Question 1: Suppose an economy's real GDP is $30,000 in year 1 and $31,200 in year 2. What is the growth rate of its real GDP? Assume that population is 100 in year 1 and 102 in year 2. What is the growth rate of GDP per capita?
Question 2: If the CPI was 110 last year and is 121 this year, what is this year's rate of inflation? What is the "rule of 70"? How long would it take for the price level to double if inflation persisted at (a) 2, (b) 5, and (c) 10 percent per year?
Question 3: Graph the accompanying demand data, and then use the midpoint formula for Ed to determine price elasticity of demand for each of the four possible $1 price changes. What can you conclude about the relationship between the slope of a curve and its elasticity? Explain in a nontechnical way why demand is elastic in the northwest segment of the demand curve and inelastic in the southeast segment.
Product Quantity
Price Demanded
$5 1
4 2
3 3
2 4
1 5
Question 4: A firm has fixed costs of $60 and variable costs as indicated in the table on the following page. Complete the table and check your calculations by referring to question above.
a. Graph total fixed cost, total variable cost, and total cost. Explain how the law of diminishing returns influences the shapes of the variable-cost and total-cost curves.
b. Graph AFC, AVC, ATC, and MC. Explain the derivation and shape of each of these four curves and their relationships to one another. Specifically, explain in nontechnical terms why the MC curve intersects both the AVC and the ATC curves at their minimum points.
c. Explain how the location of each curve graphed in question would be altered if (1) total fixed cost had been $100 rather than $60 and (2) total variable cost had been $10 less at each level of output.
Question 5: "In the corn market, demand often exceeds supply and supply sometimes exceeds demand." "The price of corn rises and falls in response to changes in supply and demand." In which of these two statements are the terms "supply" and "demand" used correctly? Explain.
Question 6: What are economic resources? What categories do economists use to classify them? Why are resources also called factors of production? Explain: "If resources were unlimited and freely available, there would be no subject called economics."