Addis Ababa University Econ 101 – Introduction to EconomicsFaculty of Technology Worksheet II

1. Given a short run production function with variable labor and fixed capital.

L 2 3

K 30 30

AP 50 70

Which of the following is correct?

A. The MP of the third labor is 110B. The MP of the third labor is 55C. MP is increasingD. None

2. MC starts to rise whenA. The law of diminishing marginal

returns begins to operateB. TVC starts to riseC. AP starts to increaseD. b and c

3. MC and ATC are the same at output level at which

A. AVC is minimumB. MC is minimumC. ATC is minimumD. They will never be the same

4. Supply means the existing stock of a good

A. True B. False5. If you are a producer and the demand for

your product is inelastic, what would you do to increase your total revenue?

A. Increase priceB. Decrease priceC. Continue to sell at the prevailing

priceD. None of the above

6. Which of the following elasticity will measure the extent of shift of the demand curve?

A. Price elasticity of demandB. Cross price elasticity of demandC. Price elasticity of supplyD. None

7. The income elasticity of good X is 0.67. X is;

A. Luxury good B. Normal good C. Necessity good

D. a and b E. b and c8. Alternative economic systems basically

differ on all exceptA. Economic problems they faceB. Forms of property ownershipC. Mechanism of resource

allocationD. a and cE. b and c

9. Given an 80% increase in a family’s income, whose income elasticity of demand is 0.75. What is the change in quantity demanded?

A. 50% B. 15%C. 60% D. 0.8%

10. Which of the following is independent of the level of output?

A. Average fixed costB. Average variable costC. Total variable costD. Total fixed costE. Marginal cost

11. Depression is;A. Where there is increase in

unemploymentB. A time of prosperityC. Prolonged recessionD. b and cE. a and c

12. In line with the current inflation, the nominal GDP

A. Overstates the value of production

B. Understates the value of production

C. Underestimates the value of inflation

D. A and C

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Addis Ababa University Econ 101 – Introduction to EconomicsFaculty of Technology Worksheet II

13. Given the GDP forecast 200 billion birr of Ethiopia for the year 2000 E.C. and the actual GDP of the year 1999 E.C, which is 170 billion birr. Then, what is the approximate forecast of the economic growth for the year 2000 E.C.?

A. 15% B. 18% C. 11.6% D. None of the above

Short Answer Questions

1. Show stages of production in a clearly labeled diagram. At which stage does the diminishing marginal product sets in? At which stage will you produce, assuming that you are a rational producer?

2. Distinguish between GDP and GNP3. Is GDP/GNP a perfect indicator of welfare? Why/why not?

Workout Questions

1. Suppose a certain economy is confronted with making choices among the production of civilian goods (C) and military equipment (M) using its fixed resources. The production possibility frontier (PPF) representing the choice problem between the civilian goods (C) and military equipment (M) is defined as:

4C2+16C + 4M = 80 where , C≥ 0 and M≥ 0 .a. State the basic assumptions and draw the PPF. What is the shape of the PPF? Why

does the PPF take such a shape? b. Suppose the economy is currently producing 8 units of military equipment on its

PPF. What is the opportunity cost of producing one more unit of military equipment?

c. What is the opportunity cost of producing 15 units of military equipment instead of 8 units?

d. Can this economy produce 20 units of civilian goods and 2 units of military equipment? Explain why and how

2. Given the following cost and revenue functions of a perfectly competitive firm

TC=Q3−Q2+4Q+200TR=20Q

a. Calculate the profit maximizing/loss minimizing level of output. b. What are the values of the MC, TFC and TVC at this level of production? c. What is the profit/loss incurred? d. What are the conditions for the firm to be at breakeven and shutdown (no need of

calculation)

3. Suppose the demand for the product of a monopoly is given by

Q=200−20 P , and its MR and TC are;

MR=20−0 .2QTC=0 .5Q2+5Q+225

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Addis Ababa University Econ 101 – Introduction to EconomicsFaculty of Technology Worksheet II

a. Determine how much output the monopoly will produce if it maximizes profit b. What price will it charge at profit maximizing level of output? c. Calculate AVC, AFC, MC, TR and TC d. Calculate the profit or loss

4. Show that there is an inverse relationship between MC and MP as well as AC and AP both mathematically and graphically. Assume that production is in the short run with two inputs, capital (fixed input) and labor (variable input).

5. Suppose that in 2001 value of export of Ethiopia is equal to its import value and gross investment equals government expenditure. Private consumption expenditure is twice its government expenditure, and equals birr 500 million birr.

a. Calculate the gross domestic product (GDP).b. What is the total value added in 2001? c. Suppose the net income from abroad (NFI) is 50 million birr. What is the gross

national product (GNP)? d. What is the depreciation if the net national product (NNP) in the same year is 300

million birr?6. Consider a hypothetical economy with the following aggregate data in a fiscal year of

2002. (All figures are in Millions of the national currency)

Particulars ValueCompensation to employees…………………………4250Personal consumption expenditures by households….6500Interest income..……………………………………...3050Undistributed (Retained) profit……………………......400Exports………………………………………………...550Rental income………………………………………...1500Indirect business taxes……………………………..…2550Gross investment expenditures by firms…………..…4500Depreciation (Capital consumption allowance)……...1000Proprietors income……..………………………….…. 300Corporate profit tax….....…………………………….1000Income earned by foreigners in the economy…..……1500Imports………………………………………….……..750Government transfers…………………………......….3500Government spending………………………………..5000Social Security contribution……………………...….1550Dividends………………………………………….....1750Income earned by nationals abroad………………..…2750

a. Calculate the GDP of the country using the expenditure and income approaches. b. Compute the years real GNP if the price index is 150 in year 2002.)c. Calculate national income of the economy in the same year.

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