Macro econ chapter 2

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What are the two main categories of participants in​ markets? Which participants are of greatest importance in determining what goods and services are​ produced?

Firms and households. Households.

What is absolute​ advantage? What is comparative​ advantage? Is it possible for a country to have a comparative advantage in producing a good without also having an absolute​ advantage? A country without an absolute advantage in producing a good

The ability to produce more of a good or service than competitors using the same amount of resources. The ability to produce a good or service at a lower opportunity cost than other producers. will have a comparative advantage if it has a lower opportunity cost of producing that good.

Whether carried out by an individual or a​ country, production beyond the production possibilities frontier With respect to​ consumption, individuals and countries

is not physically possible. ​can, through​ trade, consume beyond their production possibilities frontiers.

Using the same amount of​ resources, suppose that Nicaragua can produce twice as much sugarsugar as Columbia.​ Nevertheless, Columbia could still have the comparative advantage in producing sugarsugar if

it is even less efficient than Nicaragua in the production of goods other than

During the 1928 presidential election​ campaign, Herbert​ Hoover, the Republican​ candidate, argued that the United States should only import those products that could not be produced here. Do you believe that this would be a good​ policy? Explain.

This is not a good policy because it does not necessarily result in countries producing those goods for which they have a comparative advantage.

Evaluate the following​ argument: "Adam​ Smith's analysis is based on a fundamental​ flaw: He assumes that people are motivated by​ self-interest. But this​ isn't true. ​ I'm not​ selfish, and most people I know​ aren't selfish."

This statement is based on the misconception that following your​ self-interest and being selfish are the same thing.

What is the basis for​ trade? How can a country gain from specialization and​ trade?

Comparative advantage. A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services.

What does increasing marginal opportunity costs​ mean? What are the implications of this idea for the shape of the production possibilities​ frontier?

Increasing the production of a good requires larger and larger decreases in the production of another good. The production possibilities frontier will be bowed outward.

Suppose that Lichtenstein and Luxembourg currently have identical production possibilities frontiers but that Lichtenstein devotes only 5 percent of its resources to producing capital goods over each of the next 10​ years, whereas Luxembourg devotes 30 percent. Which country is likely to experience more rapid economic growth LOADING... in the​ future?

Luxembourg

Uwe​ Reinhardt, an economist at Princeton​ University, wrote the following in a column in the New York Times​: ​[Cost-effectiveness analysis] seeks to establish which of several alternative strategies capable of achieving a given therapeutic goal is the​ least-cost strategy. It seems a sensible form of inquiry in a nation that is dismayed over the rising cost of health care. . . . Opponents of​ cost-effectiveness analysis includes individuals who sincerely believe that health and life are​ "priceless." . . . ​Source: Uwe E.​ Reinhardt, "'Cost-Effectiveness​ Analysis' and U.S. Health​ Care," New York Times​, March​ 13, 2009. If health and life were​ priceless,

people would spend all of their time preventing illness and protecting their life.

Suppose you win free tickets to a movie plus all you can eat at the snack bar for free. Would there be a cost to you to attend this​ movie?

​Yes, because the​ movie's opportunity cost is equal to the​ highest-valued alternative that must be given up to attend the movie.

In The Wealth of Nations​, Adam Smith wrote the following​ (Book I, Chapter​ II): ​"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 did Smith mean by​ this?

Pursuing their own​ self-interest, entrepreneurs produce the goods and services most desired by their customers for financial reward.

What is a free​ market? In what ways does a free market economy differ from a centrally planned​ economy? Unlike a free market​ economy,

A free market is one where the government does not control the production of goods and services. centrally planned economies have extensive government controls.

In many parts of Europe during the​ mid-1770s, governments gave​ guilds, or organizations of​ producers, the authority to control who was allowed to produce a​ good, the amount of the good​ produced, and the price charged for the good. Would you expect more competition among producers in a guild system or in a market​ system? Regarding the entity occupying the center​ (of attention) in the two​ systems, it appears that

A market system is clearly more competitive because it allows for the free entry and exit of producers. the consumer is at the center of the market system while the guild system centered on the producer. With regard to the innovation of new products and​ technologies, the fact that it limited the entry oflimited the entry of new producers suggests that the guildguild system waswas LESS conducive to such innovation.

