ECO 202 Chapter 1-4 Study Guide
As the number of advertisements of a firm increases from 100 to 500, its sales increases from $1,000 to $10,000. If this information is plotted on a line chart, the slope of the line equals
$22.5
Which of the following statements is true
Testing with data enables economists to distinguish between good models and bad models.
The Law of Supply states that, in most cases, the quantity supplied of a good ___________ when the price of the good rises. This means we would expect a typical supply curve to be___________
rises; upward-sloping
The opportunity cost of an activity is a measure of ________ when you do that activity. Let's say that you are trying to decide what to do on Friday at 11 a.m. You rank your possible options from the one you value the most to the one that you value the least in the following order: going to class, sleeping in late, going to work early, getting lunch, going to the gym to exercise, and watching television. If you decide to go to class, then what do we know about the opportunity cost of your decision?
what is given up The opportunity cost would be sleeping in late, since it was your next-best option
Economics differs from these other social sciences because it also addresses these three key concepts:
Optimization, equilibrium, and empiricism.
A fall in the price of flour, used in making cakes, is likely to:
increase the supply of cakes
Which of the following statements correctly describes perfectly competitive market equilibrium?
Deviations from equilibrium are temporary and equilibrium is automatically restored
A variable that is potentially affected by an experimental treatment is referred to as a(n):
dependent variable
The ethical implications of a hotly debated government policy would best be considered a
normative question, since it deals with a subjective issue based on personal preferences.
During the process of optimization economists believe that people are considering The goal for optimization for an individual is to maximize
the feasibility of a choice, given the information available at the time overall well-being
Which of the following statements is true?
A bar chart indicates the frequency of a variable by using rectangles of different heights or lengths.
Which of the following is most likely to be an example of causation?
A firm producing CFLs installs new machinery. The per-day production of CFLs increases.
Which of the following factors is expected to cause the demand curve for coffee to shift to the right?
A higher tax on the sale of tea, a substitute for coffee
Suppose that you allocate $20 each week for your entertainment budget. This money is spent on two items: either renting movies for $1 each at Redbox or downloading songs from iTunes at $1 each. Given this information, which of the following would represent your budget constraint for entertainment? Your budget constraint for entertainment illustrates the concept of trade-offs , since as you increase your purchases of one item, you must decrease your purchases of the other item
Amount spent on iTunes + Amount spent at Redbox = $20.
Suppose you are accepted at all of the three business schools to which you applied. Consider all the factors that could matter when it comes to choosing a business school. How would you go about making an optimal decision about which school to attend? Suppose you have to give up a job that pays you $40,000 a year to attend business school. How would this affect your calculation of whether to attend business school?
By comparing the net benefits from attending the three schools It will increase the indirect cost of your time, making you less likely to attend business school.
Suppose your New Year resolution is to get back in shape. You are considering various ways of doing this: you can sign up for a gym membership, walk to work, take the stairs instead of the elevator, or watch your diet. How would you evaluate these options and choose an optimal one? When making your decision about which activity to choose, you should consider the monetary cost ______ the opportunity cost of the activities. The goal is to choose the option that offers the greatest ______ beneft
Do a cost-benefit analysis to compare the alternatives as well as, net
Which of the following pairs of variables are likely to be positively correlated?
Income and consumption
Which of the following is true regarding the concept of causation? Which of the following is not an example of causation?
It describes how one event can bring about change in another Driving without car insurance will lead to getting into an accident
Which of the following is true regarding the concept of causation? Which of the following is not an example of causation?
It describes how one event can bring about change in another Driving without car insurance will lead to getting into an accident
In which of the following areas will taking an economics course help benefit you throughout your life?
It will help you analyze and predict human behavior in a variety of situations. It will instill the concept that what activity is given up by a decision plays an important role when making choices. It will give you the logic behind using cost-benefit analysis when evaluating decisions
Which of the following statements is true of the scientific method?
