Economics for IB - mock exam explained
Economics for IB (EBP660C05)
Rijksuniversiteit Groningen
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Economics for IB
Mock exam assignments explained
- Assume that Germany and the USA only produce Adidas and New Balance shoes. The following table informs you about how many shoes of each type each country can produce in one day if all resources are devoted to either the production of Adidas or the production of New Balance shoes:
Given the data, which of the following statements is true? A = The USA has an absolute and comparative advantage in producing Adidas shoes B = Germany has an absolute advantage in producing Adidas shoes and a comparative advantage in producing New Balance shoes C = The USA has a comparative advantage in producing New Balance shoes and Germany has a comparative advantage in producing Adidas shoes D = Germany has a comparative advantage in the production of both types of shoes
Correct answer = C Explanation: First of all, to be able to answer this question it is highly important to exactly know what comparative- and absolute advantage actually mean. Therefore, let us formulate the definition of both terms: Absolute advantage: economic concept that is used to refer to a party's superior production capability. Specifically, it refers to the ability to produce a certain good or service at lower cost (i., more efficiently) than another party. Comparative advantage: the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.
First, let us take a look at what the absolute advantages are in this situation. The USA can produce more of both, Adidas and New Balance shoes, in a day (as 12 is more than 9 and 18 a=is more than 11). Therefore, we can conclude that the USA has an absolute advantage in both production processes. So, we can already say that option B won’t be the correct answer. Let us now look at the comparative advantages. We see that the difference in producing Adidas shoes is only (12-9)/9100% = 33% while the difference with New Balance shoes is (18-11)/11100% = 63%. This means that relatively seen Germany is more efficient in
producing Adidas shoes. Therefore, we can say that Germany has a comparative advantage for Adidas and the USA for New Balance.
A and D can now also be excluded option C is the correct answer
- Please consider the graph above. It depicts two indifference curves of the same individual, characterizing two different utility levels. Which of the following assumptions regarding preferences is violated here?
A = None, there is no violation B = Preferences are ordinal C = We would need information on the individual’s budget to determine the correct answer. D = ‘More is better’
Correct answer = D Explanation: It can be seen that the utility is decreasing as the quantity of either good A or good B is increasing. Graphically this can be seen in the changes along the slope of the indifference curve. This phenomenon is also called ‘diminishing marginal utility’ which means that the additional utility decreases as the quantity increases.
Correct answer = B Explanation : At point Y, firm 1 produces 0 products, thus the whole market demand in figure I belongs to firm 2. A firm always tries to achieve the maximizing profit level; this point is determined by the intersection of the Marginal Revenue (MR) and the Marginal Cost (MC) lines. The straight line in figure 1 reflects the MR as it indicates the price for which the products will be sold. In addition, in the information given it is stated that the MC in this situation equals 1. If you draw this horizontal MC line into the figure, you can find the intersection between MR and MC, which turns out to be 3. This is the optimal quantity to be produced for firm 2.
Quantity for Y in figure 2 is 3 correct answer B
- Anouk sells origami-falcons on Etsy and hires workers in a competitive labor market to help produce the origami-falcons. Her company’s weekly output varies with the number of workers hired, as shown in the table below.
If each origami-falcon sells for 1€ more than the cost of the materials used in producing it and the competitive market wage is 80€ per week, how many workers should Anouk hire? How many origami-falcons will she produce each week?
A = 3; 240 B = 2; 180 C = 4; 280 D = 5; 300
Correct answer = A Explanation: the competitive market wage for a worker Is 80 euro of worker, while the profit of each origami falcon is 1. This means that we have to produce an additional 80/1 = 45 origami falcons to reach the break-even point of hiring an additional worker.
If you take a look at the table you see that the difference between 0 and 1 worker is 100 units, which is more than 45, indicating the extra worker would be profitable. This is the same for the second and third worker. However, if you look at the step from 3 to 4 workers, the difference turns out to be 280-240 = 40, which is less than the 45 needed to make it a profitable move. Therefore Anouk should stop at 3 workers. The corresponding amount of origamis produced at the 3 worker point, is 180.
Hiring 3 workers is the best option for Anouk correct answer A
- A promotion of a new brand of smoothies takes place in Kapteynborg. Free samples are being handed out to RUG students. At some point in time, five students interested in trying the new smoothie remain while only three free samples are left over. The table below lists the students who would like to try one, together with their respective times of arrival in Kapteynborg and their reservation prices.
Suppose the person hired by the brand to run the promotional activity in Kapteynborg solicits students to postpone trying out the new smoothie by offering increasing amounts of cash compensation until only three students wish to stay. If she gives each student the same amount, how much more/less economic surplus will be generated under this policy than if she lets students try the smoothie on a first-come, first-served basis?
A = 25
B = 45
C = 20
D = 30
Correct answer: B Explanation: What do they ask from us? the difference between economic surplus of first-come, first- served & cash compensation situations.
● Let us first take a look the economic surplus of the first-come, first-served situation: First 3 students get the smoothie economic surplus 430+410+350 = 1,
● Now, let us determine the economic surplus of the cash compensation situation. The 3 highest reservations prices are earned, thus: 430+410+395 = 1,
However, the lowest two reservation prices need to be compensated. 350 and 370. Amount of cash we need in order to compensate the two lowest reservation prices: (395- 370) + (395-350) = 90 euro-cents. We have to take into account this expense when calculating the economic surplus: 1,235 – 90 = 1,145 euro-cents.
Difference between the two surplus situations: 1,190-1,145 = 45 answer B
Tax of 75 euro will achieve the goal correct answer C
- Referring again to the spillage situation depicted above, what is the total cost to society of the policy of taxing the spillage at the rate you found in the previous question?
A = 190 B = 270 C = 340 D = 460
Correct answer = A Explanation: - Cost at unregulated situation: 60+90 = 150 - Cost at regulated situation: 180+160 = 340 - Difference in costs: 340-150 = 190
In the regulated situation, the costs are 190 higher. This number reflects the total cost to society, as the tax income is not part of the total cost of society correct answer A
Economics for IB - mock exam explained
Vak: Economics for IB (EBP660C05)
Universiteit: Rijksuniversiteit Groningen
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