Imagine that the next time the Indianapolis Colts play the New England Patriots at Lucas Oil Stadium in​ Indianapolis, Colts star quarterback Andrew Luck has a temporary lack of judgment and plans to sell Colts memorabilia during the game because he realizes that he can sell five times more Colts products than any other player.​ Likewise, imagine that you are a creative and effective manager at work and that you tell your employees that during the next six​ months, you plan to clean the offices because you can clean five times better than the cleaning staff. You​ shouldn't necessarily do what you are better than anyone else at doing

Both you and Andrew are making an error in judgment by assuming that specialization should be based upon absolute advantage . unless your advantage in that activity is greater than advantages you possess in other activities.

What do economists mean by​ scarcity? Which of the following is not scarce according to the economic​ definition?

Economists mean that unlimited wants exceed limited resources. None of the above A. CoalCoal. B. FoodFood. C. Time. D. WorkersWorkers.

What is an​ entrepreneur? Why do entrepreneurs play a key role in a market​ system?

Entrepreneurs operate businesses that produce goods and services. They bring together factors of production.

In the​ 1950s, the economist Bela Balassa compared 28 manufacturing industries in the United States and Britain. In every one of the 28​ industries, Balassa found that the United States had an absolute advantage LOADING... . In these​ circumstances, would there have been any gain to the United States from importing any of these products from​ Britain? Explain

Even with an absolute​ advantage, the United States would have benefited from importing those products for which Britain had a comparative advantage.

Writing in the New York Times​, Michael Lewis argued that ​"...a market economy is premised on a system of incentives designed to encourage an ignoble human​ trait: self-interest." ​Source: Michael​ Lewis, "In Defense of the​ Boom." New York​ Times, October​ 27, 2002. What incentives does a market system provide to encourage​ self-interest?

Financial reward.

In a speech at the New York University Law​ School, Federal Reserve Chairman Ben Bernanke​ stated: Writing in the eighteenth​ century, Adam Smith conceived of the​ free-market system as an​ "invisible hand" that harnesses the pursuit of private interest to promote the public good.​ Smith's conception remains relevant​ today, notwithstanding the enormous increase in economic complexity since the Industrial Revolution. ​Source: Ben S.​ Bernanke, "Financial Regulation and the Invisible​ Hand," speech made at the New York University Law​ School, New​ York, New​ York, April​ 11, 2007. What is so important about the idea of the invisible​ hand?

Firms will provide consumers what they want without the government.

Suppose that France and Germany both produce wine and schnitzel. The table below shows combinations of the goods that each country can produce in a day.

France has a comparative advantage producing wine and Germany has a comparative advantage producing schnitzel.

Identify whether each of the following transactions will take place in the factor market LOADING... or in the product market LOADING... and whether households or firms are supplying the good or service or demanding the good or service.

George buys a Tesla Model S. This takes place in the PRODUCT market. The household DEMANDS the good and the firm SUPPLIES the good. Tesla increases employment at its Fremont plant. This takes place in the FACTOR market. The households SUPPLY the labor and the firm DEMANDS the labor. George works 20 hours per week at​ McDonald's. This takes place in the FACTOR market. The household SUPPLIES the labor and the firm DEMANDS the labor. George sells land he owns to​ McDonald's so it can build a new restaurant. This takes place in the FACTOR market. The household SUPPLIES the factor of production and the firm DEMANDS the factor of production.

Suppose Iran and Iraq both produce oil and olive oil. The following table shows combinations of both goods that each country can produce in a​ day, measured in thousands of barrels. Can these two countries gain from trading oil and olive​ oil?

Neither country has a comparative advantage producing oil because their opportunity costs of producing oil are equal. These countries cannot gain from trade because neither has a comparative advantage producing either good.

According to an article in the Wall Street Journal​, the parts contained in the BlackBerry Torch smartphone include a power management chip made by Texas Instruments​ (United States), a memory chip made by Samsung​ (South Korea), a GPS receiver made by CSR​ (United Kingdom), a radio frequency​ (RF) transceiver made by Dialog Semiconductor​ (Germany), an RF transceiver made by Renesas​ (Japan), an application and communications processor made by Marvell​ (United States), a video image processor made by STMicroelectronics​ (Switzerland), and plastic and stamped metal parts made by several firms in China. A firm in Mexico carries out final assembly of the Torch before it is shipped to BlackBerry for sale in the United States and other countries. ​Source: Jennifer​ Valention-DeVries and Phred​ Dvorak, "Piece by​ Piece: The Suppliers behind the New BlackBerry Torch​ Smartphone," Wall Street Journal​, August​ 16, 2010. Is it necessary for all of the managers in all of these firms to know how all of the components of the Torch are manufactured and how the components are assembled into a​ smartphone? Is it necessary for the chief executive officer​ (CEO) of BlackBerry to know this​ information?

