Chapter 1: The Nature of Economics

The "ceteris paribus" assumption means

"other things being equal."

Which of the following statements is true about whether economics is a science? Economics is a science because the study of economics uses models and theories that are tested. Economics is not a science since the models developed are a simplification of the real world. Economics is a science since it is possible to set up laboratory experiments. Economics is not a science since only natural sciences such as biology, physics and chemistry can be called a science.

Economics is a science because the study of economics uses models and theories that are tested.

It is justifiable to criticize theories on the realism of the assumptions employed.

False

What role does rational self-interest play in economic analysis?

It is assumed that individuals act as if they are motivated by self-interest and respond predictably to opportunities for gain.

7. (Macroeconomics, Microeconomics) studies the causes and effects of inflation.

Macroeconomics

What is the difference between microeconomics and macroeconomics?

Microeconomics examines individual units of an economy, while macroeconomics examines the big picture.

A politician states "taxes should be raised to provide more spending on school lunch programs." This is a positive economic statement. a normative economic statement. a ceteris paribus assumption. a irrational statement

a normative economic statement.

9. According to the rationality assumption, people a. do not intentionally make decisions that would leave them worse off. b. do not ever take into account the interests or well-being of others. c. can never consider each of the most relevant alternatives. d. use rules of thumb to make choice

a. do not intentionally make decisions that would leave them worse off.

11. As is true of a road map showing how a traveler can move about a geographic region, a model of economic behavior typically a. omits trivial details and emphasizes factors most relevant to the problem under consideration. b. makes no simplifying assumptions, so that every feature of a problem is taken into account. c. must be rejected if it leaves out some information, even if it makes correct predictions. d. includes each and every element of a problem confronting an individual or group.

a. omits trivial details and emphasizes factors most relevant to the problem under consideration.

4. Which one of the following areas of study is concerned, primarily, with microeconomics? a. the personal computer industry b. inflation c. the national unemployment rate d. national income determination

a. the personal computer industry

9. The rationality assumption is that individuals ________ they are rational.

act as if

Macroeconomics focuses on decisions made by individual households and firms. aggregates or total economic quantities like overall unemployment. individual household reaction to tax change. individual firm decisions regarding product output and price

aggregates or total economic quantities like overall unemployment.

13. Economists maintain that incentives (are, are not) important to decision making.

are

13. Which one of the following is a positive economic statement? a. Full employment policies should be pursued. b. If minimum wage rates rise, then unemployment will rise. c. We should take from the rich and give to the poor. d. The government should help the homeless.

b. If minimum wage rates rise, then unemployment will rise.

3. Which one of the following is NOT one of the three fundamental economic questions? a. How will items be produced? b. Who deserves produced items? c. For whom will items be produced? d. What and how much will be produced?

b. Who deserves produced items?

6. Economists maintain that Ms. Chung will usually make decisions that promote the interests of a. her colleagues at work. b. herself. c. her class. d. her race.

b. herself.

When business persons respond to incentives, their actions are consistent with the assumption(s) of neither rationality nor self-interest. rationality but not self-interest. self-interest but not rationality. both rationality and self-interest.

both rationality and self-interest.

14. Economists define self-interest (narrowly, broadly).

broadly

Economists develop their understanding of how the economy works by asking people how they feel the economy is currently performing. building models that explain every detail of the economy. conducting controlled laboratory experiments like scientists do in biology and physics. building models and testing their refutable predictions with empirical data.

building models and testing their refutable predictions with empirical data.

12. Which one of the following is a normative economic statement? a. If price rises, people will buy less. b. If price rises, people will buy more. c. If price rises, the poor will be injured. Therefore, price should not be permitted to rise. d. If price rises, people will buy less. Therefore, we ought to observe that quantity demanded falls.

c. If price rises, the poor will be injured. Therefore, price should not be permitted to rise.

1. Economics is a. a natural science. b. nonscientific. c. a social science. d. usually studied through lab experiments.

c. a social science.

14. Normative economic statements a. are testable hypotheses. b. are value-free. c. are subjective, value judgments. d. can be scientifically established.

c. are subjective, value judgments

5. Macroeconomic analysis deals with a. the personal computer industry. b. how individuals respond to an increase in the price of gasoline. c. inflation. d. how a change in the price of energy affects a family.

c. inflation.

