EC 231 Ch.1 - Ten Principles of Economics

Rational people act only when the marginal benefit of the action exceeds the marginal cost.

True

Suppose you find $20. If you choose to use the $20 to go to the football game, your opportunity cost of going to the game is - Nothing, because you found the money. - $20 (because you could have used the $20 to buy other things). - $20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game. - $20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game plus the cost of the dinner you purchased at the game. - None of the above.

$20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game.

Referring to question 17 (above question - "You have spent $1,000), your decision rule should be to complete the hot-dog stand as long as the cost to complete the stand is less than - $100 - $300 - $500 - $800 - None of the above

$800

In the short run, - An increase in inflation temporarily increases unemployment. - A decrease in inflation temporarily increases unemployment. - Inflation and unemployment are unrelated. - The business cycle has been eliminated. - None of the above is true.

A decrease in inflation temporarily increases unemployment.

Market Failure

A situation in which the market fails to allocate resources efficiently.

Which of the following activities is most likely to produce an externality? - A student sits at home and watches television. - A student has a party in her dorm room. - A student reads a novel for pleasure. - A student eats a hamburger in the student union.

A student has a party in her dorm room.

Which of the following involve a trade-off? - Buying a new car - Going to college - Watching a football game on Saturday afternoon - Taking a nap - All of the above involve trade-offs.

All of the above involve trade-offs.

Foreign trade - Allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home. - Allows a country to avoid trade-offs. - Makes the members of a country more equal. - Increases the scarcity of resources. - Is none of the above.

Allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home.

Market Economy

An economic system where interaction of households and firms in markets determines the allocation of resources.

Inflation

An increase in the overall level of prices.

Marginal Change

An incremental adjustment to an existing plan.

In a and b above and c and d above, which is the opportunity cost of which—college for work or work for college? corn for beans or beans for corn?

Each is the opportunity cost of the other because each decision requires giving something up.

A goal for a society is to distribute resources more equally and fairly. How might you distribute resources if everyone were equally talented and worked equally hard? What if people had different talents and some people worked hard, while others did not?

Fairness might require that everyone get an equal share because they were equally talented and worked equally hard. Fairness might require that people not get an equal share because they were not equally talented and did not work equally hard.

An auto manufacturer should continue to produce additional autos as long as the firm is profitable, even if the cost of the additional units exceeds the price received.

False - a manufacturer should produce as long as the marginal benefit exceeds the marginal cost.

In the short run, a reduction in inflation tends to cause a reduction in unemployment.

False - a reduction in inflation tends to raise unemployment.

An individual farmer is likely to have market power in the market for wheat.

False - a single farmer is too small to influence the market.

The United States will benefit economically if we eliminate trade with Asian countries because we will be forced to produce more of our own cars and clothes.

False - all countries gain from voluntary trade.

A tax on liquor raises the price of liquor and provides an incentive for consumers to drink more.

False - higher prices reduce the quantity demanded.

Adam Smith's "invisible hand" concept describes how corporate business reaches into the pockets of consumers like an "invisible hand."

False - the "invisible hand" refers to how markets guide self-interested people to create desirable social outcomes.

When the government redistributes income with taxes and welfare, the economy becomes more efficient.

False - the economy becomes less efficient because it decreases the incentive to work hard.

Workers in the United States have a relatively high standard of living because the United States has a relatively high minimum wage.

False - workers in the United States have a high standard of living because they are productive.

Farmer Jones has 100 acres of land. He can plant corn, which yields 100 bushels per acre, or he can plant beans, which yield 40 bushels per acre. He chooses to plant beans.

Farmer Jones gives up 10,000 bushels of corn.

Farmer Jones has 100 acres of land. He can plant corn, which yields 100 bushels per acre, or he can plant beans, which yield 40 bushels per acre. He chooses to plant corn.

Farmer Jones gives up 4,000 bushels of beans.

Business Cycle

Fluctuations in economic activity.

Which of the following products would be least capable of producing an externality? - Cigarettes - Stereo equipment - Inoculations against disease - Education - Food

Food

High and persistent inflation is caused by - Unions increasing wages too much. - OPEC raising the price of oil too much. - Governments increasing the quantity of money too much. - Regulations raising the cost of production too much.

Governments increasing the quantity of money too much.

Raising taxes and increasing welfare payments - Proves that there is such a thing as a free lunch. - Reduces market power. - Improves efficiency at the expense of equality. - Improves equality at the expense of efficiency. - Does none of the above.

Improves equality at the expenses of efficiency.

Productivity can be increased by - Raising minimum wages. - Raising union wages. - Improving the education of workers. - Restricting trade with foreign countries.

