Exercises 3

A)

Q1: „Economics is the science which studies human … as a relationship between ends and scarce … that have alternative uses.” (Robbins, 1936:16)

(b) behaviour, means

Q2: Which of the following terms can be coined with the citation?

(c) constrained optimization

Q3: Economics is a discipline of

(a) rational choice

B) Accordingly, which of the following statements are correct regarding the discipline of neoclassical economics?.

Q1: Economics is not able to understand the decisions of a housewife since the latter does not earn money.. Incorrect

Q2: Every single individual behaves rationally. Correct

Q3: It does not matter whether we study the demand for water in a Sub-Saharan African country or in Europe, the same ideas and methods can be used in both cases, according to neoclassical economists.. Correct

Q4: Having 14 children in a family in the remote areas of Malawi, where water and food is in scarce supply, is absolutely irrational.. Incorrect

Q5: A Polish plumber would never move to Great Britain if he does not speak the language of the foreign country.. Incorrect

C) Based on the three points above, answer the following questions:

Q1: A consumer would like to buy some apples and bananas on the market. The price of one unit of apples is 1 dollar, while the price of one unit of bananas is 8 dollars. She likes both fruits very much but bananas in general are more attractive to her. The consumer has brought with her 6 dollars to the market and she would like to spend all of her money. How much apples and bananas will she buy?

(a) 1 unit of bananas, because she likes bananas the most.

(b) 6 units of apples, because she does not have enough money to buy bananas.

(c) 6 units of bananas, because she does not have enough money to buy apples.

(a) 1 unit of apples, because she likes apples the most.

Q2: Now assume that the same consumer has doubled her purchasing power, so she has brought twice as much money as before to the market, while the prices of the fruits are still the same (she has now 12 dollars). However, let us assume also that our consumer is indifferent between the two goods, that is, she gets the same utility from the consumption of both fruits. How much apples and bananas will she buy?

(a) 1.5 units of bananas, because bananas are cheaper than apples (eight times cheaper) and the consumer is not indifferent between the two goods.

(b) 8 units of bananas, because bananas are cheaper than apples (six times cheaper indeed) and the consumer is indifferent between the two goods.

(c) 12 units of apples, because apples are much cheaper than bananas (eight times cheaper indeed) and the consumer is indifferent between the two goods.

(d) 12 units of bananas, because bananas are much cheaper than apples and the consumer is apparently indifferent between the two goods.

Q3: The goods are…

(a) indifferent.

(b) complementary.

(c) cannot compete with each other.

(d) perfect substitutes of each other.

D) Please look at Diagram 1, showing London’s public transportation statistics. The data points refer to daily aggregates. During the weekends less people choose the metro than during the weekdays; this explains the relatively high spread of the data.

Diagram 1: public transportation in London

Q1: According to the diagram, what is our exogenous or explanatory variable?

(a) Total revenue

(b) Number of passengers

(c) Both

(d) None

Q2: What do we mean by an “exogenous” variable?

(a) it is estimated

(b) it is calculated by forecasts

(c) it is not estimated but calculated

(d) it is given

Q3: According to Diagram 1, what is our endogenous or explained variable?

(a) Total revenue

(b) Number of passengers

(c) Both

(d) None

Q4: Based on the previous questions, which of the following mathematical representations (or functional relationships) are correct?

(a) Number of passengers = f (Total revenue)

(b) Total revenue = f (Total revenue)

(c) Total revenue = f (Number of passengers)

(d) None

Q5: In our very simple model, is it possible for us to know exactly what determines the number of passengers?

(a) no, it cannot be known.

(b) yes, it can be known

(c) no, it cannot be known because it might depend on total revenue

(d) yes, it can be known because it depends on total revenue

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