1. THE ECONOMY: THE CORE PROJECT

2. UNIT 1. THE CAPITALIST REVOLUTION
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3. T1.2 Nominal and real GDP
Eden, a country, produces just two output goods: apples and snakeskin handbags. In 2014 the prices of apples and hand bags were 10 and 24, respectively. In 2015, the prices increased to 12 and 25. The quantities produced of the two goods were unchanged in both 2014 and 2015, at 100 and 20. From this information, we can conclude that:
Select all correct answers
The nominal GDP in 2014 is 1,480.
The real GDP is unchanged between 2014 and 2015.
The nominal GDP growth rate between 2014 and 2015 is 14.9%.
The economy of Eden grew between 2014 and 2015 in real terms.
Section 1.2

4. T1.4 Economic inequality
You are given the following graph of Gini coefficients for Britain, the
United States and the Netherlands. The information in the figure suggests that:
Select all correct answers
Capitalist economies tend to have similar degrees of equality.
The Netherlands was the most equal country over the past three centuries.
The US and British economies are currently at their most unequal level since the 1750s.
Over time, capitalist economies can become less as well as more equal.
Section 1.13

5. T1.5 Lorenz curves and Gini coefficient
The following diagram shows the Lorenz curves for the factor (the market) income and the disposable income of the Netherlands in The disposable income is the factor income plus any taxes and government transfers. A’ is the area between the perfect equality line and the disposable income Lorenz curve, while B’ is the area under the disposable income Lorenz curve. Based on this information, which of the following statements are correct?
Select all correct answers
The Gini coefficient is the ratio A’/B’.
The Gini coefficient for the factor income is higher than that for the disposable income.
The taxes and the transfers reduce income inequality in the Netherlands.
After the taxes and the transfers, the poorest 50% of the population receive about 20% of the total income.
Section 1.13

6. UNIT 2. TECHNOLOGICAL CHANGE, POPULATION AND ECONOMIC GROWTH
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7. T2.3 Average product of labour
The following diagram depicts the production function of the farmers, where diminishing average product of labour is assumed. At A the average product of labour is 500,000/800 = 625 kg of grain per farmer. At B the average product of labour is 732,000/1,600 = 458 kg of grain per farmer. If you know that for 2,800 farmers the grain output is 894,000kg, then which of the following is/are correct?
Select all correct answers
The average product of labour when the labour input is 2,800 is 300.
The decreasing slopes of the rays from the origin to the production function along the curve indicate the decreasing average product of labour.
If the production function curve is an upward-sloping straight line, then there is no diminishing average product of labour.
It is possible that initially there is an economy of scale: for example, going from one farmer to two, the average output increases as they efficiently share the workload.
Section 2.5
Section 2.5

8. T2.4 The Malthusian trap Section 2.8
The following figures show the real wage index in England from 1750 to 2000, and the explanation of how England escaped the Malthusian trap in the period up to Based on this information, which of the following statements are correct?
Select all correct answers
The above shows evidence that increased productivity of labour increases wages immediately.
Throughout the 1800s political development led to a fall in the workers’ bargaining power, keeping the real wage low.
England was able to escape from the Malthusian trap after the 1830s by being able to increase the workers’ share of the rising output, due to the increase in the workers’ bargaining power.
The above demonstrates that the size of pie (the total output) does not determine the wage rate, but it merely sets a limit on how high the wage could possibly be.
Section 2.8
Section 2.8

9. UNIT 3. SCARCITY, WORK AND CHOICE
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10. T3.3 Average product of labour
The average product of labour is diminishing when:
Select all correct answers
The marginal product of labour is diminishing.
The production function is of a concave shape.
The marginal product of labour is smaller than the average product of labour.
The marginal product of labour is negative.
Section 3.0

11. T3.4 Indifference curves
Consider an individual’s indifference curves for the consumption of two goods (things you would like to have more of). In this case:
Select one answer
The indifference curves are downward-sloping.
The indifference curves can sometimes cross.
The indifference curves cannot have sections that are straight lines.
The indifference curves cannot have kinks.
Section 3.2

12. T3.5 Choice of goods
Consider indifference curves for consumption of milk and chocolates (you may assume that both are "goods"). The indifference curves are drawn with the number of chocolate bars on the horizontal axis and pints of milk on the vertical axis. You are given that consumer A has a flatter indifference curve than consumer B. In this case, we can conclude that:
Select one answer
Consumer A likes chocolate more than consumer B.
The price of milk relative to the price of chocolates is higher for consumer A than for consumer B.
The indifference curves of the two consumers cannot cross.
Given the same amount of chocolates, consumer A is willing to swap one bar of chocolate with a smaller amount of milk than consumer B.
Section 3.2

13. T3.7 Budget constraint
A worker has two jobs that he can choose to work any number of hours in a day, up to the upper limit (if any). The first job pays £10 an hour and has an upper limit of 6 hours a day. The second job pays £6 an hour and has no upper limit. The worker will always choose the first job if he can. Consider his budget constraint with the amount of free time on horizontal axis and his consumption expenditure (which equals his daily income) on the vertical axis. Based on this information, which of the following is correct?
Select one answer
The worker’s budget constraint is kinked at 6 hours of free time.
The worker will never choose to consume exactly 18 hours of free time.
The slope of the budget constraint is -6 when the hours of free time is small and -10 when the hours of free time is large.
For the choice of 8 hours of free time, the maximum expenditure for the day is £96.
Section 3.6

