Chapter 1
Microeconomics is the study of
how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
*Start of SECTION 1.2* Scarcity implies that every society and every individual face trade-offs because scarcity means that
human wants are greater than what available resources can produce.
In a market system, what determines how goods and services will be produced?
Firms determine how goods and services will be produced.
An opinion columnist in the Washington Post argues that the Stop Bad Employers by Zeroing Out Subsidies Act is "virtually guaranteed to hurt the very low-income working families its sponsors want to help." Part 2 a. What was the main provision of this act? b. Why would the columnist argue that the act was more likely to hurt than help low-income families? c. If the columnist is correct, why did the sponsors of the act in Congress write the act the way that they did?
-Firms whose employees received assistance from government benefits, including Medicaid and the Supplemental Nutrition Assistance Program (SNAP), would be required to pay a tax equal to cost of the assistance. -Firms that might otherwise have hired a low-wage worker may now be reluctant to do so because the firms could be liable for paying the tax. -The sponsors of the legislation may have hoped that firms would raise the wages of low-income workers, which would make it unnecessary for these workers to apply for government benefits.
Question content area Part 1 A firm operating in a market economy has a strong incentive to be productively efficient and allocatively efficient because the former enables it to ___________ while the latter ensures it of ___________. If a firm is productively and allocatively efficient, it earns ________; if not it ____________
-Minimize production costs/ample revenues -profit/ suffers a lost
Today, which of the following countries has a centrally planned economy? How are economic resources allocated in a market economy?
-North Korea -by the decisions of households and firms interacting in markets
The three economic questions that every society must answer are Centrally planned economies allocate resources based on decisions by ________, while market economies answer these questions through decisions made by ______________________.
-What goods will be produced, how will they be produced, and who will receive the goods? -government/ households and firms
Productive efficiency means that Allocative efficiency means that
-a good or service is produced at the lowest possible cost -every good or service is produced up to the point where marginal benefit is equal to marginal cost.
(1/3)The grading system plays an important role in student learning. In their book Effective Grading: A Tool for Learning and Assessment in College, Barbara Walvoord and Virginia Anderson state that "grading infuses everything that happens in the classroom." They also argue that grading "needs to be acknowledged and managed from the first moment that an instructor begins planning a class." Part 2 The grading system used by a teacher can affect the incentives of students to learn the course material by_________ (2/3)If teachers put too little weight in the grading scale on a certain part of the course, like readings outside the textbook, students might respond by ________ that part of the course. (3/3)Teachers often wish that students came to class prepared having read the upcoming material. A teacher could design the grading system to motivate students to come to class prepared by ______ the grade weight assigned to being prepared.
-altering the payoffs to achieving success on the various components of the course. -de-emphasizing -increasing
The U.S. Postal Service (USPS) charges Amazon about $2 to deliver a package. The USPS argues that its contract with Amazon allows it to reduce the loss it suffers on its overall operations. A business writer for the Washington Post observes: "Looked at from the standpoint of incremental revenue (huge) minus these incremental expenses (modest), the Postal Service could very easily have come to the conclusion that, even at $2 a package, the Amazon contract was likely to be highly profitable." What does the writer mean by "incremental revenue" and "incremental cost"? Why would he focus on incremental revenue and incremental cost rather than on total revenue and total cost? "Incremental" means the same thing as____
-"marginal." If the marginal revenue exceeds the marginal cost, the USPS's profit will increase. If the marginal cost exceeds the marginal revenue, the USPS's profit will decrease.
