Chapter 1

People think at the margin

A marginal change is an incremental adjustment to a plan of action (edge of decision making) A decision maker takes an action if and only if the marginal benefit is bigger than the marginal cost

Assume Aaron and José each own a small ranch, and each produces milk and cheese. One of them is better than the other at producing both milk and cheese (but we do not know who). Which of the statements cannot be true regarding absolute or comparative advantage? -Aaron could have a comparative advantage in producing both milk and cheese. -Aaron could have an absolute advantage in producing milk. -José could have an absolute advantage in producing both milk and cheese. -José could have an absolute advantage in producing cheese. -José could have a comparative advantage in producing cheese.

Aaron could have the comparative advantage in producing both milk and cheese.

True or False? Economics assumes that people act rationally and in their own self-interest.

True

Suppose you are trying to determine the aftereffects of hurricane Katrina on the economy of Louisiana. Which assumptions could be made to simplify the study? -compare the change in prices for all goods -determine the effects while holding the infrastructure and factors of production constant -consider the effects on all of Louisiana's interstate trade partners -focus on just the crawfish and catfish farming industries in Louisiana -track the total net worth of the output produced by the state prior to the hurricane and after the hurricane

-focus on just the crawfish and catfish farming industries in Louisiana -determine the effects while holding the infrastructure and factors of production constant

Determine which of the items are factors of production. -land -military power -labor -corporate stocks -capital -solar energy

-land -labor -capital

Order each of the statements with regard to whether the economic activities in each statement are more market oriented (laissez-faire) or command oriented (centrally planned). (Market oriented to command oriented) Answer Bank: -The government regulates some production and consumption decisions -Buyers and sellers make all production and consumption decisions. -The government makes all production and consumption decisions. -The government attempts to induce certain production and consumption decisions using monetary incentives.

1. Buyers and sellers make all production and consumption decisions 2. The government attempts to induce certain production and consumption decisions using monetary incentives. 3. The government regulates some production and consumption decisions 4. The government makes all production and consumption decisions.

Economists make use of the scientific method to understand choices. The following represent steps in economic research. Place the steps in the appropriate order based on the scientific method. - You reject of fail to reject your hypothesis -You hypothesize that college students eat more fries than other demographic groups -You observe that college students eat lots of fries -You collect data to test the hypothesis -You repeat the process

1. You observe that college students eat lots of fries 2. You hypothesize that college students eat more fries than other demographic groups 3. You collect data to test the hypothesis 4. You reject of fail to reject your hypothesis 5. You repeat the process

Suppose that Rob and Big both raise animals and sell them. Because Rob and Big have different talents, they have varying abilities to raise these animals. In 1 day, Rob can produce either 10 cows or 20 pigs. In 1 day, Big can produce either 9 cows or 36 pigs. Assume that Rob and Big decide to specialize completely and trade with one another. After specialization, suppose that Rob and Big trade with one another and Rob sends Big 6969 cows. In order for both Rob and Big to benefit from trade, what is the least quantity of pigs that Big must send Rob? Round your answer to two decimal places.

138

A farmer produces both beans and corn on her farm. If she must give up 1616 bushels of corn to be able to get 66 bushels of beans, then her opportunity cost of 11 bushel of beans is -0.38 bushels of corn. -16.0 bushels of corn. -2.67 bushels of corn. -2.99 bushels of corn.

2.67 bushels of corn

Suppose that Rob and Big both raise animals and sell them. Because Rob and Big have different talents, they have varying abilities to raise these animals. In 1 day, Rob can produce either 10 cows or 20 pigs. In 1 day, Big can produce either 9 cows or 36 pigs. In order for both Rob and Big to benefit from trade, what is the greatest quantity of pigs that Big must send Rob? Round your answer to two decimal places.