Improving the education of workers.

An increase in the price of beef provides - Information that tells consumers to buy more beef. - Information that tells consumers to buy less pork. - Information that tells producers to produce more beef. - No information because prices in a market system are managed by planning boards.

Information that tells producers to produce more beef.

The government declares marijuana and cocaine illegal. The price of illegal drugs increases, creating more gangs and gang warfare. Due to the high price of illegal drugs, fewer street drugs are consumed.

Intended: Fewer street drugs are consumed. Unintended: More gangs and gang warfare.

The government bans imports of sugar from South America. South American sugar beet growers can't repay their loans to U.S. banks and turn to more profitable crops such as coca leaves and marijuana. U.S. sugar beet growers avoid a financial crisis.

Intended: Improve the financial condition of U.S. sugar beet growers. Unintended: Cause South American growers to grow marijuana and coca leaves.

The government prohibits the killing of wolves. The wolf population increases. Sheep and cattle herds suffer losses.

Intended: Increase the wolf population. Unintended: Damage to sheep and cattle herds.

The government places rent controls on apartments restricting rent to $300 per month. Few landlords are willing to produce an apartment at this price causing more homelessness. Some low-income renters are able to rent an apartment more cheaply.

Intended: Low-income renters get a cheap apartment. Unintended: Some people find no apartment at all causing more homelessness.

The government raises the minimum wage to $15 per hour. Some workers find jobs at the higher wage making these workers better off. Some workers find no job at all because few firms want to hire low-productivity workers at this high wage.

Intended: Raise the wage of low-productivity workers. Unintended: Some workers are unemployed at the higher wage.

The government raises the tax on gasoline by $2 per gallon. The deficit is reduced, and people economize on their use of gasoline. There is a boom in bicycle sales.

Intended: Reduce the deficit and use less gasoline. Unintended: Bicycle sales increase.

What do you think would happen to the amount of time it would take to find a parking place?

It would take much longer to find a parking place.

Scarcity

Limited resources and unlimited wants.

Which of the following statements is true about a market economy? - Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being. - Taxes help prices communicate costs and benefits to producers and consumers. - With a large enough computer, central planners could guide production more efficiently than markets. - The strength of a market system is that it tends to distribute resources evenly across consumers.

Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being.

Which of the following situations describes the greatest market power? - A farmer's impact on the price of corn - Volvo's impact on the price of autos - Microsoft's impact on the price of desktop operating systems - A student's impact on college tuition

Microsoft's impact on the price of desktop operating systems

What do you think would happen to the number of students desiring to park their cars on campus?

More students would wish to park on campus.

Directions

Multiple-Choice Questions

Thinking in terms of opportunity cost, would the lower price of a parking permit necessarily lower the true cost of parking?

No, because we would have to factor in the value of our time spent looking for a parking place.

Is air scarce? Is clean air scarce?

No, you don't have to give up anything to get air. Yes, you can't have as much clean air as you want without giving up something to get it (pollution equipment on cars, etc.).

Would the opportunity cost of parking be the same for students with no outside employment and students with jobs earning $15 per hour?

No. Students who could be earning money working are giving up more while looking for a parking place. Therefore, their opportunity cost is higher.

Directions

Opportunity cost is what you give up to get an item. Because there is no such thing as a free lunch, what would likely be given up to obtain each of the items listed below?

Directions

People respond to incentives. Governments can alter incentives and, hence, behavior with public policy. However, sometimes public policy generates unintended consequences by producing results that were not anticipated. For each of the following public policies, determine which result was likely the intended result and which was the unintended consequence.

Trade-offs are required because wants are unlimited and resources are - Efficient - Economical - Scarce - Unlimited - Marginal

Scarce

High and persistent inflation is caused by excessive growth in the quantity of money in the economy.

True

Economics is the study of how - To fully satisfy our unlimited wants. - Society manages its scarce resources. - To reduce our wants until we are satisfied. - To avoid having to make trade-offs. - Society manages its unlimited resources.

Society managers its scarce resources.

Incentive

Something that induces a person to act.

If the government printed twice as much money, what do you think would happen to prices and output if the economy were already producing at maximum capacity?

Spending would double, but since the quantity of output would remain the same, prices would double.

Because people respond to incentives, we would expect that if the average salary of accountants increases by 50 percent while the average salary of teachers increases by 20 percent, - Students will shift majors from education to accounting. - Students will shift majors from accounting to education. - Fewer students will attend college. - None of the above is true.

Students will shift majors from education to accounting.

Economics

Study of how society manages its scarce resources.