The scientific method may not reveal a "true" model of the world
Assume that your country's income tax structure has the following tax rates: if your income is $60 comma 00060,000 or less you pay no income tax; if your income is above $60 comma 00060,000, you pay 4040 percent of the amount above $60 comma 00060,000. And so, for example, someone who earns $120 comma 000120,000 would pay 4040% times ×($120 comma 000120,000minus−$60 comma 00060,000)equals=$24 comma 00024,000. Your marginal tax rate is defined as the taxes you pay if you earn one more dollar. Your average tax rate is defined as the total taxes you pay divided by your income. And so, to continue with this example, someone who earns $120 comma 000120,000 would have a marginal tax rate of 4040 percent and an average tax rate of $ 24 comma 000 divided by $ 120 comma 000$24,000/$120,000equals=2020%. You have three alternatives. You could not work at all, you could work half time, or you could work full time. If you do not work at all, you will earn $0; if you work half time you will earn $60 comma 00060,000; and if you work full time, you will earn $120 comma 000120,000. Any time you do not work, you can spend surfing. You love to surf: surfing half time is worth $50 comma 00050,000 to you. As you are making your decision about how much to work, should you pay attention to your average tax rate or to your marginal tax rate?
Marginal tax rate to identify marginal changes
How does microeconomics differ from macroeconomics? Which of the following is not an item studied under microeconomics?
Microeconomics is the study of how individuals, households, firms, and governments make choices, while macroeconomics is the study of the economy as a whole Aggregate issues
Maimonides' rule generates _____ to study the effect of class size. One might perform the experiment as follows: 1. Collect a ______, ______ data set of students' grades with and without the specified number of teachers based on class size 2. Analyze the data to see if it supports the rules issued by Maimonides. 3. Make a determination if relationships in the data are ______ by understanding if a logical, _______ relationship exists.
Natural experiment 1. large, random 3. correlation or causation, cause-and-effect
There is a proverb "anything worth doing is worth doing well." Do you think an economist would agree with this proverb?
No, because the marginal cost of extra effort may be greater than the marginal benefit.
Some people choose to live close to the city center; others choose to live away from the city center and take a longer commute to work every day. Does this mean that those who stay away from the city center are being irrational?
No, because their opportunity cost of commuting must be lower
Are all markets perfectly competitive?
No, there are other market types where firms have considerable power to control the price
Which of the following is the best example of causation (vs correlation)?
Oil prices go up and gasoline prices go up
Scenario: A model is based on an assumption that an additional year of education increases a student's future wage by 20%. Refer to the scenario above. Which of the following statements is true of the model?
The prediction of this model can be applied to unlimited years of additional education.
Does the principle of optimization imply that people always make the best choices?
Yes, it is a good approximation for the decisions people make
Other things remaining same, a left shift in the demand curve will lead to:
a decrease in the equilibrium price and the equilibrium quantity
A model refers to
a simplified description, or representation, of reality.
Economics is divided into two broad fields of study: microeconomics and macroeconomics. Microeconomics studies _________, while macroeconomics studies _________. Policy decisions made by the government are analyzed by ________ A policy such as taxes on cigarettes taxes on cigarettes would be studied under ____ since it deals with a small part of the overall economy
a small piece of the overall economy; the economy as a whole both microeconomics and macroeconomics. microeconomics, a small part of the overall economy
The definition of economics states that it is the study of how
agents choose to allocate scarce resources and the impact of those choices on society.
Lower infant mortality is ______ end an improvement in nutrition is ____ A surge in cocoa prices is ______ and a pest attack on the cocoa crop is ______
an effect, the cause an effect, the cause
Other things remaining same, a right shift in the demand curve will lead to:
an increase in the equilibrium price and the equilibrium quantity.
Suppose you have just landed a job near the center of a city and you now need to decide where to live. If you live close to the city center, your round-trip commute will be 15 minutes. If you live in the distant suburbs, your round-trip commute will be 60 minutes. There are lots of workers like you who work downtown. Since there are only a limited number of apartments near the city center, these apartments will be allocated based on _______ that you face. This process is known as _______
both the costs and benefits optimization
In a perfectly competitive market, sellers _________ and buyers _________ In a perfectly competitive market, if one seller chooses to charge a price for its good that is slightly higher than the market price, then it will
cannot change more than the market price; cannot pay less than the market price lose all or almost all of its customers
On a line chart, the income of a consumer is measured along the horizontal axis, and his consumption is measured along the vertical axis. The slope of the line is equal to:
change in consumption divided by change in income
Comparing a set of feasible alternatives and picking the best one is an optimization process called _________. When deciding whether to install visible countdown timers for pedestrians at crosswalks, which of the following would be considered in the cost-benefit analysis?
cost-benefit analysis The higher maintenance bill associated with fixing these more complex signals when they break down. The value of the lives lost by drivers who watch the countdown timers and try to make it through a light. The cost in terms of dollars of installing these new timers all over the city. The value of the pedestrians' lives saved by having the timers to assist in crossing the street.