276

Suppose that Rob and Big both raise animals and sell them. Because Rob and Big have different talents, they have varying abilities to raise these animals. In 1 day, Rob can produce either 10 cows or 20 pigs. In 1 day, Big can produce either 9 cows or 36 pigs. Assume that Rob and Big decide to specialize completely and trade with one another. Over the course of 1 month (30 days), Rob will produce (0/300) cows and (600/0) pigs, whereas Big will produce (270/0) cows and (1080/0) pigs.

300, 0, 0, 1080

Suppose there are two individuals, Casey and Rick, who live in a very simplified world where only two goods are produced and consumed: steak and potatoes. The production opportunity cost for Casey is 5.00 kg5.00 kg of steak for every kilogram of potatoes. Rick has a production opportunity cost of 3.00 kg3.00 kg of steak for every kilogram of potatoes. Casey eventually realizes that, through trade, both individuals can be better off. Rick is willing to trade. What price can be settled between these two parties such that both individuals can enjoy more steak and potatoes? Give your answer to two decimals.

4

Which demonstrates a scenario with no opportunity cost? 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. 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. 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. You are ecstatic because you know it is a win-win scenario and choose to work for Chez Nous. All of these scenarios have an opportunity cost.

All of these scenarios have an opportunity cost

Market power or not market power? Hanz owns the only German-food restaurant in his town, and no other such places exist for hundreds of miles in any direction.

An example of market power

Policy makers sometimes ignore the advice of economic advisors. Why? -Because the economic advice of these individuals is positive in nature, in actuality, if policy makers listened and enforced the economic policies given to them by the top economists, the country would indeed be a better place. -Because the economic advice of the leading economists is normative in nature, they exclude political bias that may run contrary to policy makers' goals. -Because of the myriad of different perspectives and inputs the policy makers receives, the economic advice is only one part of the whole that must be considered when making economic policies.

Because of the myriad of different perspectives and inputs the policy makers receives, the economic advice is only one part of the whole that must be considered when making economic policies.

True or False? Resources are limited and wants are virtually unlimited. So, economic wants exceed society's productive capacity to satisfy those wants.

True

Types of incentives

Economic - dollars, points, etc Social - created by society (desire for acceptance) Moral - your sense of what's right and wrong

An economist uses the scientific method when trying to explain economic observations. What makes the economist's task of developing/supporting theories different than that of a chemist? -Chemists can utilize natural experiments offered by history, whereas the economist cannot. -Because they both use the scientific method, economists and chemists develop and test theories in the same way. -Chemists cannot conduct controlled experiments like an economist can. -Economists, unlike chemists, cannot conduct controlled experiments as easily to offer support for their theories.

Economists, unlike chemists, cannot conduct controlled experiments as easily to offer their support for their theories.

True or False? Economics equates rational self-interest with selfishness.

False

True or False? The diagram shown, because all possible gaps in the loop are closed to form the circular loop, is not a simplified model.

False

Trade can make everyone better off

If you only bought local, how far would you make it?

Which scenario would least likely change an individual's behavior? -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. -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. -In an effort to make people eat healthier, the city of Bakersville tells its residents to eat wheat bread instead of white bread. -The city of Saskatoon chooses to give its residents a penny for each soda can they recycle in an effort to promote environmental awareness.

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

Assume Italy and Mali can both produce grain and dates, and that the only limited resource is the farming labor force, meaning that land, water, and all other resources are plentiful in both countries. Each farmer in Italy can produce 10 t of grain or 5 t of dates in a season. Each farmer in Mali can also produce 10 t of grain or 25 t of dates. Which country has the comparative advantage in producing grain?

Italy

Vincent and Jean are two cooks who work in a village. Each of them can either bake cakes or make pizzas. Every ingredient is readily available to them, and the only scarce resource is the cooks' time. Vincent can bake 1010 cakes or make 55 pizzas in an hour. Jean can bake 1212 cakes or make 88 pizzas in an hour. Which cook has the absolute advantage in making pizzas?

