Table Of ContentS T U DY G U I DE
& C A N A D I AN P O L I CY
Seventh Edition
David Stager
University of Toronto
Butterworths
Toronto and Vancouver
Study Guide
Economic Analysis and Canadian Policy
© Butterworths Canada 1992
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Printed and bound in Canada by
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Canadian Cataloguing in Publication Data
Stager, David, 1937-
Economic analysis & Canadian policy, seventh
edition. Study guide
Supplement to: Stager, David, 1937-
Economic analysis & Canadian policy. 7th ed.
ISBN 0-409-89946-1
1. Economics - Problems, exercises, etc.
2. Canada - Economic policy - Problems,
exercises, etc. I. Title.
HB171.5.S72 1991 330 C91-095416-X
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Before You Begin
A FEW WORDS OF EXPLANATION AND SUGGESTION may help you make
better use of this book. The purpose of this study guide is to develop a
better understanding of the concepts, theories, and policies presented
in an introductory economics course —and especially in a course using
Economic Analysis and Canadian Policy, seventh edition.
There are many approaches to the study of economics, but the basic
stages in anyone^s approach are likely to be fairly similar. You should
rely on a combination of the textbook, your lecture notes, and these
exercises. No one source is sufficient. This is particularly true of any
workbook or study guide because not all of the important concepts can
be included appropriately in the format of multiple-choice and true/
false questions or problems. When you begin a new chapter or a new
section of the course, browse through that chapter of the text, taking
note of the headings, sections printed in colour, and diagrams and their
captions. Read the chapter summary, but do not worry if some parts
make little sense at that stage. In this initial survey you will begin to see
the main themes and the important concepts that are discussed in the
section. Next, read and re-read a few pages—or only parts of a page—
just before your class if you are in a lecture course. Try to identify spe
cific sections or ideas that you do not understand; read the preceding
and following paragraphs carefully to see whether the problem can be
resolved in this larger context.
Read the chapter completely again, breaking it into the major sec
tions, so that you can grasp the "big picture" within which the specific
details have been explained. Briefly, you should go from the general to
the specific and back to the general again. Only when you feel fairly
confident that you understand each chapter or section should you then
proceed to the review exercises.
The chapters in this study guide correspond to the chapters in the
textbook. Each chapter begins with a list of the important terms and
concepts that you should be able to define or explain before proceeding
further. The multiple-choice questions are to be answered with the
"most appropriate" statement among those offered. For some questions,
no statement may be 100 per cent satisfactory as an answer, but one
statement should stand out as a better answer than any other.
The problems vary in format and purpose. Some problems are short
and simply review specific ideas; others are longer and include several
parts to guide you through the same logical development of a conclusion
w Before You Begin
that is presented in the textbook. In other cases it is also possible to
extend some topics beyond the treatment they receive in the text. Some
problems require you to make calculations, plot the data, and draw
conclusions. This is not simply to test your arithmetic skills. Try to see
how the successive steps in each problem are related to the text's discus
sion of various factors and their interrelationships. Look for the general
concepts and conclusions that are illustrated by the specific numerical
examples.
Answers to the multiple-choice and true/false questions and prob
lems are included in this book, but you will find it most beneficial not to
look at the answers until you have completed the assignment. Then look
carefully at questions where you had incorrect answers to see whether
you should review those topics before proceeding.
Discussion questions at the end of each chapter have several purposes.
Some questions serve as a final review, or present a different perspective
on an idea. Other questions are intended as "thought-provokers": they
ask you to think about your own experience within the economics
framework you have just learned, or they challenge you to think beyond
the concise discussion in the text. When you are asked to explain your
answer, provide the detailed reasoning that leads to your conclusion.
Be sure to ask questions about anything that puzzles you. There may
still be ambiguities lurking in the questions or answers, or you may have
a plausible interpretation that was not anticipated. If you or your in
structor do discover such difficulties or incorrect answers, please bring
these to my attention by writing to me in care of the publisher. I am
greatly indebted to the students in my own classes who have helped to
improve these exercises; to the several instructors who tested most of
these questions in their classes and made important suggestions and
corrections; and to other instructors who have written with useful com
ments for additional exercises.
1 Economics:
The Analysis of Choice
IMPORTANT TERMS AND CONCEPTS
Be sure you can define or explain each of these terms before proceeding with
the questions and problems.
economics economic decisions or problems
economic resources technology
factors of production economic growth
commodity economic systems
intermediate vs. final goods traditional economy
producer vs. consumer goods planned economy
economic vs. free goods market economy
services price system
consumption market
utility
mixed economies
production
scarcity Appendix:
opportunity cost coordinate graph
production-possibilities boundary dependent variable
consumption-possibilities curve independent variable
MULTIPLE-CHOICE QUESTIONS
Circle the letter corresponding with the most appropriate answer for each
question.
