ECO2023 Ch 1 Ten Principles of Economics
Which of the following describe some of the trade-offs faced by a family deciding whether to buy a new car?
A newer model offers better protection and functions but is more expensive than an older model. An increase in the family's car payment means the family will be unable to afford a vacation.
Which of the following activities is most likely to produce an externality? A student sits at home and watches television. A student has a party in her dorm room. A student reads a novel for pleasure. A student eats a hamburger in the student union.
A student has a party in her dorm room.
Workers will *benefit* from the change in productivity growth because they will produce and earn *more*.
Both the workers, who will get paid more because they are producing more, and the factory owners, who will get a higher return on their investments, will benefit from higher productivity. See Section: Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.
What is the opportunity cost of saving some of your paycheck?
The items you could have enjoyed had you spent that portion of your paycheck (current consumption).
Who is more self-interested, the buyer or the seller?
They are equally self-interested. The seller will sell to the highest bidder, and the buyer will buy from the lowest offer.
The short-run tradeoff between inflation and unemployment implies that, in the short run,
a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.
Trade
allows specialization, which reduces costs.
The property of society getting the most it can from its scarce resources is called
efficiency.
In a market economy, who makes the decisions that guide most economic activity?
firms and households
Which of the following products would be least capable of producing an externality? cigarettes stereo equipment inoculations against disease education food
food
High and persistent inflation is caused by
governments increasing the quantity of money too much.
Economics is best defined as the study of
how society manages its scarce resources
Raising taxes and increasing welfare payments
improves equality at the expense of efficiency.
Productivity can be increased by
improving the education of workers.
A marginal change is one that
incrementally alters an existing plan
Government policies resulting in reduced efficiency include (i) the welfare system (ii) unemployment insurance (iii) progressive income tax
(i), (ii), and (iii)
Market economies are distinguished from other types of economies largely on the basis of
the ways in which scarce resources are allocated
Suppose that you have received $300 as a birthday gift. You can spend it today or you can put the money in a bank account for a year and earn 5 percent interest. The opportunity cost of spending the money today, in terms of what you could have after one year, is
$315.
T/F China is an example of a centrally-planned economy.
False China's communist government plays a significant role in their economy but most economic activity is organized by markets (the interaction of households and firms)
T/F A tax on liquor raises the price of liquor and provides an incentive for consumers to drink more.
False higher prices reduce the quantity demanded.
Farmer Jones has 100 acres of land. He can plant corn, which yields 100 bushels per acre, or he can plant beans, which yield 40 bushels per acre. He chooses to plant beans. what would likely be given up to obtain each of the items listed below?
Farmer Jones gives up 10,000 bushels of corn.
List and briefly explain the three principles that describe how the economy as a whole works.
How people make decisions -opportunity cost -marginal cost -incentives How people interact -trade -market power -government control How the economy as a whole works -standard of living -creating more money -inflation and unemployment
Foreign trade
allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home.
The idea that only the government can organize economic activity in a way that promotes economic well-being for a country as a whole
amounts to a denial of one of the basic principles regarding interactions among people.
One advantage market economies have over centrally-planned economies is that market economies
are more efficient.
Suppose the cost of operating a 75 room hotel for a night is $6,000 and there are 5 empty rooms for tonight. The marginal cost per room per night
cannot be determined from the information given.
The principle that trade can make everyone better off applies to a. individuals. b. families. c. countries. d. All of the above
d. All of the above
Which of the following products would be considered scarce? a. bread b. baseballs autographed by Babe Ruth c. motorcycles d. All of the above are correct
d. All of the above are correct
Which of the following would a permanent increase in the growth rate of the money supply change permanently? a. both inflation and unemployment b. inflation c. neither inflation nor unemployment d. unemployment
inflation
An increase in the price of beef provides
information that tells producers to produce more beef.
Market power refers to the
power of a single person or small group to influence market prices.
The amount of goods and services produced from each unit of labor input is called
productivity.