Suppose that your local police department recovers 100 tickets to a big NASCAR race in a drug raid. It decides to distribute these to residents and announces that tickets will be given away at 10 A.M. Monday morning at City Hall. Suppose that your college decides to give away 1,000 tickets to the football game against your school's biggest rival. The athletic department elects to distribute the tickets by giving them away to the first 1,000 students who show up at the department's office at 10 a.m. the following Monday. Part 2 a. The groups of people that are most likely to get the tickets will be those for whom the expected marginal ___________ of going to the department's office on Monday morning are greater than the expected marginal ______. What is the actual cost and also the opportunity cost of distributing the tickets this way? Productive efficiency occurs when a good or service (such as the distribution of tickets) is produced at the lowest possible cost. Is this an efficient way to distribute the tickets?_____ This is ______
-benefits/costs -The cost of people blocking traffic in and around the department's office building. The activities that cannot be done (such as earning money at work) when one is standing in line. The cost of travel to the department's office. -no -not an equitable way to distribute the tickets because some students who really want them may be unable to go and get them.
What do economists mean by the word "marginal"? Economists believe that an activity should be continued up to the point where______
-extra or additional -the marginal benefit from the activity is equal to the marginal cost.
In the United States, to receive a medical license, a doctor must complete a residency program at a hospital. Hospitals are not free to expand their residency programs in a particular medical specialty without approval from a Residency Review Committee (RRC), which is made up of physicians in that specialty. A hospital that does not abide by the rulings of the RRC runs the risk of losing its accreditation from the Accreditation Council for Graduate Medical Education (ACGME). The ACGME and the RRCs argue that this system makes it possible to ensure that residency programs do not expand to the point where they are not providing residents with high-quality training. This system may help protect consumers by ensuring that When it comes to assessing how this system affects the financial interests of doctors and the well being of consumers, it may be that the former gain more simply because Any attempt to determine whether or not this is a good system must focus on its
-future doctors receive high-quality training. -there are far fewer of them, hence each stands to gain much from supply restrictions. -costs and benefits
College football attendance, especially student attendance, has been on the decline. In 2019, home attendance at major college football games declined for the ninth consecutive year and was the lowest since 1996. The opportunity cost of engaging in an activity is the value of the best alternative that must be given up in order to engage in that activity. Your opportunity cost of attending a game compared with the opportunity cost facing a college student 23 years ago is______ Can this change in opportunity cost account for the decline in college football attendance? Briefly explain.
-higher, because more games are televised today. -yes, because these changes increase the opportunity cost of watching football games in person.
(1/3)The federal government subsidizes some loans to college students. Typically, the more students who participate in these programs and the more they borrow, the higher the cost to the federal government. In 2011, President Barack Obama convinced Congress to pass these changes to the federal student loan programs: (1) Payments were capped at 10 percent of a borrower's discretionary income; (2) any unpaid balances for people working for the government or in the non-profit sector were forgiven after 10 years; and (3) people working in the private sector had their loans forgiven after 20 years. Part 2 As a result of these changes in the federal student loan program, you would predict that the total amount students' borrowed under these programs would have________. (2/3) Given your answer to the previous question, do you think President Obama was likely to have recommended changes that would increase, or changes that would decrease, the payments that borrowers would have to make? President Obama was likely to have recommended changes that would _______ (3/3) President Obama and his advisers have failed to correctly forecast the effects of the 2011 changes to the loan pr
-increased because the terms of repayment have been made more generous. -increase the payments that borrowers would have to make so that the government would be paid back sooner. -underestimated the number of students who would take advantage of the programs.
(1/2) Many universities and corporations offer a health wellness program that helps their employees improve or maintain their health and get paid (a relatively small amount) for doing so. The programs vary, but typically consist of employees completing a health assessment, receiving a healthy living program, and monitoring their monthly health activities. Part 2 Corporations and universities are willing to pay employees to take care of themselves because a healthier workforce (2/2) The incentive of employees to improve or maintain their health once they obtain health insurance may be_____ (3/3) When an employer offers a wellness program to its employees, the health insurance premiums the employer pays on behalf of the employees are likely to_____
-performs more efficiently, thereby improving overall productivity in the workplace & translates into lower costs, in part by reducing illness-related absenteeism and premature retirements. -negatively -decrease
Leonard Fleck, a philosophy professor at Michigan State University, has written, "When it comes to health care in America, we have limited resources for unlimited health care needs. We want everything contemporary medical technology can offer that will improve the length or quality of our lives as we age. But as presently healthy taxpayers, we want costs controlled." Part 2 Is it necessary for all economic systems to limit services such as health care? A market system prevents people from getting as many goods and services as they want due to which of the following?