Of course not. Any given manager need only command the knowledge necessary to produce the component for which​ s/he has responsibility. Generic knowledge about the product is certainly to be expected. But a CEO is more of a strategist​ and, ideally, a​ visionary, who orchestrates the​ conception, design,​ production, and marketing of an innovative product.

The 2012 International Property Rights Index study​ states: ​[T]hose developing countries that respect property rights grow on average faster than those that fail to provide sound legal and political environments and protection for physical property rights. ​Source: Guarev​ Tiwari, "Report: Property Rights Linked to Economic​ Security," International Property Rights Index 2012 Report. How would this creation of property rights LOADING... be likely to affect the economic opportunities available to citizens of those countries ranking lowest in property rights​ protections?

Owners could use their property as COLLATERAL FOR A LOAN ​, ​which, by affecting their ability to start a​ business, would INCREASE personal income and national wealth.

Suppose we can divide all the goods produced by an economy into two​ types: consumption goods and capital goods. Capital​ goods, such as​ machinery, equipment, and​ computers, are goods used to produce other goods. Is it likely that the production possibilities frontier LOADING... in this situation would be a straight​ line: LOADING... click on the icon for an example or bowed​ out: LOADING... click on the icon for an​ example?

The production possibilities frontier would likely be bowed out because not all resources are equally well suited to produce both consumption and capital goods.

Suppose the president is attempting to decide whether the federal government should spend more on research to find a cure for heart disease. What is the opportunity cost of spending more money to find a cure for heart​ disease? How should policymakers determine the amount of money that should be allocated for research curing heart​ disease? They should base their decision on

The reduction in funding for research to cure other diseases. whether the last dollar devoted to research on heart disease results in more benefit than the last dollar spent on research for curing other diseases.

Suppose that the federal government is deciding which of two cancer treatment therapies it will allow Medicare funds to be used to pay for​ (assume that only one treatment therapy will be​ funded): Therapy​ A, which will prolong the average lifespan of patients receiving the treatment by 3636 months and will cost ​$300 comma 000300,000 per patient​ treated; and Therapy​ B, which will prolong the average lifespan of patients receiving the treatment by 3030 months and will cost ​$200 comma 000200,000 per patient treated. What factors should the federal government take into account in making its decision of which therapy it will allow Medicare funds to be used to pay​ for? Which therapy would you​ recommend?

The relative cost of each therapy. Therapy B

In The Wonderful Wizard of Oz and his other books about the Land of​ Oz, L. Frank Baum observed that if​ people's wants were modest​ enough, most goods would not be scarce LOADING... . According to​ Baum, this was the case in​ Oz: ​"There were no poor people in the Land of​ Oz, because there was no such thing as money... Each person was given freely by his neighbors whatever he required for his​ use, which is as much as anyone may reasonably desire. Some tilled the lands and raised great crops of​ grain, which was divided equally among the whole​ population, so that all had enough. There were many tailors and dressmakers and shoemakers and the​ like, who made things that any who desired them might wear. Likewise there were jewelers who made ornaments for the​ person, which pleased and beautified the​ people, and these ornaments also were free to those who asked for them. Each man and​ woman, no matter what he or she produced for the good of the​ community, was supplied by the neighbors with food and clothing and a house and furniture and ornaments and games. If by chance the supply ever ran​ short, more was taken from the great storehouses of the​ Ruler, which were afterward filled up again when there was more of any article than people needed... You will​ know, by what I have told you​ here, that the Land of Oz was a remarkable country. I do not suppose such an arrangement would be practical with us.​ " ​Source: L. Frank​ Baum, The Emerald City of Oz​, pp.​ 30-31, First edition published in 1910. Do you agree with Baum that the economic system in Oz​ wouldn't work in the contemporary United​ States?

