Topic 1 Practice Problems
Understanding opportunity cost: Missing an hour of work that pays $20 an hour for a concert that costs $14. The total dollar cost of missing work and going to the concert, including the opportunity cost of your time, is _____.
$34 ----- The opportunity cost of a choice includes both the monetary amount paid and the value of your time given up by making that choice over another. By skipping practice, you forgo earning your hourly wage of $20 per hour, so this is the opportunity cost of your time. You also choose to pay $14 to get into a concert. So your opportunity cost in dollars is $20 + $14 = $34
Scarcity, opportunity cost, & marginal analysis: Janet is training for a biathlon, a winter racing sport that combines cross-country skiing and rifle shooting. Consider the following scenario: Because her ski training sessions are helping her quickly improve at skiing, Janet plans to reduce the time she spends training at the shooting range by an hour, and increase the time she spends skiing by an hour. However, her training partner says that she should pause all shooting practice and spend the entire 15 hours this week in the pool. Which basic principle of individual choice does Janet's plan illustrate that her training partner's advice does not? A.) Many decisions are made on the margin. B.) People usually exploit opportunities to make themselves better off. C.) Resources are scarce. D.) All costs are opportunity costs.
A.) Many decisions are made on the margin. ----- Janet's decision about skiing time versus shooting time is a how-much decision. Both skiing time and shooting time can help improve her race time. Because ski time seems to be having a greater effect at the moment, it makes sense for her to spend a bit more time skiing and a bit less time on shooting.
Factors that influence standard of living: Which of the following factors explains most of the differences in standards of living among countries around the world? A.) Productivity B.) Welfare and transfer payments C.) Labor unions D.) Minimum wage laws
A.) Productivity ----- Productivity is the amount of goods and services that can be produced for each unit of labor input. Countries with high productivity, in which workers can produce large amounts of goods and services, tend to have higher standards of living. On the other hand, countries with low productivity, where workers produce relatively fewer goods and services, often experience lower standards of living. Other factors, such as minimum wage laws, labor unions, and welfare payments, all have much smaller effects on living standards than the productivity of a country's workers has.
Scarcity, opportunity cost, & marginal analysis: Shen is training for a biathlon, a winter racing sport that combines cross-country skiing and rifle shooting. Consider the following scenario: In order to ski for one hour, Shen must take that time off of work, where he earns an hourly wage of $19. Additionally, there is a $8 entrance fee to the skiing facility. Which basic principle of individual choice do these statements best illustrate? A.) The cost of something is what you give up to get it. B.) People usually exploit opportunities to make themselves better off. C.) Trade can make everyone better off. D.) Markets are usually a good way to organize economic activity.
A.) The cost of something is what you give up to get it. ----- Shen is not only paying $8 for admission to the skiing facility, but he is also giving up the $19 he could have earned by working instead of skiing. In this sense, the $8 price of admission alone does not capture what must be given up to ski. Shen must give up $8+$19=$27, which represents the opportunity cost of skiing.
The interaction of individual choices: Sharon registered a startup graphic design company. About a month after opening, Sharon strikes a deal to revamp a law firm's brand image in exchange for a tax lawyer's help filing for the upcoming year. Which of the following principles of economic interaction best describes this scenario? A.) Trade can make everyone better off. B.) All costs are opportunity costs. C.) When markets do not achieve efficiency, government intervention can improve overall welfare. D.) Markets allocate goods effectively.
A.) Trade can make everyone better off. ----- When tasks are divided according to who can provide them at the lowest cost, specialization occurs—which can lead to greater output. Economists refer to this concept as gains from trade.
Scarcity, opportunity cost, & marginal analysis: Yakov is training for a biathlon, a winter racing sport that combines cross-country skiing and rifle shooting. Consider the following scenario: Yakov has only 15 hours available to devote to his training this week. Each hour he spends skiing is one hour that cannot be spent working onhis shooting. Which basic principle of individual choice do these statements best illustrate? A.) People usually exploit opportunities to make themselves better off. B.) Yakov can use time most efficiently by spending the same amounts of time on skiing and shooting. C.) People face trade-offs. D.) Yakov has an incentive to spend more time on skiing than on shooting.
C.) People face trade-offs. ----- Allocating scarce resources, such as Yakov's time, requires making trade-offs of one goal against another. In this case, in allocating his time, Yakov faces a trade-off between improving at skiing and improving at shooting. There is no information on the effectiveness of an extra hour of skiing as compared to that of an extra hour of shooting. Therefore, you don't know whether Yakov has an incentive to spend more time on skiing. Similarly, you don't know whether it is most efficient for Yakov to spend the same amount of time on each of the two activities.
Factors that influence standard of living:: Which of the following factors played the biggest role in the slow growth of average incomes in the United States during the 1970s and 1980s? A.) Increased competition from India B.) Disinflation of the dollar C.) Slow growth in productivity D.) Increased competition from Japan
C.) Slow growth in productivity ----- While many analysts claimed that increased competition from foreign countries, such as Japan, caused a slowing of income growth in the 1970s and 1980s, slow growth in the productivity of U.S. workers played a much bigger role in the slow growth of average income.
Inflation and unemployment: Suppose that the government believes the economy is not producing goods and services at its optimal level. In an attempt to stimulate the economy, the government increases the quantity of money in the economy by printing more money. This monetary policy action _____ demand for goods and services in the economy, leading to _____ prices for products. In the short run, the change in prices induces firms to produce _____ goods and services. This, in turn, leads to a _____ unemployment level. Based on this analysis, the economy faces the following trade-off between inflation and unemployment: Higher inflation leads to _____ unemployment.
