes. It can produce 200
units of wine for every 100 units of cloth. Which country has the higher opportunity cost
of producing cloth?

A) Portugal: 2 units of wine for every unit of cloth

B) England: 2 units of wine for every unit of cloth.
C) Portugal: ½ units of wine for every unit of cloth
D) England: ½ unit of wine for every unit of cloth