The system in Oz​ wouldn't work. The wants of people in the United States exceed the resources available to fulfill those wants.

What is the​ circular-flow diagram and what does it​ illustrate?

The​ circular-flow diagram shows how households and firms are linked through product and factor markets.

Is specialization and trade between individuals and countries more about having a job or more about obtaining a higher standard of​ living? ​Individually, if you go from a situation of not trading with others​ (you produce everything​ yourself) to a situation of trading with​ others, do you still have a​ job? Does your standard of living​ increase? ​Likewise, if a country goes from not trading with other countries to trading with other​ countries, does it still have​ jobs? Does its standard of living​ increase?

While specialization and trade facilitate the attainment of higher living​ standards, the immediate or proximate motive behind it is most likely jobs. Yes you​ do, for even if you are less efficient than others in the production of​ everything, there will be something at which you are least​ disadvantaged; it is in this activity that you have a comparative advantage​ and, hence, a job. Economic theory says​ yes: specialization and trade produce mutually beneficial results. ​Certainly, because trade expands total production and therefore creates more jobs than it destroys. Economic theory says​ yes: specialization and trade produce mutually beneficial results.

Some economists have been puzzled that although entrepreneurs take on the risk of losing time and money by starting new​ businesses, on average their incomes are lower than those of people with similar characteristics who go to work at large firms. William Baumol believes part of the explanation for this puzzle may be that entrepreneurs are like people who buy lottery tickets. On​ average, people who​ don't buy lottery tickets are left with more money than people who buy tickets because lotteries take in more money than they give out. Baumol argues that​ "the masses of purchasers who grab up the​ [lottery] tickets are not irrational if they receive an adequate payment in another​ currency: psychic​ rewards." ​Source: William J.​ Baumol, The Microtheory of Innovative​ Entrepreneurship, Princeton,​ NJ: Princeton University​ Press, 2011. The term​ "psychic rewards" refers to Psychic rewards that an entrepreneur might receive include ​(check all that ​apply)​:

nonmonetary forms of remuneration that are psychologically uplifting. A.status within the community. Your answer is correct. B.the pride of​ self-accomplishment. Your answer is correct. C. stock options. Your answer is not correct. D. being​ one's own boss.

A production possibilities​ frontier: We can show economic​ efficiency: We can show economic​ inefficiency: The production possibilities frontier will shift outward

shows the maximum attainable combinations of two goods that may be produced with available resources. with points on the production possibilities frontier. with points inside the production possibilities frontier. If technological advances occur.

Lawrence Summers served as secretary of the treasury in the Clinton administration and as director of National Economic Council in the Obama administration. He has been quoted as giving the following moral defense of the economic approach. ​"There is nothing morally unattractive about​ saying: We need to analyze which way of spending money on health care will produce more benefit and which​ less, and using our money as efficiently as we can. I​ don't think there is anything immoral about seeking to achieve environmental benefits at the lowest possible​ costs." ​Source: David​ Wessel, "Precepts from Professor​ Summers," Wall Street Journal​, October​ 17, 2002. It would be more moral to reduce​ pollution,

taking the cost into account because money spent on pollution reduction is not available for other worthy activities.

In colonial​ America, the population was spread thinly over a large​ area, and transportation costs were very high because it was difficult to ship products by road for more than short distances. As a​ result, most of the free population lived on small farms where they not only grew their own food but also usually made their own clothes and very rarely bought or sold anything for money. Why were the incomes of these farmers likely to rise as transportation costs​ fell? As transportation costs​ fell,

the farmers gained access to new markets and customers. Using comparative​ advantage, the farmers​ specialized, producing those goods for which they had lower opportunity cost. As they traded for other​ goods, their incomes and living standards increased.

What are private property​ rights? Private property rights​ are: What role do they play in the working of a market​ system? Private property​ rights: Why are independent courts important for a​ well-functioning economy? Independence is necessary for​ courts:

the rights individuals and firms have to the exclusive use of​ tangible, physical property and intellectual property. both a and b. A. encourage a significant number of people to be willing to risk funds by investing them in business. B. encourage firms to spend money on research and development. all of the above. A. to make their decisions free of influence from other parts of the government. B. to make their decisions free of intimidation by criminal gangs. C. to make their decisions based on the law. D. to make their decisions free of influence from people with powerful political connections.


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