Econ0002 term 1Exam Test Guide With
Complete solution
What is the 90/10 ratio? - ANS average income of the richest 10% divided by the average
income of the poorest 90%
What does disposable income not measure? - ANS quality of social and physical
environment, amount of free time, goods and services you can't buy, goods and services that
are produced within the household
How to calculate nominal gdp? - ANS sum of (price of good i x quantity of good i)
How to calculate real gdp? - ANS multiply prices from base year by quantities for year of
measurement
How do we compare living standards across countries? - ANS use estimates of GDP per
capita in a common set of prices (purchasing power parity PPP prices). Because exchange
rates stop you comparing countries accurately
What is the ratio scale? - ANS With GDP per capita doubling up the vertical axis
what is the ratio scale used for? - ANS comparing growth rates
What does a steeper line in the ratio scale chart mean? - ANS Faster growth rate
growth rate = - ANS change in income/original level of income
what does a growth rate of 100% mean? - ANS level of income doubles
What is technology in economics? - ANS a process that takes a set of materials and other
inputs, including the work of people and machines, and creates an output
Examples of hockey stick graph - ANS Gross domestic product per capita, productivity of
labour, connectivity of the various parts of the world, impact of the economy on the global
environment
What is a centrally planned economic system? - ANS The government controls production
and decides how goods should be distributed, and to whom
What does a market economy consist of? - ANS Private property and markets
,What does a capitalist economy consist of? - ANS Private property, markets and firms
What is absolute advantage? - ANS If the inputs to produce a good are less than in some
other person or country
What is comparative advantage? - ANS If the cost of producing an additional unit of a good
relative to the cost of producing another good is lower than another person or country's cost to
produce the same two goods
Explanations for why capitalism is less dynamic? - ANS private property is not secure (weak
enforcement of the law or expropriation), markets are not competitive, firms owned by people
only because of connections
How can firms stay ahead of the competition in capitalist economies? - ANS By constantly
innovating
How do governments help economies work? - ANS They adjudicate disputes over ownership
and enforce property rights necessary for markets to work
Why is an equilibrium at subsistence level an equilibrium? - ANS Because movements away
from subsidence income are self-correcting
Average product of labour = - ANS total output/total number of workers
What does a production function describe? - ANS the relationship between the amount of
output produced and the amount of input used to produce it
What is diminishing average product of labour? - ANS Where as more labour is used in a
given production process, the average product of labour falls
What can diminishing average product of labour be caused by? example - ANS More labour
devoted to a fixed quantity of land or more (inferior) land bought into cultivation
malthus's model - ANS diminishing average product of labour and increased living standards
created population increase which both led to Malthusian trap
what variables stay constant in the malthus model equilibrium? - ANS size of population,
income of population
What is subsistence level? - ANS The level of living standards (measured by consumption or
income) such that the population will not grow or decline
, What does Malthus' model predict? - ANS improvements in technology will not raise living
standards if the average product of labour diminishes as more labour is applied to a fixed
amount of land, or population grows in response to increases in real wages
Malthusian trap theory - ANS population will be constant when the wage is at subsistence
level, it will rise when the wage is above subsistence level, and it will fall when it is below
subsistence level
when wages are low, is population growth positive or negative? (malthus) - ANS negative
how does a technological improvement affect the average product of labour and wage? - ANS
increases
How did the permanent technological revolution break the theory of a vicious cycle of economic
stagnation and poverty that the Malthusian model predicted? - ANS Improvements in
technology happened at a faster rate than population growth, offsetting the diminishing average
product of labour
Economic rent = - ANS benefit from option taken - benefit from next best option
What is the reservation option? - ANS A person's next best alternative among all options in a
particular transaction
Slope of Isocost line = ? - ANS -w/p
Equation of Isocost line - ANS R=(c/p)-(w/p)L where R=amount of good x and L=number of
workers/amount of labour
When can Isocost line become steeper? - ANS when wage is rising relative to the cost of
good x
What is creative destruction? - ANS sticking to the old technologies, everyone has gone to
new ones so price of good goes down --> bankruptcy
What is the production function? - ANS Graph describing amount of output that can be
produced by any given amount/combination of input(s)
Average product = - ANS total output/particular input
Average product of production function? - ANS Vertical distance from 0/horizontal distance
from 0
What is marginal product? - ANS Additional amount of output that is produced if a particular
input was increased by one unit, holding all other inputs constant
