chapter 2

Refer to Table 2-1. A student has only a few hours to prepare for two different exams tomorrow morning. The above table shows alternative possible exam outcomes with three alternative uses of the student's time. The opportunity cost of scoring an 84 on the history exam rather than 76 is:

C. 7 points on the economics exam

Why is there scarcity?

C. Because our unlimited wants exceed our limited resources

Refer to Figure 2-1. An economy is operating at full employment, and then workers in the bread industry are laid off. This change is portrayed in the movement from:

C. C to F

The marginal benefit of a slice of pizza is the:

C. the maximum amount that a consumer is willing to pay for the slice

In deciding how many hours to work, Beulah will make a choice that maximizes her _______; that is, she will choose according to her preferences for leisure time and income.

C. utility

"If I didn't have class tonight, I would save the $4 campus parking fee and spend four hours at work where I earn $10 per hour." The opportunity cost of attending class this evening is:

D. $44

Refer to Figure 2-1. Along the production possibilities frontier, the most efficient point of production depicted is:

D. All points on the production possibilities frontier are equally efficient

Philosophers draw a distinction between positive statements, which describe the world as it is, and ___________________s, which describe how the world should be.

A. normative statement

The model that economists use for illustrating the process of individual choice in a situation of scarcity is the budget constraint, sometimes also called the _______________, a diagram which shows what choices are possible.

A. opportunity set

The opportunity cost of attending university is likely to include all except which of the following?

A. the cost of haircuts received during the school term

Refer to Figure 2-2. When the economy moves from Point A to Point B in the diagram above:

A. the economy begins using its resources efficiently to produce both food and clothing. B. the economy operates at its productive capacity once it reaches Point B. C. the economy increases production of both clothing and food. D. All of the above occur.

The model that economists use for illustrating the process of individual choice in a situation of scarcity is the _________________, sometimes also called the opportunity set, a diagram which shows what choices are possible.

B. budget constraint

Most real-world choices aren't about getting all of one thing or another, instead, most choices involve _________________, which involves comparing the benefits and costs of choosing a little more or a little less of a good.

D. marginal analysis

Scarcity exists because of:

D. unlimited wants and limited resources

The choice on a production possibilities set that is socially preferred, or the choice on an individual's budget constraint that is personally preferred, will display _____________________.

A. allocative efficiency

Marginal thinking is best demonstrated by:

A. choosing to spend one more hour studying economics because you think the improvement in your score on the next quiz will be worth the sacrifice of time.

Refer to Figure 2-2. At Point A in the production possibilities graph shown above, the economy

A. is not using its resources efficiently

The leader of a federal political party made the following campaign promise: "My administration will increase national defense without requiring sacrifices elsewhere in the economy." The promise can be kept if:

A. the economy moves along the production possibilities in the direction of a greater quantity of defense. B. the economy moves from a point inside the production possibilities curve toward a point on the production possibilities curve. C. the production possibilities frontier shifts outward due to an improvement in technology. D. either b) or c) occurs, but not as a result of a).

As depicted in _________________________________, it is necessary to give up some of one good to gain more of the other good.

A. the production possibilities frontier

The general pattern that consumption of the first few units of any good tends to bring a higher level of _______ to a person than consumption of later units is a common pattern.

A. utility

Referring to Table 2-1: A student has only a few hours to prepare for two different exams this afternoon. The above table shows alternative possible exam scores with three alternative uses of the student's time. The opportunity cost of scoring a 94 on the economics exam rather than a 77 is:

B. 15 points on the history exam

Which of the following would most likely shift the production possibilities curve inward

B. a decrease in the average number of hours worked per week as the labor force chooses to enjoy more leisure time

Scarcity implies that:

B. it is impossible to completely fulfill the unlimited human desire for goods and services with the limited resources available.

Economists refer to this pattern, the ___________________________________, which means that as a person receives more of a good, the additional or marginal utility from each additional unit of the good declines.

B. law of diminishing marginal utility

Most choices involve _________________, which involves comparing the benefits and costs of choosing a little more or a little less of a good.

B. marginal analysis

Philosophers draw a distinction between ___________________, which describe the world as it is, and normative statements, which describe how the world should be.