Jean

Vincent and Jean are two cooks who work in a village. Each of them can either bake cakes or make pizzas. Every ingredient is readily available to them, and the only scarce resource is the cooks' time. Vincent can bake 1010 cakes or make 55 pizzas in an hour. Jean can bake 1212 cakes or make 88 pizzas in an hour. Which cook has the comparative advantage in making pizzas?

JeanMali

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

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

Macro or micro? As a result of a severe recession, the total output, or gross domestic product, of a nation falls by 4 percent.

Macro

Macro or micro? Increased consumer spending causes the rate of inflation to rise.

Macro

Assume Italy and Mali can both produce grain and dates, and that the only limited resource is the farming labor force, meaning that land, water, and all other resources are plentiful in both countries. Each farmer in Italy can produce 10 t of grain or 5 t of dates in a season. Each farmer in Mali can also produce 10 t of grain or 25 t of dates. Which country has the absolute advantage in producing dates?

Mali

Assume Italy and Mali can both produce grain and dates, and that the only limited resource is the farming labor force, meaning that land, water, and all other resources are plentiful in both countries. Each farmer in Italy can produce 10 t of grain or 5 t of dates in a season. Each farmer in Mali can also produce 10 t of grain or 25 t of dates. Which country has the comparative advantage in producing dates?

Mali

Positive or normative economics? Predicts how the economy will change as a result of specific events.

Positive

People take action if and only if

Marginal benefit outweighs marginal cost

Alsace Cellular is the first and only company to sell 3-D phones, and thus they can charge whatever price they like. Market power or externality?

Market power

Market power or not market power? The four major American providers of orange juice, a staple food in the United States, collectively decide to increase prices.

Market power

Micro or macro? Robotic technology reduces the demand for auto workers.

Micro

Assume Italy and Mali can both produce grain and dates, and that the only limited resource is the farming labor force, meaning that land, water, and all other resources are plentiful in both countries. Each farmer in Italy can produce 10 t of grain or 5 t of dates in a season. Each farmer in Mali can also produce 10 t of grain or 25 t of dates. Which country has the absolute advantage in producing grain?

Neither

Positive or normative economics? Involves recommendations or arguments about what should be.

Normative

Market power or not market power? Jim uses an online coupon site to buy a vacuum cleaner for below market price.

Not an example of market power

Market power or not market power? The price of oil increasing, causing the price of gasoline to increase as well.

Not an example of market power

The cost of something is what you give up to get it

Opportunity cost - whatever was given up, not just dollars

People face tradeoffs

To get something you want, you always have to give up something else you want; "there's no such thing as a free lunch"

Vincent and Jean are two cooks who work in a village. Each of them can either bake cakes or make pizzas. Every ingredient is readily available to them, and the only scarce resource is the cooks' time. Vincent can bake 1010 cakes or make 55 pizzas in an hour. Jean can bake 1212 cakes or make 88 pizzas in an hour. Which cook has the comparative advantage in baking cakes?

Vincent

Consider four of Aesop's fables. 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." 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." 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. 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 hound chased a rabbit

Christine is writing her doctoral dissertation on why a real estate bubble bursts. In her writing, Christine is employing (positive/normative) analysis

postive

Marginal benefit

additional benefit or change in benefit

Marginal cost

additional cost

Which of the four options best represents specialization and its relationship with trade? -absolute advantage -economic crises -comparative advantage -all the above

comparative advantage

Answer the questions about the relationship between unemployment and inflation. If unemployment increases , inflation should (increase/decrease). If the amount of money in the economy decreases, spending on goods and services should (increase/decrease) . As demand increases, prices should (increase/decrease) and firms should (increase/decrease) hiring and production of goods and services.