Complete solution
What is the 90/10 ratio? - ANS average income of the richest 10% divided by the average
income of the poorest 90%
What does disposable income not measure? - ANS quality of social and physical
environment, amount of free time, goods and services you can't buy, goods and services that
are produced within the household
How to calculate nominal gdp? - ANS sum of (price of good i x quantity of good i)
How to calculate real gdp? - ANS multiply prices from base year by quantities for year of
measurement
How do we compare living standards across countries? - ANS use estimates of GDP per
capita in a common set of prices (purchasing power parity PPP prices). Because exchange
rates stop you comparing countries accurately
What is the ratio scale? - ANS With GDP per capita doubling up the vertical axis
what is the ratio scale used for? - ANS comparing growth rates
What does a steeper line in the ratio scale chart mean? - ANS Faster growth rate
growth rate = - ANS change in income/original level of income
what does a growth rate of 100% mean? - ANS level of income doubles
What is technology in economics? - ANS a process that takes a set of materials and other
inputs, including the work of people and machines, and creates an output
Examples of hockey stick graph - ANS Gross domestic product per capita, productivity of
labour, connectivity of the various parts of the world, impact of the economy on the global
environment
What is a centrally planned economic system? - ANS The government controls production
and decides how goods should be distributed, and to whom
What does a market economy consist of? - ANS Private property and markets
,What does a capitalist economy consist of? - ANS Private property, markets and firms
What is absolute advantage? - ANS If the inputs to produce a good are less than in some
other person or country
What is comparative advantage? - ANS If the cost of producing an additional unit of a good
relative to the cost of producing another good is lower than another person or country's cost to
produce the same two goods
Explanations for why capitalism is less dynamic? - ANS private property is not secure (weak
enforcement of the law or expropriation), markets are not competitive, firms owned by people
only because of connections
How can firms stay ahead of the competition in capitalist economies? - ANS By constantly
innovating
How do governments help economies work? - ANS They adjudicate disputes over ownership
and enforce property rights necessary for markets to work
Why is an equilibrium at subsistence level an equilibrium? - ANS Because movements away
from subsidence income are self-correcting
Average product of labour = - ANS total output/total number of workers
What does a production function describe? - ANS the relationship between the amount of
output produced and the amount of input used to produce it
What is diminishing average product of labour? - ANS Where as more labour is used in a
given production process, the average product of labour falls
What can diminishing average product of labour be caused by? example - ANS More labour
devoted to a fixed quantity of land or more (inferior) land bought into cultivation
malthus's model - ANS diminishing average product of labour and increased living standards
created population increase which both led to Malthusian trap
what variables stay constant in the malthus model equilibrium? - ANS size of population,
income of population
What is subsistence level? - ANS The level of living standards (measured by consumption or
income) such that the population will not grow or decline
, What does Malthus' model predict? - ANS improvements in technology will not raise living
standards if the average product of labour diminishes as more labour is applied to a fixed
amount of land, or population grows in response to increases in real wages
Malthusian trap theory - ANS population will be constant when the wage is at subsistence
level, it will rise when the wage is above subsistence level, and it will fall when it is below
subsistence level
when wages are low, is population growth positive or negative? (malthus) - ANS negative
how does a technological improvement affect the average product of labour and wage? - ANS
increases
How did the permanent technological revolution break the theory of a vicious cycle of economic
stagnation and poverty that the Malthusian model predicted? - ANS Improvements in
technology happened at a faster rate than population growth, offsetting the diminishing average
product of labour
Economic rent = - ANS benefit from option taken - benefit from next best option
What is the reservation option? - ANS A person's next best alternative among all options in a
particular transaction
Slope of Isocost line = ? - ANS -w/p
Equation of Isocost line - ANS R=(c/p)-(w/p)L where R=amount of good x and L=number of
workers/amount of labour
When can Isocost line become steeper? - ANS when wage is rising relative to the cost of
good x
What is creative destruction? - ANS sticking to the old technologies, everyone has gone to
new ones so price of good goes down --> bankruptcy
What is the production function? - ANS Graph describing amount of output that can be
produced by any given amount/combination of input(s)
Average product = - ANS total output/particular input
Average product of production function? - ANS Vertical distance from 0/horizontal distance
from 0
What is marginal product? - ANS Additional amount of output that is produced if a particular
input was increased by one unit, holding all other inputs constant