B. positive statements

The lesson of __________ is to forget about the money that's irretrievably gone and instead to focus on the marginal costs and benefits of future options.

B. sunk costs

The slope of the _________________ is determined by the relative price of the two goods, which is calculated by taking the price of one good and dividing it by the price of the other good.

C. budget constraint

The law of ____________________________ explains why people and societies rarely make all-or-nothing choices.

C. diminishing marginal utility

As a person receives more of a good, the _______________ from each additional unit of the good declines.

C. marginal utility

Attending college is a case where the ________________ exceeds the monetary cost.

C. opportunity cost

In many cases, it is reasonable to refer to the ________________ as the price.

C. opportunity cost

Gomer decides to spend an hour playing basketball rather than studying. His opportunity cost is:

C. the benefit to his grades from studying for an hour

Refer to Figure 2-1. The most inefficient point depicted is:

D. Point G

The opportunity cost of an action:

D. is a subjective valuation that can be determined only by the individual who chooses the action.

When most people want to know the cost of an item or a service, they look for a price tag. When economists want to determine cost, they go one step further. They use the idea of opportunity cost. Explain the concept of opportunity cost and illustrate with an example.

Opportunity cost is whatever must be given up to obtain something that is desired. After the terrorist plane hijackings on September 11, 2001, many steps were proposed to improve air travel safety. For example, the federal government could provide armed "sky marshals" who would travel inconspicuously with the rest of the passengers. The cost of having a sky marshal on every flight would be roughly $3 billion per year. Retrofitting all U.S. planes with reinforced cockpit doors to make it harder for terrorists to take over the plane would have a price tag of $450 million. Buying more sophisticated security equipment for airports, like three-dimensional baggage scanners and cameras linked to face recognition software, could cost another $2 billion. But the single biggest cost of greater airline security doesn't involve spending money. It's the opportunity cost of additional waiting time at the airport.

The economics approach portrays people as self-interested. Instead, the critics argue that people should be taught to care more deeply about others. Economists offer several answers to this concern. Offer two economist responses with explanation.

Philosophers draw a distinction between positive statements, which describe the world as it is, and normative statements, which describe how the world should be. In the study of economics, positive and normative arguments often blend into each other. Second, self-interested behavior and profit-seeking can be labeled with other names, such as personal choice and freedom. Third, self-interested behavior can lead to positive social results. For example, when people work hard to make a living, they create economic output. Fourth, even people who focus on their own self-interest in the economic part of their life often set aside their own narrow self-interest in other parts of life

Define Productive Efficiency and Allocative Efficiency.

Productive efficiency means that, given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good. Allocative efficiency means that the particular mix of goods being produced—that is, the specific choice along the production possibilities frontier—represents the allocation that society most desires

Define the term "sunk costs" and illustrate with an example.

Sunk costs, which are costs that were incurred in the past and cannot be recovered. Consider the case of Edgar who pays $8 to see a movie, but after watching the film for 30 minutes he knows that it's truly terrible. Should he stay and watch the rest of the movie because he paid $8, or should he leave? The money he spent is a sunk cost and unless the theater manager is feeling kindly, Edgar won't get a refund. But staying in the movie still means paying an opportunity cost in time. Thus, Edgar's choice is whether to spend the next 90 minutes suffering through a cinematic disaster or to do something— anything—else. The lesson of sunk costs is to forget about the money that's irretrievably gone and instead to focus on the marginal costs and benefits of future options.

When economists analyze how individuals make choices, they divide the decision process into two steps. Define these two steps and label the resultant model.

The first step is to consider what choices are possible for individuals. The second step is to think about which choices individuals actually make, based on their individual preferences. The model that economists use for illustrating the process of individual choice in a situation of scarcity is the budget constraint, sometimes also called the opportunity set, a diagram which shows what choices are possible.

Explain the Law of Diminishing Returns and illustrate with a relevant example.

The law of diminishing returns holds that as additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline. Example: When government spends a certain amount more on reducing crime, for example, the original gains in reducing crime could be relatively large. But additional increases typically cause relatively smaller reductions in crime, and paying for enough police and security to reduce crime to nothing at all would be tremendously expensive.