Increases; higher; more; lower lower ----- This monetary policy action *increases* demand for goods and services in the economy, leading to *higher* prices for products. In the short run, the change in prices induces firms to produce *more* goods and services. This, in turn, leads to a *lower* unemployment level. Based on this analysis, the economy faces the following trade-off between inflation and unemployment: Higher inflation leads to *lower* unemployment.
Property rights and market failures: Graphic designers are much _____ likely to supply art to the market if property rights are not enforced. Public policy can improve economic efficiency in the presence of market failures.
Less ----- Property rights are the ability of individuals to own and control their own scarce resources. The enforcement of property rights, usually through the police and court systems, is essential for markets to function efficiently, since in the absence of secure property rights, individuals will have less incentive to produce goods and services.
Understanding opportunity cost: Accepting a job that pays $32,000 yearly vs attending college which costs $43,000 a year. You likely chose to attend college because _____
You value a year of college at more than $75,000.
Understanding opportunity cost: Job that pays $36,000 or attend college that costs $46,000 You likely chose to attend college because _____
You value a year of college at more than $82,000
Changes in incentives: Scooter rentals. New law requiring helmets when renting scooters. These new helmets reportedly decrease the probability of injury by 29% in the event of a scooter crash. While the new helmets _____ the probability of injury resulting from a scooter accident, they also incentivize individuals to ride _____ recklessly, which could _____ the number of scooter collisions & therefore injuries to renters.
decrease; more; increase. ----- While the new helmets *decrease* the probability of injury resulting from a scooter accident, they also incentivize individuals to ride *more* recklessly, which could *increase* the number of scooter collisions & therefore injuries to renters.
The interaction of individual choices: Because eels are highly endangered as a species, many governments enact laws prohibiting fishing along their migration route. Initially, eel fishers complain about this restriction on the locations they can fish, but after a while they notice that the number of eels swimming outside regulated areas is much higher than it was before. With the laws in place, eel fishers end up catching a greater quantity of eels than they did prior to the enactment of the laws. Which of the following principles of economic interaction best describes this scenario? A.) Markets allocate goods effectively. B.) There is a tradeoff between equality and efficiency. C.) When markets do not achieve efficiency, government intervention can improve overall welfare. D.) Markets usually lead to efficiency.
C.) When markets do not achieve efficiency, government intervention can improve overall welfare. ----- When a market outcome is inefficient, government intervention can improve overall welfare. In this case, since the eels can be caught by any fisherman, the individual pursuit of self-interest leads to a bad outcome—extinction of the eels—which makes everyone in the fishing industry worse off. If the government prohibits fishing along migratory routes vital to the replenishing of the eel population, this motivates fishermen to consider alternatives until the eels mature and reproduce. With this restriction, everyone is better off in the end.
The interaction of individual choices: In the aftermath of a hurricane bringing widespread damage to an area, home improvement stores were completely out of generators. Within the week, however, emergency deliveries supplied additional generators, and everyone who wished to purchase one was able to do so. Which of the following principles of economic interaction best describes this scenario? A.) All costs are opportunity costs. B.) There are gains from trade. C.) When markets do not achieve efficiency, government intervention can improve overall welfare. D.) Markets allocate goods effectively.
D.) Markets allocate goods effectively. ----- After the hurricane, people rushing to the store to purchase generators created a shortage of these items, causing their prices to rise. Home improvement stores responded to the higher prices and the increased profit opportunities by requesting special deliveries to restock their inventories.
Factors that influence standard of living: Which of the following government policies is least likely to increase the standard of living in the United States? A.) Investment in education and skills training for workers B.) Investment in tools and capital for workers C.) Investment in technology D.) Raising the minimum wage paid to workers
D.) Raising the minimum wage paid to workers ----- Since raising the minimum wage of workers does not increase their ability to produce, raising the minimum wage will not significantly impact living standards as compared with investments in capital, education, and technology.
Equality vs Efficiency: ^Define
Equality: When economic benefits are distributed uniformly across society Efficiency: When a society gets the most it can from its scarce resources
Property rights and market failures: Market power OR Externality A student using an e-cigarette in a library emits clouds of vapor that disrupt others working close to them.
Externality ----- Market power is the ability of an individual economic agent, or small number of economic agents, to influence the market price of a good or service. An externality is an impact, positive or negative, of one individual's activities on the well-being of a bystander.
Property rights and market failures: Market power OR Externality A single gas station has exclusive rights to operate along a private toll-road. As a result, the company can set the price of gasoline.
Market Power ----- Market power is the ability of an individual economic agent, or small number of economic agents, to influence the market price of a good or service. An externality is an impact, positive or negative, of one individual's activities on the well-being of a bystander.
Equality vs Efficiency: All societies face a trade-off between efficiency and equality. If the government lowers income taxes on Americans in the top one percent of earners, while decreasing welfare payments to citizens with incomes below the federal poverty threshold, the most likely result is _____ in efficiency and _____ in equality in the U.S.
an increase; a decrease ----- A lower tax rate on wealthy Americans, with a corresponding decrease in transfer payments to poorer Americans, can decrease equality since the income gap between wealthy and poor Americans will have gotten larger.