14. T3.8 Substitution effect income effects
A consumer, who has a fixed income in dollars, consumes petrol and bread. When the price of oil increases:
Select one answer
The substitution effect on the consumption of petrol is positive, as the consumer would have to increase his expenditure on petrol due to its higher price.
The income effect on the consumption of bread is negative, i.e. the consumer would consume less bread.
If the income effect dominates the substitution effect, then the consumer would consume more bread.
If the income effect dominates the substitution effect, then the consumer would consume more petrol.
Section 3.7

15. UNIT 4. SOCIAL INTERACTIONS
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16. T4.1 Prisoners’ dilemma
In a simultaneous one-shot prisoners' dilemma game:
Select one answer
The players’ payoffs are lower in the dominant strategy equilibrium than in some other outcomes.
The players will choose to cooperate to attain the socially optimal outcome.
Each player’s payoff is the highest in the socially optimal outcome that would be attained by cooperation.
Each player would choose the cooperative strategy if he or she knew that the other player would definitely also choose cooperation.
Section 4.3

17. T4.2 Altruistic preferences
The following diagram shows Anil’s preferences when he is either completely selfish or somewhat altruistic, when he and Bala participate in the prisoners' dilemma game with the payoffs shown below. Based on the graph, which of the following are correct?
Select all correct answers
The outcome (I, T) is attained as the dominant strategy equilibrium if Anil is completely selfish and Bala is somewhat altruistic.
The outcome (I, T) is attained as the dominant strategy equilibrium if Anil is somewhat altruistic while Bala is completely selfish.
The outcome (I, T) cannot be attained as the dominant strategy.
The outcome (I, I) is attained as the dominant strategy equilibrium only if both Anil and Bala are somewhat altruistic.
Section 4.5

18. T4.3 Public goods game
Bruce owns a cooperative project with two other members. One day of work by any member costs that member £50; this produces a total income of £120 which is shared amongst the three. So, for example, if Bruce and one other member put the work in, then the income per member is £120 × 2 ÷ 3 = £80, leaving Bruce with a net income of £80 - £50 = £30. Assume that a member must either put in a full day of work or none at all. Based on this information, we can conclude that:
Select all correct answers
The socially optimal outcome (one with the highest total net income) is when all work.
The dominant strategy equilibrium of this public goods game is when no one works.
Bruce is better off not working, irrespective of the actions of the other members.
Bruce’s net income when all three members work is £80.
Section 4.6

19. T4.5 Multiple equilibria
The following game represents the interaction between two software engineers, Astrid and Bettina, who are working together writing code as a part of a project. Astrid is better at writing Java code, while Bettina prefers C++. The numbers represent the pay in dollars for completion of the project. Based on this information, which of the following are true?
Select all correct answers
There are two Nash equilibria: (Java, Java) and (C++, C++).
If Astrid can choose the format first and commit to it, then (Java, Java) will be chosen.
If the two can make an agreement, including a transfer of $500 from Bettina to Astrid, then (C++, C++) will be chosen.
If the two cannot make an agreement then they may end up with the (Java, C++) outcome.
Section 4.11

20. UNIT 5. PROPERTY AND POWER : MUTUAL GAINS AND CONFLICTS
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21. T5.1 Pareto efficiency
Anil and Bala have the choice of using either Integrated Pest Control (IPC) or Terminator (T) to solve the problem of pest insects. The table below shows their payoffs depending on their choice. The following diagram shows these possible outcomes on a graph. Based on the information above, which of the following is correct?
Select one answer
(I, I) is the unique Pareto efficient outcome.
Anil and Bala can Pareto improve by moving from (T, T) to (T, I).
(T, T) is the only Pareto inefficient outcome.
Anil and Bala will both be happy to move from the Pareto efficient (I, T) to the "fairer" Pareto efficient outcome (I, I).
Section 5.2

22. T5.2 Coercion vs take-it-or-leave-it
The figure below shows Angela and Bruno’s feasible frontier, Angela’s biological survival constraint and her reservation indifference curve. You are also given that the total amount of grain produced is 8 bushels if Angela works for 8 hours and 10 bushels if she works for 11 hours. From this, we can conclude that:
Select one answer
Bruno can devise a take-it-or-leave-it offer under voluntary exchange such that he is just as well off as the best outcome under coercion.
Bruno can claim an economic rent of 5 out of the total surplus of 6 under his best voluntary exchange outcome.
Angela will choose not to work if she is offered 2 bushels of grain for 16 hours of free time under voluntary exchange.
Bruno can increase his share by 2 bushels if he could coerce Angela to work 11 hours compared to under the voluntary exchange outcome.
Section 5.8

23. T5.3 The reservation indifference curve
The figure below shows Angela and Bruno’s feasible frontier, Angela’s biological survival constraint and her reservation indifference curve, when Angela would accept any offers strictly better than her reservation position of no work and 2 bushels of survival rations from the government. Now consider the case where Angela cares about the fairness of distribution, such that she can reject an offer that she considers unfair and choose not to work. In such a case Bruno will also receive no income. Then, compared to the reservation indifference curve depicted above, Angela’s new reservation indifference curve is:
Select one answer
Shifted higher.
The same.
Steeper and goes through Z.
The midpoint between the feasible frontier and the biological survival constraint.
Section 5.8

24. T5.4 Gini coefficient when sharing a surplus
The figure below is the Lorenz curve when 90 farmers and 10 landowners share the crop 50:50 (the kinked solid line) and 75:25 (the kinked dotted line). Recall that the Gini coefficient is calculated by A/(A + B), where A is the area between the 45 degree line and the Lorenz curve, and B is the area below the Lorenz curve. Based on this information, which of the following are correct?
Select all correct answers
A + B = 10,000.
Under the 50:50 sharing, A = 2,000.
Under the 75:25 sharing, A = 1,500.
The Gini coefficient under 75:25 is A/(A + B) = 750/5,000 = 0.15.
Section 5.12