Economics Chapter 1
Which of the following statements about normative analysis is correct?
Normative analysis is concerned with what ought to be.
Productive efficiency means that
a good or service is produced at the lowest possible cost
If a firm is productively and allocatively efficient, it earns _______, if it is not it __________.
a profit suffers a loss
What do economists mean by the word "marginal"?
extra or additional
Macroeconomics is the study of
the economy as a whole, including topics such as inflation, unemployment, and economic growth
Which of the following statements about a hypothesis is correct?
A hypothesis is a statement that could in principle turn out to be incorrect.
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 true about scarcity ?
All individuals face a scarcity of time and need to make choices how to allocate it.
When does allocative efficiency occur?
Allocative efficiency occurs when production is in accordance with consumer preferences.
Which of the following statements is correct about technology, invention, and innovation ?
An innovation is the practical application of an invention.
According to the FBI Bank Crime Statistics, there were nearly 4,000 bank robberies in the United States in 2014. 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." 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 decisions. 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.
Which of the following statements about economics as a social science is correct?
Economics studies the actions of individuals.
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.
Which of the following statements is correct about businesses, firms, and companies?
Economists use the terms firm, company, and business interchangeably.
Economists assume that the only reason people take the actions they do is in response to economic incentives. (T/F)
False
In a market system, what determines how goods and services will be produced?
Firms determine how goods and services will be produced.
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.
Which of the following statements about 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.
The Making the Connection explains that there are both positive and normative elements to the debate over whether medical schools should charge tuition and whether hospitals should continue to pay residents who pursue primary care but not residents who specialize. Which of the following economic statistics would be the most useful in evaluating the positive elements in this debate?
Med school tuition rates, applications, and enrollments. & Poverty rates by geographic region. & Physician incomes by specialty and geographic region. & Age distribution characteristics of the population by geographic region.
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 is correct?
Microeconomics involves the study of how households and firms make choices.
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
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. c. 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?
No
Would McDonald's decision have to be all or nothing—either serve breakfast only up to 10:30 A.M. or serve breakfast all day?
No. McDonald's could evaluate serving items from the breakfast menu that could be cooked in better coordination with the dinner menu for a period after 10:30 A.M.
What type of economic analysis is concerned with the way things ought to be?
Normative analysis
Today, which of the following countries has a centrally planned economy?
North Korea
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.
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. b. What is the actual cost and also the opportunity cost of distributing the tickets this way?
The cost of travel to the department's office. & The activities that cannot be done (such as earning money at work) when one is standing in line. & The cost of people blocking traffic in and around the department's office building.
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.
A market system prevents people from getting as many goods and services as they want due to which of the following?
Their income
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.
Warren Buffet is the Chief Executive Officer of the investment firm Berkshire Hathaway and one of the wealthiest people in the world. In an editorial in the Wall Street Journal, Buffet argued that economic policies in the United States should be designed so that people who are willing to work receive enough income to live a "decent lifestyle." He argued that an expansion of the Earned Income Tax Credit (EITC) would be superior to an increase in the minimum wage as a means to reach this goal. The EITC is a program under which the federal government makes payments to low-income workers. Is Buffet correct that it is the role of the federal government to make sure people who work will have enough income to live a "decent lifestyle"?
This is a normative economic question, so the answer is a matter of the norms or values of the person answering.
Which of the following best describes scarcity?
Unlimited wants exceed the limited resources available.
The three economic questions that every society must answer are
What goods will be produced, how will they be produced, and who will receive the goods?
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.
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." Is it necessary for all economic systems to limit services such as health care?
Yes
Consider the following statements: a. Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than other rival gas stations in the area. b. Banks do not take steps to increase security since they believe it is less costly to allow some bank robberies than to install expensive security monitoring equipment. c. Firms produce more of a particular DVD when its selling price rises. Which of the above statements demonstrates that economic agents respond to incentives?
a, b, and c
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." The grading system used by a teacher can affect the incentives of students to learn the course material by
altering the payoffs to achieving success on the various components of the course.
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. 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 ________
benefits costs
Relative to a market economy, a centrally-planned economy would be expected to be
better at neither productive efficiency nor allocative efficiency because the absence of market-imposed competition negates the need of firms to satisfy consumer wants or produce using the lowest-cost methods.
How are economic resources allocated in a market economy?
by the decisions of households and firms interacting in markets
Any attempt to determine whether or not this is a good system must focus on its
costs and benefits
A news story on declining attendance at college football games noted that schools in the central time zone had particular problems with attendance at games that started at 11 a.m. The athletic director at the University of Illinois was quoted as saying, "I'm a big fan of evening games." Playing games in the late afternoon or evening, rather than in the morning, would _________.
change the opportunity cost for students whose alternative activities vary throughout the day.
McDonald's typically serves breakfast until only 10:30 a.m. on weekdays and 11:00 a.m. on weekends. In 2015, the company began to experiment with serving breakfast all day at various locations in San Diego. Several owners of McDonald's restaurants, however, point out that offering breakfast 24 hours a day presents two logistical problems: (1) Burgers and other meats need to be cooked at a higher temperature than eggs, so it would be difficult for employees to set the grill at the right temperature for both foods; and (2) scrambled eggs require employees to continually stir, while hamburgers don't require this attention. In addition, some customers might buy the cheaper breakfast than the more expensive lunch or dinner meals. From an economics perspective, to determine whether to serve breakfast all day, McDonald's should
compare the marginal revenue from serving breakfast all day with the marginal cost of serving breakfast all day.
