ECON 202 Ch 1 HW: The Big Ideas in Economics

In economics, what is meant by "optimal decisions are made at the margin?" a. The idea of the margin is related to making decisions while thinking about the benefits and costs of small changes in behavior. b. The idea of the margin does not help compare trade-offs and is not relevant to decision-making. c. The idea of the margin is that all economic decisions are made at the very fringes of society. d. The concept of the margin was initially developed in 2012 by Professor Marginus; research is still being done on how it can be used for decision-making.

a. The idea of the margin is related to making decisions while thinking about the benefits and costs of small changes in behavior.

Classify the economic factors according to whether or not they encourage investment and economic growth in a country. Encourage investments in physical and human capital vs. Do not encourage investments in physical and human capital 1. Dependable Legal System 2. Property Rights 3. Trade Restrictions 4. Competitive Markets 5. Political Instability 6. Corrupt Government Which of the following are macroeconomists most interested in encouraging in order to increase the standard of living? a. trade-offs b. ideas c. inflations

(1) 1. Dependable Legal System - Encourage investments in physical and human capital 2. Property Rights - Encourage investments in physical and human capital 3. Trade Restrictions - Do not encourage investments in physical and human capital 4. Competitive Markets - Encourage investments in physical and human capital 5. Political Instability - Do not encourage investments in physical and human capital 6. Corrupt Government - Do not encourage investments in physical and human capital (2) b. ideas

(1) What is inflation? a. an increase in the amount of money in circulation b. a decrease in the overall price level c. an increase in the overall price level d. an increase in the overall level of economic activity (2) Which of the examples provides the best evidence that inflation has occurred? a. A person whose salary has increased is able to purchase more goods and services. b. A person whose salary has increased is able to purchase fewer goods and services. c. A person whose salary has decreased is able to purchase fewer goods and services. d. A person whose salary has remained the same is able to purchase more goods and services. e. A person whose salary has decreased is able to purchase more goods and services.

(1) c. an increase in the overall price level (2) b. A person whose salary has increased is able to purchase fewer goods and services.

(1) The day-to-day living conditions of modern Americans are very different from what they were in the 20th century. While doing research for an economics project, Charlie discovers that more households today, as compared to households 100 years ago, have electricity, air conditioning, and a car. Which of the following explains why modern Americans enjoy a higher standard of living than Americans 100 years ago? a. Americans have prospered and earned more money due to a complete lack of recessions. b. Market failures are nonexistent. c. The invisible hand has guided all nations around the world to this prosperity. d. There has been economic growth in our society. (2) In which field do researchers focus on investigating the phenomena described? a. Business b. Political Science c. Economics d. Sociology

(1) d. There has been economic growth in our society. (2) c. Economics

Label each scenario by deciding whether the opportunity cost has INCREASED or DECREASED. 1. Emily is deciding between her two favorite restaurants. One makes Indian food and the other makes Chinese food. The Indian restaurant has just raised its prices. The opportunity cost of Chinese food has... 2. Jacob has a bagel or a muffin for breakfast. Muffins are on sale, so they cost $1 less than usual. The opportunity cost of eating a bagel has... 3. Taylor has to take time off work to study. Since her wage has increased from $10/hour to $15/hour, the opportunity cost of studying has... 4. Justin decides to take the bus to school instead of driving to school. The price of gasoline has just decreased. The opportunity cost of taking the bus has...

1. Decreased. Because the prices of Indian food has just rise, so the opportunity cost of Chinese food will fall. 2. Increased. Because the price of muffins has decreased, so the opportunity cost of eating bagel will increase. 3. Increased. Because his wage rate increases, so now he have to foregone more money income as compared to earlier. So, the opportunity cost of studying has increased. 4. Increased. This lower price of gasoline makes the bus ride cheaper.

Please label the statements as true or false regarding economic booms and busts. 1. With enough careful planning, fiscal and monetary policy can prevent recessions. 2. Had the U.S. government used fiscal and monetary policy more effectively, many economists believe that the Great Depression would not have been as severe. 3. At the time of the Great Depression, fiscal and monetary policy were not well understood. 4. Booms and busts are natural responses to ever‐changing economic conditions.