1. Economics is the study of how to use:
(a) limited resources to satisfy limited wants
(b) unlimited resources to satisfy limited wants
(c) limited resources to satisfy virtually unlimited wants
(d) virtually unlimited resources to satisfy virtually unlimited wants
Chapter 1
2. The quantity of one good that must be given up when more of another
good is produced is described as:
(a) substitute goods
(b) opportunity cost
(c) economy of scale
(d) efficient production
3. A production-possibilities boundary illustrates the principle that:
(a) an economy will automatically move to the full utilization of all its
productive resources
(b) if an economy is making the maximum use of all available
resources, more of one good can be produced only if less of another
good is produced
(c) an economy can produce more as its population increases
(d) different economies have different production possibilities
4. If the production-possibilities boundary were a straight line joining the
vertical and horizontal axes, this would mean that:
(a) the two goods concerned are produced in equal amounts
(b) the two goods are sold at the same market prices
(c) there must be some unemployment of labour
(d) the opportunity cost of each good is constant regardless of the level
of output of each good
5. An outward shift of the production-possibilities boundary would likely
occur if:
(a) unemployment was reduced
(b) there was an increase in the level of technical training of the labour
force
(c) consumer wants were increased
(d) the composition of the population shifted such that there were
more full-time students and fewer workers
6. If it is possible to increase the quantity produced of one good without
decreasing the quantity produced of any other good:
(a) the economy is producing at its maximum efficiency
(b) the economy is beyond its production-possibilities boundary
(c) the opportunity cost of the good is zero
(d) it is not possible to define the production-possibilities boundary
Economics: Ttie Analysis of Cfioice 5
7. The productive resources available to an economy could be increased
by:
(a) an increase in the population
(b) an increase in net immigration
(c) higher levels of education and training in the labour force
(d) all of the above
8. When economists say "there are no free lunches", they mean that:
(a) the government should not subsidize food programs for the poor
(b) the employee pays indirectly for fringe benefits through lower
wages than would be received otherwise
(c) any good or service that is provided at no direct expense to the user
nevertheless requires economic resources that could have been used
for the production of other goods
(d) they do not have an adequate theory of government services
9. In a pure market economy, economic decisions are determined by:
(a) prices set by supply and demand conditions
(b) prices set by governments
(c) planners who have been given this authority
(d) persons who control the money market and the stock market
10. An economy based on the market system requires:
(a) self-sufficient family units
(b) money for the exchange of goods
(c) direction from central economic authorities
(d) an organized interaction of buyers and sellers
TRUE/FALSE QUESTIONS
State whether each of the following statements is true or false, or whether you
are uncertain because the statement may be either true or false depending on
the relevant circumstances and/or assumptions. Explain the reasons for your
answer in each case.
1. Intermediate goods and producer goods are the same, since both are
used to make consumer goods.
2. By the "fact of scarcity", economists mean that there will always be
widespread poverty in the world.
6 Chapter 1
3. Opportunity cost is defined as the total dollar amount that must be
spent to purchase a specific commodity.
4. In an economy that produces only wheat and cheese, introduction of a
higher yielding wheat variety will reduce the relative costs of both
wheat and cheese.
5. A technological improvement in the production of one good may result
in the increased production of another good.
6. An economy's production-possibilities boundary may shift inward as
well as outward.
7. An economy may be at a point on its production-possibilities boundary
even though it has some unemployed labour.
8. An economy cannot increase its current consumption of goods and
services unless it gives up some future goods and services.
9. All economies face the same basic economic problems.
10. A market economy is more productive than a planned economy.
PROBLEMS
1. Suppose that an economy faces the following production-possibilities
schedule:
Alternative Combinations Β D
Producer goods 60 52 32 16 0
Consumer goods 0 20 40 48 50
Economics: The Analysis of Choice
(a) Plot these combinations, label the points, and draw the pro
duction-possibilities boundary represented by this schedule.
Producer
Goods
(units
per
601
week)
401
20\
20^ 40 ' ' ' sb
Consumer Goods (units per week)
(b) If the economy is producing the combination of goods represented
by C, the opportunity cost of the 41st unit of consumer goods will
be units of producer goods. The opportunity cost of con
sumer goods (increases/decreases/remains constant) as the output
of consumer goods increases.
(c) If the production-possibilities curve were a straight line joining
points A and E, the opportunity cost of consumer goods would (in
crease/decrease/remain constant) with increased output of con
sumer goods.
(d) Combination C represents a (faster/slower) rate of economic
growth than combination D.
(e) Combination represents some unemployment, under-
utilization of productive capacity, or otherwise inefficient produc
tion.
(f) If the economy were producing combination F, it would have the
immediate potential for increasing its output of producer goods by
units without reducing the output of consumer goods.
8 Chapter 1
(g) It is (possible/uncertain/impossible) that the economy could im
mediately produce combination G, given the existing resources and
technological knowledge.
(h) Indicate with a check-mark in the appropriate column the effect
each of the following events would likely have on the production-
possibilities curve:
Shift No Shift
Inward Change Outward
(i) emigration of skilled workers
(ii) discovery of new energy sources
(iii) increase in size of the labour
force
(iv) increase in output of consumer
goods
(v) depletion of natural fertility of
agricultural lands
(i) Draw the new production-possibiHties boundary that would result
if a technological change in the production of producer goods
made it possible to produce a maximum of 72 units, but there was
no increase in the maximum number of consumer goods. If the
economy now produces 32 units of producer goods, can it produce
more consumer goods than before? Explain why or why not.
