Question

(a) Farmer Sherry can grow wheat and barley. She can grow 75 bushels of wheat
or 125 bushels of barley on a hectare of her land for the same cost. The price of wheat is $2 per bushel
and the price of barley is $0.80 per kilogram. Show the benefits to Sherry of specialization. What should
she specialize in? Why ? (2)
(b) You work at your school, making $15 per hour. Yesterday, you decided to cancel your two-
hour tutoring appointment in order to meet friends for a coffee. The coffee cost you $3.50. What was the
opportunity cost of this decision in dollars? Explain your solution! (2)
(c) Give two examples of each of the following: (4)
(i) Positive economic statement, (ii) Normative statement (iii) Micro Economics (iv) Macro Economics

Answer 1

A - She should specialise in the production of barley and not wheat. This is because the opportunity cost of producing barley is less than that of wheat. This means that she has comparitive advantage in production of barkey and hence the would enjoy the lower cost and hence can earn more profits if she produces barley.

B - Opportunity cost is the cost of the next best alternative forgone. Here , 2 hours of meeting which paid $ 15 per hour has been sacrificed for coffee.

Opportunity cost = 15*2

= $ 30.

C

A - Positive economic statement -

1 - GDP growth in India has declined by 13% in the last quater.

2 - Rise in government spending leads to the rise in level of employment in economy.

B - Normative statement -

1 - Prices of Rail fare should be lower than they currently are.

2 - Government should provide funding to public schools to improve their infrastructure.

C - Micro economics

1 - The medical supplies industry is facing shortage because of huge demand

2 - Government has set up the price floor for wheat farmers to increase their revenue.

D - Macro Economics.

1 - The economy is running into phase of recession with unemployment very high.

2 - Central bank has formulated expansionary monetary policy to stimulate the demand and curb recession.