Aplia Homework: What is Economics?

EILEEN: Hi, Hubert. This is my first economics course, and many of the concepts discussed in class are really confusing. Today the professor said that there is an "opportunity cost" associated with everything that I do, but I don't understand what she means by that. I want to go to the movies tonight with some friends, and a movie ticket costs $9. So is the opportunity cost of going to the movies equal to $9? HUBERT: Not exactly, Eileen. Let's talk it through. Economists think of costs a bit differently than just the dollar amount that you pay. To an economist, the true cost of going to the movies includes the total value of what you give up in order to see the film and the cost of the movie ticket. In other words, not only will you give up the money to pay for a ticket, but by going to the movies you will give up opportunities to do other things with your time as well. This is where the idea of opportunity cost comes from. The opportunity cost of your decision to go to go to the movies is the value of the next best alternative that you will have to give up. Suppose that your next best alternative is to study for your first economics exam. Suppose this study time will increase your grade on the exam by 10%. How much is an increase in your grade worth to you? EILEEN: Wow! For a 10% increase in my exam score? That would be worth $100 to me given the cost of the class and the fact that I need an A to maintain my scholarship. HUBERT: Okay, so by going to the movies, you would be giving up that higher grade. So your opportunity cost of going to the movies is ________, and your total cost of seeing the movie is ________. I think I get it now. When factoring in the opportunity cost, the true cost going to the movies is actually ___________ than just the ticket price. HUBERT: Correct. Thinking about costs in this way will help you make more rational decisions in your everyday life. Now tell me, are you going to go to the movies? EILEEN: I'm not going to the movies because, for me, the value of seeing the movie ____________ of going to the movies.

$100, $109, higher, falls short of the total cost

Kenji and Lucia are partners at a management consulting firm. They are trying to determine which of them has a comparative advantage in creating the 25 slides required for a presentation to a prospective client. Kenji can create 20 slides per hour. For other activities, he can bill clients $500 per hour. Kenji's opportunity cost of creating slides is ___________ per slide.

$25.00

The points on the graph represent observations along the U.S. economy's Phillips curve during the 1960s. If the inflation rate had been 2.5% during the 1960s, the unemployment rate would most likely have been:

2.8%

Notice that real GDP trends upward over time but experiences ups and downs in the short run. A period of increasing real GDP is known as a _________!

Boom

True or False: Economists today believe fluctuations in real GDP are inevitable and that there is nothing the government can do to attenuate these cycles.

False

Despite their differences, with which proposition are two economists chosen at random most likely to agree?

Free trade is usually preferable to the erection of tariffs and quotas.

Suppose that Sam, an economist from a business school in Georgia, and Teresa, an economist from a public television program, are arguing over budget deficits. The following dialogue shows an excerpt from their debate: TERESA: Most people recognize that the budget deficit has been rising considerably over the last century. We need to find the best course of action to remedy this situation. SAM: Based on a few studies I have seen, I believe that a cut in income tax rates of 5% would boost economic growth and raise tax revenue enough to reduce budget deficits. TERESA: I think cutting income tax rates would boost the economy as well, but how do we know that a 5% cut is big enough to stimulate the economy in this day and age? The studies I have seen suggest a more aggressive cut of 20% should be made to income taxes. The disagreement between these economists is most likely due to _________________________

Imperfect information

Lucia's opportunity cost of creating slides is 25% lower than Kenji's. Therefore, ___________ has a comparative advantage in creating slides.

Lucia

What happened to the inflation rate between the year when the unemployment rate was 4.5% and the year when it was 3.5%?

The inflation rate decreased by 2 percentage points.

True or False: The consequences of price ceilings are not accidental but result from the ways in which free markets operate.

True

Consider the following dialogue between Crystal, a student in an introductory economics class, and Crystal's teaching assistant, Hilary. CRYSTAL: Hi, Hilary. I was very confused by what the professor was lecturing on today in class. The professor said that in real life many people do not use marginal analysis and mistakenly look at average costs and benefits when making decisions. What did she mean by that? HILARY: Hi, Crystal. A lot of students have had questions about this topic. Let's go over the concept together. Marginal analysis involves examining the additional costs and benefits of an activity. Suppose you are deciding how many glasses of wine to drink. Some people may look at the costs and benefits of drinking an entire bottle of wine. Marginal analysis says you should consider the costs and benefits of each glass individually. Suppose you have drank two glasses of wine. You are considering drinking a third glass. If the marginal benefit of the third glass is $14 and the marginal cost is $3, then you should _________ an additional glass.

drink

However, if the marginal benefit of the third glass is $2 and the marginal cost is $14, then you should ___________ an additional glass. I see! So following this logic, I should continue to drink wine as long as the marginal benefits are _____________ the marginal costs. If the marginal cost of the next glass of wine is greater than the marginal benefit, I should _________! I think you get it now. While this is a very simple example, it does show how marginal analysis can help prevent you from drinking an extra wine and getting sick!

not drink, greater than, stop

Rent controls force landlords to price apartments below the equilibrium price level. An immediate effect is that housing becomes _________ because at the lower rent, it is _____________ profitable to build and maintain rental housing.

scarce, less