8. An economic model is justifiably criticized if a. its assumptions are not realistic. b. it cannot be tested in a controlled, laboratory experiment. c. it fails to predict. d. All of the above.

c. it fails to predict.

1. Because it is impossible to have all that we want, people are forced to make ______.

choices

3. Economics is the study of how people make __________ to satisfy their _________.

choices, wants

Explaining economic growth of a country is __________ considered part of microeconomics. more political than economic. considered part of macroeconomics. normative economics.

considered part of macroeconomics.

Many people donate money to charities. Such behavior is inconsistent with the assumption of self-interest and demonstrates that economic analysis cannot be applied to many human situations. consistent with the assumption of self-interest. The people were just wrong about whether their actions would make them better off or not. inconsistent with the assumption of self-interest. The assumption of self-interest cannot be used in nonmarket situations. consistent with the assumption of self-interest because the people who donate money to charities also receive satisfaction.

consistent with the assumption of self-interest because the people who donate money to charities also receive satisfaction.

2. Wants include desires for a. material possessions. b. love. c. power. d. All of the above.

d. All of the above.

7. Economic models a. use unrealistic assumptions. b. are seldom tested in laboratories. c. are concerned with how people behave, not with how they think. d. All of the above.

d. All of the above.

15. Which one of the following is a normative economic statement? a. When more death-penalty sentences are reduced to life imprisonment, the homicide rate increases. b. An increase in the rate of executions is associated with a fall in homicides. c. Improved prison conditions increase the disincentive effects of capital punishment. d. Capital punishment is a morally wrong way to try to deter homicides.

d. Capital punishment is a morally wrong way to try to deter homicides.

Microeconomics focuses on decisions made by individual households and firms. aggregates or total economic quantities like overall unemployment. inflation and growth in our overall economy. all households and firms grouped together and how they interact with the government.

decisions made by individual households and firms.

Because economics is a science, economists do not make normative statements.

false

Economics is the study of how people think about economic phenomena.

false

Economists' definition of self-interest includes only the pursuit of material goods.

false

Households cannot be thought of as producers.

false

The rationality assumption is that individuals attempt, quite consciously, to make rational economic decisions, and will admit to it.

false

The three fundamental economic questions are as follows: (a) Who should decide what to produce, (b) what methods ought to be utilized in production, and (c) who should receive the items that are produced?

false

When economists attempt to predict the number of Web servers that an Internet bank will utilize, they are studying macroeconomics.

false

8. Economists maintain that a member of a group usually attempts to make decisions that are in (her own, the group's) interest.

her own

15. Economists take the (individual, group) as the unit of analysis.

individual

5. Microeconomics deals with

individual units (people, families, firms)

6. A nation's unemployment level is analyzed in

macroeconomics

Economics is a study of how people ... make money. behave irrationally. make choices to satisfy their wants. eliminate scarcity

make choices to satisfy their wants.

16. Behavioral economics is an approach that assumes that individuals are (fully, nearly) rational.

nearly

11. The ceteris paribus assumption permits us to consider (one thing at a time, everything at once).

one thing at a time

17. Economic statements that are testable and are of an "if/then" nature are (positive, normative).

positive

4. In a price system, _______ signal to everyone which resources are relatively scarce and which resources are relatively abundant.

prices

If you intentionally did something to make yourself worse off, you would be violating the ceteris paribus assumption. the normative assumption. rationality assumption. time consistency assumption. the positive analysis assumption.

rationality assumption.

Things of value that are used to produce other things that satisfy people's wants are called resources aggregates models incentives

resources

Economic models are developed so that changes in variables can be studied under controlled conditions. are developed in order to explain an individual's thinking. should be rejected if they are not completely realistic. should be judged by how well they predict real-world phenomena.

should be judged by how well they predict real-world phenomena.

10. Economic models are ________ representations of the real world.

simplified

2. Economics is a _________ science.

social

12. Ceteris paribus, payment of bonuses to physicians for pushing preventive health care gives physicians an incentive to (treat only actual illnesses, suggest treatments to deter illnesses).

suggest treatments to deter illnesses

A statement of fact is an example of a positive statement.

true

Economists maintain that people respond in a predictable way to economic incentives.

true

Macroeconomics deals with aggregates, or totals, of economic variables.

true

The rationality assumption is that individuals act as if they are rational.

true

The three fundamental economic questions are as follows: (a) What and how much will be produced, (b) how will items be produced, and (c) for whom will it be produced?

true