Introductory Economics
Problems Set
2008-2009
INTRODUCTION TO ECONOMIC ANALYSIS
Problems
Lesson 1: Basic Concepts
1. Describe some of the possible tradeoffs faced by:
a) A family deciding whether to buy a new car.
b) A member of Parliament deciding whether to cut income taxes.
c) A company president deciding whether to open a new factory.
d) A student deciding whether to go to the cinema.
2. Is air scarce? Is clean air scarce?
3. Your car needs to be repaired. You have already paid € 500 to have the transmission fixed, but it still doesn’t work properly. You can sell your car as it is for € 5,000, but if your car were totally repaired, you could sell it for € 6,000. The garage assures you that to have the car totally repaired you need to spend a further € 500 to replace the ignition system. Is it worthwhile to spend this additional money?
4. A pharmaceutical company is developing a new drug (drug X3Y). The total cost of this development is 6 million euros (€), and the expectation is that the sale of the drug will bring net revenue to the company for 12 million €. The development program is going as planned and, after one year of hard and laborious work, 5 million € have already been spent. Just at this moment, a new market report comes in showing that because of the irruption in the market of a new drug by a competing company, which has practically the same characteristics as drug X3Y, the expected revenues will no longer be 12 million €, but only 3 million €. Should the company continue the development of this new drug?
5. Identify the parts of the circular-flow ...