-yes -their income
According to an article on cnbc.com, in early 2021, Elon Musk was the world's richest person, with wealth of $184 billion. Part 2 Does Elon Musk face scarcity? Which of the following statements is true?
-Yes, because even though billionaires' financial resources enable them to afford a much greater array of goods and services than those less wealthy, their financial resources are not infinite. -All individuals face a scarcity of time and need to make choices how to allocate it .
Which of the following statements about a hypothesis is correct?
A hypothesis is a statement that could in principle turn out to be incorrect.
When does allocative efficiency occur?
Allocative efficiency occurs when production is in accordance with consumer preferences.
Which of the following statements about an economic variable is correct?
An economic variable is something measurable that can have different values.
Which of the following statements is correct?
An innovation is the practical application of an invention.
According to the FBI Bank Crime Statistics, there were more than 3,033 bank robberies in the United States in 2018. The FBI claims that banks have made themselves easy targets by refusing to install clear acrylic partitions, called bandit barriers, that separate bank tellers from the public. According to a special agent with the FBI, "Bandit barriers are a great deterrent. We've talked to guys who rob banks, and as soon as they see a bandit barrier, they go find another bank." Sources: U.S. Department of Justice, Federal Bureau of Investigation, "Bank Crime Statistics 2018"; and Richard Cowen, "FBI: Banks Are to Blame for Rise in Robberies," NorthJersey.com, March 10, 2009. Despite this finding, many banks have been reluctant to install these barriers. Wouldn't banks have a strong incentive to install bandit barriers to deter robberies? Why, then, do so many banks not do so?
Banks have no economic incentive to install the barriers.
Why are models based on assumptions?
Because models have to be simplified to be useful.
Consider the following statement: "The problem with economics is that it assumes that consumers and firms always make the correct decision. But we know that everyone makes mistakes." What is the most correct response to this statement?
Economics assumes that consumers and firms are rational, not that they always make the right decisions.term-1
which of the following statements about economics as a social science is correct?
Economics studies the actions of individuals.
In a paper written by Bentley University economists Patricia M. Flynn and Michael A. Quinn, the authors state: "We find evidence that Economics is a good choice of major for those aspiring to become a CEO [chief executive officer]. When adjusting for size of the pool of graduates, those with undergraduate degrees in Economics are shown to have had a greater likelihood of becoming an S&P 500 CEO than any other major." A list of famous economics majors published by Marietta College includes business leaders Warren Buffet, Donald Trump, Ted Turner, and Sam Walton, as well as former presidents George H.W. Bush, Gerald Ford, and Ronald Reagan. Why might studying economics be particularly good preparation for being the top manager of a corporation or a leader in government?
Economics teaches us how to look at the tradeoffs involved in every decision.
*start of section 1.6* Which of the following statements is correct?
Economists use the terms firm, company, and business interchangeably.
Scarcity is central in the study of economics because it implies that
Every choice involves an opportunity cost.
Economists assume that the only reason people take the actions they do is in response to economic incentives.
False
Which of the following is a correct statement about a mixed economy?
In a mixed economy, most economic decisions are made in markets but the government plays a significant role in the allocation of resources.
Annie Lowery, a business reporter, wrote the book Give People Money: How a Universal Basic Income Would End Poverty, Revolutionize Work, and Remake the World, which advocates that the federal government adopt a universal basic income (UBI) under which every person in the country would receive a monthly check of $500 to $1,000. She argues that "in a society as rich as ours...everyone deserves a guarantee of financial security." Is Lowery correct that it is the role of the federal government to guarantee that people have financial security?
Lowery is making a normative judgment regarding the policy. Normative analysis concerns what one person believes ought to be. You can agree or disagree with her opinion depending on your own views of the issue. There is no way to demonstrate that Lowery's opinion is correct.
