Economics and Scarce C. Incomes

Table of Content

Tutorial 1: Ten Principles of Economics Please attempt to answer all the questions.

1. The primary reason for households and societies having numerous decisions to make is the scarcity of resources.

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2. Which of these examples does not illustrate the principle indicated by the phrase, “There is no such thing as a free lunch”?

a. Joe needs to pay his rent and his electric bill

b. Pete must decide between buying a new flat-screen television or purchasing his textbooks for this semester

c. Kevin is faced with the dilemma of choosing between prioritizing his economics exam or his part-time job, while Lisa has to decide whether to spend her money on a new sweater or a pair of jeans.

3. Which of the options listed below does not demonstrate the opportunity cost associated with attending school?
a. The potential earnings a student could have made by working instead of going to college.
b. The restful nap a student could have enjoyed instead of attending class.
c. The enjoyable party a student could have gone to instead of studying for an exam.
d. The expenses incurred for renting an apartment while attending school.

Shane received RM100 as a birthday gift and must choose between four options, Option A, Option B, Option C, and Option D, each costing RM100. In the end, he chooses Option B. The opportunity cost of this decision can be defined as either a) the value Shane would have assigned to his alternative choice in the absence of Option B, b) the combined value of Options A, C, and D to Shane, c) RM50 or d) RM100. Efficiency refers to a society’s ability to produce with its resources while equality pertains to the equitable distribution of benefits from resource usage among members of society.

The idea of making rational decisions “at the margin” involves comparing the marginal costs and benefits for each decision. It does not involve only considering decisions without a marginal cost or always calculating the dollar costs for each decision.

For example, let’s say the cost of operating a 100 room hotel for one night is RM10,000 and there are currently 5 empty rooms available. If it costs RM30 to operate one room for one night and a customer is willing to pay RM60 for that night, the hotel manager should rent out the room because the marginal benefit outweighs the marginal cost.

Among given options, attending class due to an attendance policy that penalizes absences or consumers buying more of a product when it is on sale at a discounted price are both examples of groups responding to incentives. However, universities offering fewer online classes despite generating more revenue than traditional classes does not exemplify a group responding to an incentive.

Employees are motivated to work harder when they have the opportunity to earn higher commissions. This is exemplified by Kevin, the CEO of a major corporation, who chooses to hire a landscaper instead of tending to his own lawn. Kevin recognizes that he can generate more income by utilizing his time for other revenue-generating tasks rather than dedicating it to lawn maintenance. This example illustrates which economic principle?

  1. a. Trade can benefit everyone
  2. b. Markets are generally efficient in organizing economic activity
  3. c. Governments can potentially improve market outcomes
  4. d. Prices increase when there is excessive government printing of money.

Market economies rely on self-interest and prices to guide economic activity. Market-determined prices are seen as superior to government-determined prices because they accurately reflect both the value of a good to society and its production cost.

The government’s involvement in a market economy is justified because markets can sometimes fail to produce a fair distribution of economic well-being, an efficient allocation of resources, and enforce property rights. This is evident in cases such as the development of lung cancer from second-hand exposure to cigarette smoke, which is caused by an externality rather than equality or market power.

When comparing worker productivity, it is observed that a typical worker in India can produce 32 units of product in an eight-hour day, whereas a typical worker in Bangladesh can produce 30 units of product in a 10-hour day. From this information, we can deduce that worker productivity in Bangladesh surpasses that in India and consequently the standard of living will likely be higher there as well.

In addition to this, productivity rates are calculated at 4 units per hour for workers in Bangladesh and 3 units per hour for workers in India. Therefore, there will be no disparity between the standard of living in India and Bangladesh.

Most economists agree that increasing the quantity of money can have several effects: a) it can lead to an increase in the demand for goods and services, b) it can temporarily decrease unemployment, and c) in the long run, it can cause higher inflation. All of these outcomes are considered valid.

Problems and Applications (*from week 3 onwards, please refer to your text book for the questions)

Problem #7: The welfare department has implemented a restriction where many welfare recipients will only receive benefits for up to two years. This change has the potential to impact work incentives.

Problem #7: How does this alteration create a trade-off between fairness and efficiency?

Problem #14: If Malaysians opt to save more from their incomes and banks lend this additional savings to businesses that utilize the funds to construct new factories, it could result in accelerated growth in productivity. It is crucial to consider who benefits from this increased productivity. Is society getting something for nothing?

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