1. With enough careful planning, fiscal and monetary policy can prevent recessions - false 2. Had the U.S. government used fiscal and monetary policy more effectively, many economists believe that the Great Depression would not have been as severe - true 3. At the time of the Great Depression, fiscal and monetary policy were not well understood - true 4. Booms and busts are natural responses to ever‐changing economic conditions - true

Consider four of Aesop's fables. 1. A lion and a bear seized a lamb at the same moment, and fought fiercely until they collapsed, exhausted. A fox ran in, seized the lamb, and quickly ran off. The lion and the bear watched him and said, "Just our luck, that we fought, only to serve the reward up to the fox." 2. A hound chased a rabbit, but gave up after a long run. A shepherd watched and said, "The rabbit is the better runner." The hound replied, "I only ran for dinner. He ran for his life." 3. As Patty walked to market, her milk pail on her head, she planned what she would do with the money she earned. "I'll buy hens, and sell their eggs. Then I'll buy a new dress! Polly will be jealous, but I shall just toss my head like this." As she tossed her head back, the pail fell off, and all the milk was spilt. 4. One day a farmer found an egg of pure gold in the goose's nest. The goose laid a golden egg every morning, and the farmer soon grew rich - and greedy. Thinking he would get all the gold at once, he killed it, but found no gold inside. Which fable from Aesop best illustrates the moral idea that incentive spurs effort? a. A Hound Chased a Rabbit b. A Lion and a Bear c. Patty the Milkmaid d. A Farmer Who Raised Geese

a. A Hound Chased a Rabbit

Daniel is a baker who has decided to create his own brand of chain restaurants, Short and Sweet. He negotiates with three suppliers for weeks and ultimately signs contracts with these suppliers. Francis, who owns a new sugar plantation, agrees to sell Daniel freshly refined sugar on the condition that Daniel helps him advertise his brand of sugar. Diana runs an orchard and provides Daniel with fruit. She enters into the partnership knowing that she can dramatically increase her profits if she can sell fruit to Daniel. Lastly, Ryan, who owns a mill, decides to purchase a new piece of machinery so that he can sell Daniel flour at a lower price than his competitor. The end result of Daniel's interactions with his suppliers is that folks in his neighborhood have a chance to buy delicious baked goods at reasonable prices. Daniel's situation with his suppliers is an example of: a. the invisible hand. b. a command economy. c. a recession. d. market failure.

a. the invisible hand.

What is the great economic problem? a. to satisfy as many wants as possible with our limited resources b. to use our unlimited resources to satisfy our unlimited wants c. to satisfy as few of our wants as possible with our limited resources d. to make everyone equally happy

a. to satisfy as many wants as possible with our limited resources

Which is an issue that makes central banking difficult for the Federal Reserve Bank (the Fed)? a. The Fed does not control the money supply, so it is hapless in the face of Congress, who does control the money supply. So even when the Fed has many ideas for the betterment of the economy, Congress sometimes makes bad economic decisions. b. There is a lag between when policies are enacted and when the effects of those policies can be seen. c. Because inflation is unacceptable due to the increased price levels throughout the economy, the Fed can only lower the money supply, not raise it. d. All of these make central banking difficult. e. Central banking is a relatively easy task, so none of these make it difficult.

b. There is a lag between when policies are enacted and when the effects of those policies can be seen.

What can be inferred from the fact that Juan has voluntarily entered into a contract with Cafe Emporium? a. Juan has negotiated a a price that is favorable to him and therefore makes it difficult for Cafe Emporium to earn profits. b. Juan is earning zero economic profit selling coffee. c. Juan is better off as a result of his deal with Cafe Emporium. d. Cafe Emporium is a monopoly.

c. Juan is better off as a result of his deal with Cafe Emporium.

In 2008, Betserai was a 10-year-old quintrillionaire living in Bulawayo, Zimbabwe. He was literally rolling in money. In fact, Betserai has so much money that he decided to make kites out of billion dollar bills instead of putting the money into the bank to earn interest. None of Betserai's friends bothered to save their money, either. Rupert was Betserai's American pen pal and heard of Betserai's story and was extremely confused. He was taught that Zimbabwe was one of the poorer countries in the world, or at the least substantially poorer than the United States. Which statement best explains this phenomenon? a. A country's wealth is based on the amount of money in circulation. b. Zimbabwe was in the midst of an incredible economic boom, substantially increasing the wealth of all its citizens. c. Rapid rises in price levels made the Zimbabwean dollar near worthless in terms of purchasing power. d. All of these statements could explain what happened in Zimbabwe in 2008.

c. Rapid rises in price levels made the Zimbabwean dollar near worthless in terms of purchasing power.

Which scenario would least likely change an individual's behavior? a. A basketball team manages to sign a trio of famous basketball stars who then clamor for other players to come join their team to win a guaranteed championship. b. The city of Saskatoon chooses to give its residents a penny for each soda can they recycle in an effort to promote environmental awareness. c. The country of Ravamolk enacts a policy to fine companies 20% of their earnings if the safety standards in their factories do not reach acceptable work conditions. d. In an effort to make people eat healthier, the city of Bakersville tells its residents to eat wheat bread instead of white bread.

d. In an effort to make people eat healthier, the city of Bakersville tells its residents to eat wheat bread instead of white bread.