Which of the following statements about microeconomics and macroeconomics is correct?
Macroeconomics is the study of the economy as a whole
which of the following is not a step that economists use in developing a useful economic model?
Make a value judgement about the merits of the hypothesis.
*Start of section 1.4* Question content area Part 1 A primary difference between macroeconomics and microeconomics is
Microeconomics examines individual markets while macroeconomics examines the economy as a whole.
Which of the following statements about microeconomics and macroeconomics is correct?
Microeconomics involves the study of how households and firms make choices.
What type of economic analysis is concerned with the way things ought to be?
Normative Analysis
Which of the following statements about normative analysis is correct?
Normative analysis is concerned with what ought to be.
Which of the following statements about positive analysis is correct?
Positive analysis is concerned with what is.
When does productive efficiency occur?
Productive efficiency occurs when a good or service is produced at the lowest possible cost.
Which of the following statements about the idea that people are rational is correct?
The idea assumes that consumers and firms use all available information as they act to achieve their goals.
Suppose economists develop an economic model and find that "it works great in theory, but it fails in practice." Which of the following should the economists do next?
They should revise the model in light of its failure to explain or predict real world events.
Which of the following best describes scarcity?
Unlimited wants exceed the limited resources available.
In a market system, how does society decide who will receive the goods and services produced?
Who receives the goods and services produced depends largely on how income is distributed.
Suppose you were building an economic model to forecast the number of people employed in U.S. manufacturing in 2026. Should your model take into account the possibility of changes in economic policy enacted by the president and Congress?
Yes, the model should account for economic policy because it could affect employment in manufacturing.
Steven Pearlstein, a columnist for the Washington Post, observed: "Arthur Okun's book...Equality and Efficiency: The Big Tradeoff, remains a classic." Why is there a trade-off between equality and efficiency? Why might an economist write an entire book on the subject? There is a trade-off between equality and efficiency because
a more equal distribution of income reduces incentives to work and invest. An economist can write an entire book on the subject because the trade-off involves complicated normative and positive issues.
in early 2021, an article in the Wall Street Journal made the following comment about President Biden's policies to increase manufacturing employment in the United States: "[President] Biden's "buy American" proposals echo those of previous presidents, including President Trump, who issued executive orders to spur more federal purchases of U.S. goods and sought to use tariffs to disadvantage foreign producers." a. How does a tariff on goods "disadvantage foreign producers"? b.During his term in office, President Trump imposed tariffs on imports of foreign steel. U.S consumers are likely to be _______ by a tariff on imported steel. c.Would people in the United States helped by the steel tariffs necessarily support the tariffs? Which of the following statements is true? a. Some of the people who lose from the tariffs may not understand that the tariffs have inflicted losses on them. For example, a consumer who pays more for a washing machine may not understand that the price of the washing machine has increased because of the steel tariffs. B. People who benefitted from the tariff are likely to support them. We can't say those people will necessarily support the tar
a. A tariff on goods will raise the prices of those imports, making it likely that some U.S. consumers will shift from buying imported goods to buying domestically-produced goods. b. hurt c.all the above
Indicate whether each of the following is primarily a microeconomic issue or a macroeconomic issue: a.he effect of higher cigarette taxes on the quantity of cigarettes sold. This is a b. The effect of higher income taxes on the total amount of consumer spending. This is a c. The reasons for the economies of East Asian countries growing faster than the economies of sub-Saharan African countries. This is a _____ issue d. The reasons for low rates of profit in the airline industry. This is a
a. microeconomic b. macroeconomic c. macroeconomic d. microeconomic
Indicate which of the following statements represent positive analysis and which represent normative analysis Part 2 a. A 50-cent-per-pack tax on cigarettes will reduce smoking by teenagers by 12 percent. This represents b. The federal government should spend more on AIDS research. This represents
a. positive b. normative c. positive d.normative
The Apply the Concept feature explains that there are both positive and normative aspects to the debate over whether the federal government should enact tariffs on imports from China. What economic statistics would be most useful in evaluating the positive elements in this debate? Assuming that these statistics are available or could be gathered, are they likely to resolve the normative issues in this debate? Part 2 Which of the following economic statistics would be useful in evaluating the positive elements in this debate? A. Revenue the U.S. government could receive from the tariff. B. The size of the U.S. government's trade debt. C. Employment in the U.S. industries that produce goods that compete with Chinese imports. D. Prices of affected goods in the U.S. E. All of the above. Assuming that these statistics are available or could be gathered, are they likely to resolve the normative issues in this debate?