Directions

Suppose your university decides to lower the cost of parking on campus by reducing the price of a parking permit from $200 per semester to $5 per semester.

Susan can work full time or go to college. She chooses work.

Susan gives up a college degree and the increase in income through life that it would have brought her (but doesn't have to pay tuition).

Susan can work full time or go to college. She chooses college.

Susan gives up income from work (and must pay tuition).

Rational People

Systematically and purposefully doing the best you can to achieve your objectives.

Why is there a trade-off between equality and efficiency?

Taxes and welfare make us more equal but reduce incentives for hard work, lowering total output.

Market Power

The ability of an individual or group to substantially influence market prices.

Property Rights

The ability of an individual to own and exercise control over scarce resources.

A rational person does not act unless - The action makes money for the person. - The action is ethical. - The action produces marginal costs that exceed marginal benefits. - The action produces marginal benefits that exceed marginal costs. - None of the above is true.

The action produces marginal benefits that exceed marginal costs.

Productivity

The amount of goods and services produced from each unit of labor input.

In the Wealth of Nations, Adam Smith said, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." What do you think he meant?

The butcher, brewer, and baker produce the best food possible, not out of kindness, but because it is in their best interest to do so. Self-interest can maximize general economic well-being.

Monopoly

The case in which there is only one seller in the market.

Why do you think air bags have reduced deaths from auto crashes less than we had hoped?

The cost of an accident was lowered. This changed incentives, so people drive faster and have more accidents.

What is the opportunity cost of saving some of your paycheck?

The items you could have enjoyed had you spent that portion of your paycheck (current consumption).

Water is necessary for life. Diamonds are not. Is the marginal benefit of an additional glass of water greater or lesser than an additional one-carat diamond? Why?

The marginal benefit of another glass of water is generally lower because we have so much water that one more glass is of little value. The opposite is true for diamonds.

Which of the following is not part of the opportunity cost of going on vacation? - The money you could have made if you had stayed home and worked - The money you spent on food - The money you spent on airline tickets - The money you spent on a Broadway show

The money you spent on food.

"Invisible Hand"

The principle that self-interested market participants may unknowingly maximize the welfare of society as a whole.

Equality

The property of distributing economic prosperity uniformly among society's members.

Efficiency

The property of society getting the most from its scarce resources.

Suppose one country is better at producing agricultural products (because they have land that is more fertile), while another country is better at producing manufactured goods (because they have a better educational system and more engineers). If each country produced their specialty and traded, would there be more or less total output than if each country produced all of their agricultural and manufacturing needs? Why?

There would be more total output if the two countries specialize and trade because each is doing what it does most efficiently.

Who is more self-interested, the buyer or the seller?

They are equally self-interested. The seller will sell to the highest bidder, and the buyer will buy from the lowest offer.

An unintended consequence of public support for higher education is that low tuition provides an incentive for many people to attend state universities even if they have no desire to learn anything.

True

Sue is better at cleaning, and Bob is better at cooking. It will take fewer hours to eat and clean if Bob specializes in cooking and Sue specializes in cleaning than if they share the household duties evenly.

True

To a student, the opportunity cost of going to a basketball game would include the price of the ticket and the value of the time that could have been spent studying.

True

When a jet flies overhead, the noise it generates is an externality.

True

When economists say, "There ain't no such thing as a free lunch," they mean that all economic decisions involve trade-offs.

True

Directions

True/False

If we save more and use it to build more physical capital, productivity will rise and we will have rising standards of living in the future. What is the opportunity cost of future growth?

We must give up consumption today.

Opportunity Cost

Whatever is given up to get something else.

Externality

When one person's actions have an impact on a bystander.

Workers in the United States enjoy a high standard of living because - Unions in the United States keep the wage high. - We have protected our industry from foreign competition. - The United States has a high minimum wage. - Workers in the United States are highly productive. - None of the above is true.

Workers in the United States are highly productive.

You have spent $1,000 building a hot-dog stand based on estimates of sales of $2,000. The hot-dog stand is nearly completed, but now you estimate total sales to be only $800. You can complete the hot-dog stand for another $300. Should you complete the hot-dog stand? (Assume that the hot dogs cost you nothing.) - Yes - No - There is not enough information to answer this question.

Yes

Your car needs to be repaired. You have already paid $500 to have the transmission fixed, but it still doesn't work properly. You can sell your car "as is" for $2,000. If your car were fixed, you could sell it for $2,500. Your car can be fixed with a guarantee for another $300. Should you repair your car? Why?

Yes, because the marginal benefit of fixing the car is $2,500 - $2,000 = $500 , and the marginal cost is $300. The original repair payment is not relevant.