Below is a table of mortality rates, expressed as the number of children per thousand live births that die yearly, for children in various countries, along with the country's GDP per capita, an economic measure of the relative standard of living in 2005. Sierra Leone - 283 Morality rate per 1000 live births annually / 600 Average annual GDP per capita ($) Nigeria - 198 Morality rate per 1000 live births annually / 1,000 Average annual GDP per capita ($) Zambia - 182 Morality rate per 1000 live births annually / 900 Average annual GDP per capita ($) Ghana - 95 Morality rate per 1000 births annually / 2,300 Average annual GDP per capita ($) China - 37 Morality rate per 1000 births annually / 5,600 Average annual GDP per capita ($) Brazil - 35 Morality rate per 1000 births annually / 8,100 Average annual GDP per capita ($) United States - 8 Morality rate per 1000 births annually / 40,100 Average annual GDP per capita ($) Korea - 5 Morality rate per 1000 births annually / 19,200 Average annual GDP per capita ($) Singapore - 3 Morality rate per 1000 births annually / 27,800 Average annual GDP per capita ($) Based on this information, what conclusion can be made? a. Sierra Leone has the highest child survival rate. b. Healthcare is the only thing that improves as economic growth occurs. c. Economic growth affects only the richest countries. d. The wealthiest countries have the lowest mortality rates.

d. The wealthiest countries have the lowest mortality rates.

Which demonstrates a scenario with no opportunity cost? a. It's Friday night and you stay up late talking and hanging out with your friends.The chemistry club is giving out free pizza for lunch to all who come to their table to get it. b. Naomi, age 8, is at a bookstore and chooses to buy a book about a young wizard instead of buying a math textbook that she would probably never open. c. Chez Moi and Chez Nous, two premiere French restaurants with three Michelin stars, both offer you a full time sous chef job at the same salary. d. You are ecstatic because you know it is a win-win scenario and choose to work for Chez Nous. e. All of these scenarios have an opportunity cost.

e. All of these scenarios have an opportunity cost. 1. Waking up on Friday night will result in the loss of sleep 2. Going to the Chemistry Club table will result in the loss of opportunity to go to another club 3. Buying book of Wizard will result in the loss of opportunity of getting mathematics book 4. Joining Chez Nous will result in the loss of opportunity to work for Chez Moi

Britney, Juliana, Flea, and Cindy are trying to form a band. They each have some basic skills on most instruments, so their current plan is for each of them to rotate among vocals, guitar, bass, and drums. After a year of practice and rehearsals the band still sounds awful. Britney cannot keep a steady beat when on bass or drums, Flea sounds terrible on everything except the bass, nobody except Juliana can remember all the chords on guitar, and even Cindy's own mother thinks her singing sounds like a dying cow. At their current rate, they expect it will be several years before they are good enough to land their first paid performance. None of them have enough money saved up to last that long. They all know you are taking economics and ask your advice. What would you say to them? a. Change the rotation to be random rather than equal to take advantage of heteroskedasticity. b. Continue with the current plan, as economies of scale should eventually kick in. c. Abandon the band, as continued practice is doomed to suffer diminishing marginal returns. d. Invest their remaining savings in new instruments, as they are at a point where the marginal product of capital exceeds the marginal product of labor. e. Have each member specialize in the role that they are best in to take advantage of benefits from specialization.

e. Have each member specialize in the role that they are best in to take advantage of benefits from specialization.

Juan Valdez, a coffee farmer in Colombia, sells his coffee to Cafe Emporium, a U.S. firm which specializes in gourmet coffee blends. What must be true of this arrangement? a. When Juan and other farmers in Colombia sell their coffee beans to foreigners, they gain in the short run, but in the long run will only impoverish their nation as a whole. b. Juan thinks he is better off with this contract, but in reality the wealthy American buyer is taking advantage of Juan's naiveté. c. While this arrangement is good for Juan, he would be even better off if the government had negotiated the contract because they could have gotten a better price for Juan. d. All three of these statements must be true. e. None of these statements must be true.

e. None of these statements must be true.

Many economists think that effective institutions are essential for economic growth. In this context, what are institutions? a. government agencies like the Food and Drug Administration (FDA) or the Environmental Protection Agency (EPA) b. long-standing companies that consumers can depend on for reliable service and products c. prisons, jails, and psychiatric hospitals that are used to keep certain people isolated from the rest of the population d. mechanisms that allow for the use of fiscal and monetary policy e. the laws, social norms, and conventions of a culture

e. the laws, social norms, and conventions of a culture