all of the above -No, because normative issues involve value judgments that incorporate an individual's full range of experiences, beliefs, and emotions.
*start of section 1.5* Government policymakers use economic principles to make decisions, such as whether to allocate additional funds to research on cancer or to research on heart disease. B. whether to raise taxes on cigarettes to discourage teenage smoking. C. whether to raise interest rates to reduce the threat of inflation. D. All of the above.
all of the above.
Alberto Chong of Georgia State University and several colleagues conducted an experiment to test the efficiency of government postal services around the world. They mailed letters to nonexistent businesses in 159 countries and kept track of how many of the letters were returned. Was this test most relevant to evaluating the productive efficiency or the allocative efficiency of these postal services? Part 2 This test that Albert Chong and his colleagues carried out was most relevant for evaluating the
allocative efficiency of these postal services because the test was designed to measure how often and how quickly the letters sent were returned.
Consider an organization dedicated to helping low-income people. The members of the organization are discussing alternative methods of aiding the poor, when a proponent of one particular method asserts: "If even one poor person is helped with this method, then all our time and money would have been worth it." If you were a member of the organization, what reply best represents clear economic thinking? This attitude
ignores the fact that the cost of helping that one person has an opportunity cost of what those funds could have been used for to help other people.
Late in the semester, a friend tells you, "I was going to drop my psychology course so I could concentrate on my other courses, but I had already put so much time into the course I decided not to drop it." Is your friend's reasoning correct or incorrect?
incorrect
The level of total investment by firms in new machinery and equipment helps to determine how rapidly the economy grows. This is a ______ issue. However, to understand how much new machinery and equipment firms decide to purchase, one must analyze the incentives individual firms face, which is ______ issue.
macroeconomic/microeconomic
Which of the following areas of economics studies issues such as whether government intervention is capable of reducing the severity of recessions?
macroeconomics
The Food and Drug Administration (FDA) is part of federal government's Department of Health and Human Services. Among its other functions, the FDA evaluates the safety and effectiveness of drugs and medical devices. In 2020, the FDA had to approve pharmaceutical firms Pfizer and Moderna's Covid-19 vaccines for emergency use before the vaccines could be distributed. In a centrally planned economy, the government decides how resources will be allocated. In a market economy, the decisions of households and firms interacting in markets allocate resources. Part 2 The regulation of the production and sale of drugs and medical devices in the United States is an example of how resources are allocated in a
market economy because the drug development, and the resources allocated to the development, occurs in the market.
Efficiency means that goods are distributed in a way that _____________, while equity means that goods are distributed in a way that____________.
maximizes benefits to society/ is fair
Which of the following areas of economics studies issues such as ways to reduce teenage smoking?
microeconomics
Dr. Strangelove's theory is that the price of mushrooms is determined by the activity of subatomic particles that exist in another universe parallel to ours. When the subatomic particles are emitted in profusion, the price of mushrooms is high. When subatomic particle emissions are low, the price of mushrooms also is low. Is it possible to test this theory?
no
Macroeconomics is the study of
the economy as a whole, including topics such as inflation, unemployment, and economic growth.
Economists assume that people are rational in the sense that
they use all available information as they take actions intended to achieve their goals.
*start of section 1.3* Economists use models
to answer questions and analyze issues.
Economic data is used
to test models.
In a market system, how does society decide what goods and services will be produced?
Consumers, firms, and the government determine what goods and services will be produced by the choices they make.