decrease, decrease, increase, increase

Suppose you are a freshman in college and you have not declared a major. One reason you enrolled at your respective college was the school's vibrant social life. At the same time, you want to balance your academic life because you know that your grades will matter for graduate school or job applications. You decide to forgo partying for two hours to study for an upcoming economics exam. Which of the following terms best describes what your supervisor has failed at? equity/efficiency/incentives/market failure

efficiency

Suppose the Eastwestern University theater department has received $250,000$250,000 from the school's endowment fund to put toward scholarships to improve the department and assist theater students entering the program. Professor Bucktell proposes that they should hold auditions and give $50,000$50,000 scholarships to the five most talented applicants in hopes of bringing the best and most promising talent to the school. Professor Rammer thinks that they should divide the money up into $10,000$10,000 scholarships to be given to the 25 applicants to the program with the most financial need, regardless of talent. Professor Bucktell's proposal is an example of economic (opportunity/scarcity/efficiency/equality). Professor Rammer's proposal is an example of economic (opportunity/scarcity/efficiency/equality).

efficiency; equality

A gardener can produce either beans or corn in her garden. The gardener's opportunity cost of a bushel of beans multiplied by her opportunity cost of a bushel of corn is -equal to two. -greater than one but smaller than three. -equal to three. -equal to infinity. -equal to one. -unknown, because there is not enough information

equal to one

Fritz decides to bring back fresh sauerkraut from his vacation to Germany, and the horrible stench causes many people on his return flight to become ill. Market power or externality?

externality

Hydraulic fracturing, known as fracking, has allowed oil drillers to reach new, untapped reserves. However, it has also caused an increase in seismic activity in areas where it is done. Market power or externality?

externality

True or False? Economics focuses on average analysis, a comparison of average benefits with average costs, as the method for making economic decisions.

false

Your economics professor is attempting to recruit more students to major in economics. She presents data showing that economics majors develop skills valuable in private industry, government, and research. She also argues that they earn a relatively higher income than other majors. c. Your professor is presenting you with (the opportunity cost/specializations/efficiency/incentives) to major in economics.

incentives

Absolute advantage can be determined by comparing different producers'... -input requirements per unit of output. -opportunity costs. -comparative advantage. -geographical location. -input payments, such as wage.

input requirements per unit of output

Vincent and Jean are two cooks who work in a village. Each of them can either bake cakes or make pizzas. Every ingredient is readily available to them, and the only scarce resource is the cooks' time. Vincent can bake 1010 cakes or make 55 pizzas in an hour. Jean can bake 1212 cakes or make 88 pizzas in an hour. Which cook has the absolute advantage in baking cakes?

jean

Megan has a 11 hr gap in her course load for the fall semester. There are two courses available for her to take at that time: reading piano sheet music and beginning rock climbing. She does not have any experience with piano or rock climbing. In the end, she decides to enroll in the rock climbing course, despite her fear of heights. Identify which activity exhibits a potential trade-off with enrolling in rock climbing. learning rock climbing skills learning to read piano sheet music overcoming her fear of heights none of the above

learning to read piano sheet music

Macro or micro? A tax on tires increases the price of tires paid by car owners.

micro

Macro or micro? Increased consumer spending causes the national unemployment rate to fall.

macro

Anna decides whether she should devote another day to studying for her music theory exam or if she can instead spend it practicing the viola. Marginal analysis or not marginal analysis?

marginal analysis

Ava decides whether or not she should spend an additional hour per day welding burn barrels by looking at how much she can produce in that hour. Marginal analysis or not marginal analysis?

marginal analysis

Miranda is pondering whether adding one more painting to her art installation will make the audience's experience better or worse. Marginal analysis or not marginal analysis?

marginal analysis

The scenarios each illustrate a principle of economics. Match each scenario with the principle that best fits it. An educational software company wants to expand the number of economics questions that it offers and is considering hiring another economist. It compares how much adding another worker will improve the product with the additional cost. Is this opportunity cost, marginal decisions, or responding to incentives?

marginal decisions

Amos owns the only ice cream shop in his town, where the average temperature is 105 degrees. Market power or externality?

market power

Macro or micro? Optimism about future car sales leads General Motors to hire more auto workers.

micro

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? -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. -Juan thinks he is better off with this contract, but in reality the wealthy American buyer is taking advantage of Juan's naiveté. -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. -All three of these statements must be true. -None of these statements must be true.