Scarcity is central to the study of economics because it implies that
every choice involves an opportunity cost
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
de-emphasizing
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
decrease
Allocative efficiency means that
every good or service is produced up to the point where marginal benefit is equal to 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
future doctors receive high-quality training.
market economies allocate resources based on decisions made by
households and firms
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
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
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? Your friend's reasoning is
incorrect
As part of his 2016 federal budget proposals, President Obama recommended significant changes to the federal student loan programs. 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
increase the payments that borrowers would have to make so that the government would be paid back sooner.
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. 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
increased because the terms of repayment have been made more generous.
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.
increasing
equity means that goods are distributed in a way that
is fair
Indicate whether each of the following is primarily a microeconomic issue or a macroeconomic issue. b. The effect of higher income taxes on the total amount of consumer spending. This is a _________ issue
macroeconomics
Indicate whether each of the following is primarily a microeconomic issue or a macroeconomic issue. c. The reasons for the economies of East Asian countries growing faster than the economies of sub-Saharan African countries. This is a _________ issue.
macroeconomics
Which of the following areas of economics studies issues such as whether government intervention is capable of reducing the severity of recessions?
macroeconomics
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 a ____________ issue.
macroeconomics microeconomics
Efficiency means that goods are distributed in a way that
maximizes benefits to society
Indicate whether each of the following is primarily a microeconomic issue or a macroeconomic issue. d. The reasons for low rates of profit in the airline industry. This is a ____________ issue.
microeconomic
Indicate whether each of the following is primarily a microeconomic issue or a macroeconomic issue. a. The effect of higher cigarette taxes on the quantity of cigarettes sold. This is a _____________ issue.
microeconomics
Which of the following areas of economics studies issues such as ways to reduce teenage smoking?
microeconomics
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 __________.
minimize production costs ample revenues
Jay Bhattacharya and M. Kate Bundorf of Stanford University have found evidence that people who are obese and work for firms that have employer-provided health insurance receive lower wages than people working at those firms who are not obese. At firms that do not provide health insurance, obese workers do not receive lower wages than workers who are not obese. Firms that provide workers with health insurance may pay a lower wage to obese workers than to workers who are not obese because the latter tend to be healthier and consequently
more productive at work. & experience lower rates of absenteeism and early retirement. & less costly to insure and therefore employ due to their lower claim submission rate
The incentive of employees to improve or maintain their health once they obtain health insurance may be ____________ impacted
negatively
Indicate which of the following statements represent positive analysis and which represent normative analysis b. The federal government should spend more on AIDS research. This represents
normative analysis
Indicate which of the following statements represent positive analysis and which represent normative analysis d. The price of coffee at Starbucks is too high. This represents
normative analysis
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. d. This is __________
not an equitable way to distribute the tickets because some students who really want them may be unable to go and get them.
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. Corporations and universities are willing to pay employees to take care of themselves because a healthier workforce
performs more efficiently, thereby improving overall productivity in the workplace. & translates into lower costs, in part by reducing illness-related absenteeism and premature retirements.
Economics is about ________ analysis, which measures the costs and benefits of different courses of action.
positive
Indicate which of the following statements represent positive analysis and which represent normative analysis a. A 50-cent-per-pack tax on cigarettes will reduce smoking by teenagers by 12 percent. This represents
positive analysis
Indicate which of the following statements represent positive analysis and which represent normative analysis c. Rising paper prices will increase textbook prices. This represents
positive analysis
A news story discussing Sanadu's prospects for success selling its home medical devices observes, "Another challenge will be getting doctors on board with the idea of patients bringing them information from home." An economic incentive for doctors to accept information supplied by their patients is that it would
reduce the amount of time spent testing and evaluating the patients' condition in the office or hospital where they were treated.
Regarding the question of whether health insurance provides people with an incentive to become obese, the finding of Bhattacharya and Bundorf seems
relevant since the link between insurance and obesity was established while holding many other variables constant.
One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls
scarcity
Economics is the study of
the choices people make to attain their goals given their scarce resources
centrally planned economies allocate resources based on decisions made by
the government
opportunity cost is
the highest valued alternative that must be given up to engage in an activity
Economists believe that an activity should be continued up to the point where
the marginal benefit from the activity is equal to the marginal cost.
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
there are far fewer of them, hence each stands to gain much from supply restrictions.
A news story discussing Sanadu's prospects for success selling its home medical devices observes, "Another challenge will be getting doctors on board with the idea of patients bringing them information from home." An incentive that doctors would have to NOT accept the patient-provided information is that
they may doubt the accuracy of information provided directly by patients.
Economists assume that people are rational in the sense that
they use all available information as they take actions intended to achieve their goals.
Economists use models
to answer questions and analyze issues
Economic data is used
to test models
President Obama and his advisers have failed to correctly forecast the effects of the 2011 changes to the loan programs because they
underestimated the number of students who would take advantage of the programs.
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.
Assuming that these statistics are available or could be gathered, are they likely to resolve the normative issues in this debate?
No, because normative issues involve value judgments that incorporate an individual's full range of experiences, beliefs, and emotions.
According to Forbes magazine, in 2015 Bill Gates was the world's richest person with wealth of $79.2 billion. Does Bill Gates face scarcity?
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.
Suppose you were building an economic model forecasting the number of physicians and physicians assistants likely to be needed in 2020. Should your model take into account the growth of the home medical device industry?
Yes, because the greater the growth in the use of home medical devices, the less patients will require the services of physicians and physician assistants.