Read the story to the right, and then answer the following questions: Based on what happened at the Richmond event, it is apparent that at a price of $50, the quantity _________ of laptops exceeded the quantity _________. This resulted in an excess _________ for laptops. Which of the following ways of distributing the laptops would be more efficient?
demand; supplied; demand using a random lottery to decide who gets the laptops, auctioning off the laptops to the highest bidders, using flexible prices, so those who value the laptop more would pay more for it
The concept of diminishing marginal benefits means that The concept of diminishing marginal benefits holds true for goods that you like a lot. Suppose you have a flashlight that takes three batteries to power it. If you buy the batteries one at a time, for which purchase will diminishing benefits set in?
each additional unit consumed is worth less to you than the previous one when you buy the fourth battery
Empiricism describes a situation where Optimization describes a situation where Equilibrium describes a situation where
economists use data to analyze what is happening in the world people weigh costs and benefits when making a decision no one would benefit from changing his or her behavior
The amount produced by sellers must be ______ the amount purchased by buyers The costs of making a product must be ______ the final price at which the product sells Buyers must place a value on the uses of the product that is ______ the cost of buying the product
equal to less than greater than
Economists say the opportunity cost of an activity The opportunity cost of an activity takes account not only of required money outlay but also the value of the time you spend on the activity. The opportunity cost of your time can be roughly estimated using Positive economic analysis Normative economic analysis
includes the value of the alternative use of your time your wage involves objective statements that can be disproven using data may include subjective and ethical judgements, makes recommendations on the best decision to achieve a given end
If the number of people over the age of 16 in the country increased significantly, then the demand for the Toyota Rav4 SUV would If Honda decided to increase the price of its Honda CRV SUV, then the demand for the Toyota Rav4 SUV would
increase (shift right) increase (shift right)
In the context of the firm's supply curve, as the firm produces more of a good, the cost of producing each additional unit ________.This implies that the marginal cost of producing a good ________ as it makes more of that good.
increases, increases the minimum price the seller is willing to accept to sell an extra unit of a good.
Oregon expanded its Medicaid coverage in 2008. Roughly 90,000 people applied but the state had funds to cover only an additional 30,000 people. The state used a lottery to determine who would receive this free health care insurance from Medicaid. How could you use the Oregon experience to estimate the impact of increased access to health care on health outcomes? The Oregon experience is a ________. One might analyze the data as follows: gather and analyze the data on the health care outcomes for the two groups to determine if
natural experiment free health care results in better health outcomes
Free riding occurs when _______ are out of sync with the Which of the following is more susceptible to the free-rider problem: government-funded symphonies or street lights? Which of the following is more susceptible to the free-rider problem: government minus funded symphonies government−funded symphonies or street lights?
people's private benefits, the public interest national security, a neighborhood watch, public libraries Use of street lights lights is more susceptible since even those who don't pay taxes still benefit, while government minus funded symphonies government−funded symphonies can charge for admission, so that everyone who goes pays their share.
Suppose people who are thinking about buying a home (demanders in the housing market) and current home owners who are thinking about selling their homes (suppliers in the housing market) suddenly believe that home prices are likely to be significantly higherhigher next year than this year. Consider the market for housing this year, as illustrated in the figure on the right. The change in the expected price of housing will
shift the demand curve to the rightright, as buyers expediteexpedite their home purchases
Assume that a worker in a technology firm can produce 3 circuit boards in an hour. Due to subsequent innovation, he is now able to produce 6 circuit boards per hour. Other things remaining constant, the firm's supply curve is likely to:
shift to the right
Suppose you have been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. Your client has requested that your consulting team expatiate on the factors that impact gasoline prices. One of the members of your team, Debbie, states that she has noticed that gasoline prices seem to rise in years when a National League baseball team wins the World Series. You _______ include this observation in your report because it is ______ In this case, correlation does not equal causation most likely due to
should not correlation, not causation omitted variables
A correlation between two variables implies that
there is a mutual relationship between both the variables.
Empiricism is a principle in economics that
uses data to test economic models