none of these statements must be true

Gregory is an advisor to the President who suggests implementing a package of economic policies in order to lower unemployment in the United States. Gregory is employing (positive/normative) analysis.

normative

Positive or normative economics? Is concerned with how a variety of moral or ethical questions should be solved.

normative

Positive or normative economics? Offers plans for what the economy should look like based on an individual's subjective values and beliefs.

normative

Andrea decides how much fabric she needs for her new costume-making business this month by using the total she used last month. Marginal analysis or not marginal analysis?

not marginal analysis

D.A. calculates how many pounds of brisket he needs to eat on a daily basis to survive by looking at the total number of calories he needs. Marginal analysis or not marginal analysis?

not marginal analysis

On Black Friday, there are huge sales for electronics at many retail stores. David must decide between buying a camera at one store and buying a flat-screen TV at another store, and buying one means he will lose the ability to purchase the other. Is this opportunity cost, marginal decisions, or responding to incentives?

opportunity cost

Suppose you are a freshman in college and you have not declared a major. One reason you enrolled at your respective college was the school's vibrant social life. At the same time, you want to balance your academic life because you know that your grades will matter for graduate school or job applications. You decide to forgo partying for two hours to study for an upcoming economics exam. a. To make that decision you weighed your (efficiency/equity/equilibrium/market failure/specialization/opportunity cost).

opportunity cost

Positive or normative economics? Concerns over the effects of an economic decision on people and not on how they will feel about it or what they will believe about why the decision was made.

positive

Positive or normative economics? Describes current economic events.

positive

Determine which of the following economic incentives would likely prompt a person or firm to reduce emission of greenhouse gases. Answer Bank: answering an internet ad looking for carpoolers a 15% increase in the tax on heating oil a carbon tax on pollution President Obama asks citizens to keep their tires inflated a $10,000 federal rebate on new hybrid-car purchases reducing the cost of bus passes

reducing the cost of bus passes, a $10,000 federal rebate on new hybrid-car purchases, a carbon tax on pollution, a 15% increase in the tax on heating oil

The scenarios each illustrate a principle of economics. Match each scenario with the principle that best fits it. To entice students to keep themselves up to date with economic current events, an instructor offers extra credit to students for participating in an online discussion forum, and this sparks a lively debate about environmental policy. Is this opportunity cost, marginal decisions, or responding to incentives?

responding to incentives

Scarcity

society has limited resources and unlimited wants

You are assigned a final group project for your economics course. One member of your group is really good at finding resources for the project, one is really good at proofreading and editing, and you are really good at making a presentation. d. Based on this, you know that via (specialization/discounting/equity/equilibrium) you can complete the project more efficiently than if you all did each part together.

specialization

Which is most likely to increase as a nation experiences an increase in productivity? marginal benefits incentives standard of living efficiency

standard of living

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 recession -market failure -a command economy -the invisible hand

the invisible hand

Economics

the study of human behavior

Suppose Matt and Bree go out to get pizza. They order breadsticks and a large pepperoni pizza. After eating the breadsticks and one piece of pizza, Bree decides to have an additional piece, but she does not eat a third piece. If Bree is a rational individual, why did she not eat a third piece of pizza? The marginal cost of the -first piece was greater than the marginal benefit of the second piece. -second piece was greater than the marginal benefit of the third piece. -third piece was greater than the marginal benefit of the second piece. -third piece was greater than the marginal benefit of the third piece.

third piece was greater than the marginal benefit of the third piece

True or False? Economics is concerned with how people, organizations, and society make optimal choices under conditions of scarcity.

true

True or False? In the diagram shown, resources are cycled through the economy.

true

True or False? Models are used to simplify complex interactions in order to allow us to better understand the key concepts.

true

True or False? To obtain more of one good, society sacrifices the opportunity to obtain other, alternative goods. This sacrifice is called the opportunity cost.

true

People respond to incentives

when incentives change, behavior often changes