Chapter 01 - Economics and Economic Reasoning connect quiz study test 2

State whether the following statements belong in positive economics, normative economics, or the art of economics.

a. In a market, when quantity supplied exceeds quantity demanded, price tends to fall. (Positive economics) b. When determining tax rates, the government should take into account the income needs of individuals (Normative economics) c. Given society's options and goals, a broad-based tax is generally preferred to a narrowly-based tax. (Could be either normative economics or art of economics) d. California currently rations water to farmers at subsidized prices. Once California allows the trading of water rights, it will allow economic forces to be a market force. (Positive economics)

Which of the following are microeconomic problems?

-The pricing policies of firms -How wages are determined in labor markets -how wages are determined in labor markets -the pricing policies of firms

Distinguish between theorems and precepts.

A theorem correct is a proposition that is logically true based on the assumptions of the model, whereas a precept correct is a policy rule that a particular course of action is preferable.

Is it possible for two economists to agree about theorems but disagree about precepts?

Economists can agree about theorems but disagree about precepts if they have different value judgments about appropriate goals.

What besides a model do economists need to make policy recommendations?

Economists need to understand the empirical evidence supporting the theory as well as real-world economic institutions to make policy recommendations.

What is the opportunity cost of buying a $20,000 car?

The benefit from spending that $20,000 on the next-best alternative.

a. Should U.S. interest rates be lowered to decrease the amount of unemployment?

Macroeconomic

c. Should the current federal income tax be lowered to reduce unemployment?

Macroeconomic

b. Will the fact that more and more doctors are selling their practices to managed care networks increase the efficiency of medical providers?

Microeconomic

e. Should Sprint and Verizon both be allowed to build local phone networks?

Microeconomic

f. Should commercial banks be required to provide loans in all areas of the territory from which they accept deposits?

Microeconomic

d. Should the federal minimum wage be raised?

Microeconomic with macroeconomic implications

Does economic theory prove that the free market system is best? Why?

No, It simply gives ways to look at systems and determine what the advantages and disadvantages of various systems will likely be. Normative decisions about what is best can only follow from one's value judgments.

Economists Henry Saffer of Kean University, Frank J. Chaloupka of the University of Illinois at Chicago, and Dhaval Dave of Bentley College estimated that the government must spend $4,170 on drug control to deter one person from using drugs and that the cost one drug user imposes on society is $897. Based on this information alone, should the government spend the money on drug control?

No, since the marginal cost of drug control exceeds the marginal benefit, the government should not spend $4,170 to deter one person from using drugs.

What is the difference between normative and positive statements?

Normative statements: reflect ethical judgements about what should be. It reflects values. correct Positive statements: refer to a fact or a logical relationship. It is in principle testable or is the result of logic analysis.

What is the opportunity cost of buying a $22,000 car?

The benefit from spending that $22,000 on the next-best alternative.

Explain why you made the choice to go to your economics course lecture in terms of marginal benefits and marginal costs.

The marginal benefit of going to the lecture (passing the inevitable quiz) was greater than the marginal cost of going (missing an hour of leisure time).

You rent a car for $30.35. The first 125 miles are free, but each mile thereafter costs $0.13. You plan to drive it 245 miles. What is the marginal cost of driving the car?

The marginal cost is $15.60 plus the cost of gas.

You rent a car for $29.95. The first 150 miles are free, but each mile thereafter costs 15 cents. You plan to drive it 200 miles. What is the marginal cost of driving the car beyond the first 150 free miles?

The marginal cost is $7.50 plus the cost of gas.

Suppose you currently earn $18,000 a year. You are considering a job that will increase your lifetime earnings by $180,000 but that requires an MBA. The job will mean also attending business school for two years at an annual cost of $24,000. You already have a bachelor's degree, for which you spent $75,000 in tuition and books. Which of the above information is relevant to your decision on whether to take the job?

The relevant costs are the opportunity cost of taking the job (forgone earnings from your current job) and other things you could have done with the money you need to pay for business school. The tuition for the bachelor's degree is a sunk cost and is not relevant. The relevant benefit is the increased lifetime earnings of $180,000.

Suppose you currently earn $30,000 a year. You are considering a job that will increase your lifetime earnings by $300,000 but that requires an MBA. The job will mean also attending business school for two years at an annual cost of $25,000. You already have a bachelor's degree, for which you spent $80,000 in tuition and books. Which of the above information is relevant to your decision on whether to take the job?

The relevant costs are the opportunity cost of taking the job (forgone earnings from your current job) and other things you could have done with the money you need to pay for business school. The tuition for the bachelor's degree is a sunk cost and is not relevant. The relevant benefit is the increased lifetime earnings of $300,000. correct

An economic model is

a framework that places the generalized insights of a theory in a more specific contextual setting.

Which of the following are macroeconomic problems?

Unemployment Inflation

Which of the following statements explains why the textbook author focuses on coordination rather than on scarcity when defining economics?

Wants are changeable and partially determined by society, and the degree of scarcity changes as the quantity of goods, services, and usable resources changes with technology and human action that underlie production.

Suppose your college has been given $5 million. You have been asked to decide how to spend it to improve your college. Use the economic decision rule and the concept of opportunity costs to decide how to spend it.

You should spend the $5 million on projects that provide the highest marginal benefit per dollar spent. correct

Individuals have two kidneys, but most of us need only one. People who have lost both kidneys through accident or disease must be hooked up to a dialysis machine, which cleanses waste from their bodies. Say a person who has two good kidneys offers to sell one of them to someone whose kidney function has been totally destroyed. The seller asks $30,000 for the kidney, and the person who has lost both kidneys accepts the offer.

a. Who benefits from the deal? Both parties benefit. b. In the long run, which of the following is true? Though neither party is hurt, society may be hurt. c. Should a society allow such market transactions? Why? Whether a society should allow this transaction is a question of value judgments and cultural norms.

Two examples of social forces that prevent an economic force from becoming a market force are

our unwillingness to charge friends interest and our unwillingness to "buy" friends. correct

Two examples of political or legal forces that interact with market forces are

rent control laws and restrictions on immigration.

Your opportunity cost of attending yesterday's lecture in this course is

the benefit of the next-best alternative; that benefit becomes a cost because you forgo another activity by attending the lecture.

Your opportunity cost of attending college is

the benefit of the next-best alternative; that benefit becomes a cost because you forgo it by attending college.

Your opportunity cost of taking this course is

the benefit of the next-best alternative; that benefit becomes a cost because you forgo one activity by taking this course.