Economics is the study of how
society manages its scarce resources
Adam Smith's "invisible hand" refers to
the ability of free markets to reach desirable outcomes, despite the self-interest of market participants
Both the production of goods and services and the unemployment rate are used to measure
the business cycle
If a nation has high and persistent inflation, the most likely explanation is
the central bank creating excessive amounts of money
Your opportunity cost of going to a movie is
the total cash expenditure needed to go to the movie plus the value of your time
The balance between efficiency and equality is an illustration of
trade-offs.
Why do you think air bags have reduced deaths from auto crashes less than we had hoped?
The cost of an accident was lowered. This changed incentives, so people drive faster and have more accidents.
Which of the following describe some of the trade-offs faced by a company president deciding whether to open a new factory?
The firm can either open a new factory or expand its current factory.
T/F High and persistent inflation is caused by excessive growth in the quantity of money in the economy.
True
T/F When economists say, "There ain't no such thing as a free lunch," they mean that all economic decisions involve trade-offs.
True
Rational people make decisions "at the margin" by comparing
additional costs and benefits
Governments may intervene in a market economy in order to
protect property rights. correct a market failure due to externalities. achieve a more equal distribution of income.
Trade-offs are required because wants are unlimited and resources are
scarce
Because people respond to incentives, we would expect that if the average salary of accountants increases by 50 percent while the average salary of teachers increases by 20 percent, students will shift majors from education to accounting. students will shift majors from accounting to education. fewer students will attend college. None of the above is true.
students will shift majors from education to accounting.
The failure of communism in a large number of countries is at least partly explained by
the lack of information, on the part of central planners in those countries, about tastes and preferences in their economies.
Which of the following is not part of the opportunity cost of going on vacation? the money you could have made if you had stayed home and worked the money you spent on food the money you spent on airline tickets the money you spent on a Broadway show
the money you spent on food
Suppose a typical worker in India can produce 32 units of product in an eight-hour day, while a typical worker in Bangladesh can produce 30 units of product in a 10-hour day. We can conclude that
the standard of living will likely be higher in India than in Bangladesh.
Workers in the United States enjoy a high standard of living because
workers in the United States are highly productive.
You have spent $1,000 building a hot-dog stand based on estimates of sales of $2,000. The hot-dog stand is nearly completed, but now you estimate total sales to be only $800. You can complete the hot-dog stand for another $300. Should you complete the hot-dog stand? (Assume that the hot dogs cost you nothing.) your decision rule should be to complete the hot-dog stand as long as the cost to complete the stand is less than
yes; $800
Suppose the large number of auto accidents in a small town results in new legislation that requires all citizens of the town to install new anti-lock brakes on their cars. These new brakes cut the time it takes a car to stop by 50%, allowing drivers to avoid collisions with other cars and pedestrians more easily. The new brakes *decrease* the probability that a vehicle will collide with another vehicle but also give drivers an incentive to drive more *recklessly*, which could potentially *increase*the number of car accidents in the town.
Although the new brakes may have the direct effect of reducing the probability of car accidents, this reduction in the probability of accidents can also change the incentives of drivers. In particular, it may give drivers an incentive to alter their behavior and driving style. A rational driver compares the costs and benefits of driving safely. For instance, if drivers had brakes that took a long time to stop the car, the marginal benefit of driving safely (and likely very slowly) would be high, giving drivers an incentive to drive very carefully and brake sooner to avoid accidents. The new brakes, however, change these incentives by altering the cost-benefit analysis that a driver would undertake. If the new brakes give drivers the ability to stop very suddenly, the marginal benefits of driving safely are reduced, giving drivers an incentive to drive less cautiously (or more recklessly). For example, drivers may wait longer to brake when close to other cars and pedestrians. This change in behavior toward riskier driving may actually lead to a larger number of car accidents, as there may be more risky drivers on the road.
Which of the following statements is true about a market economy? Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being. Taxes help prices communicate costs and benefits to producers and consumers. With a large enough computer, central planners could guide production more efficiently than markets. The strength of a market system is that it tends to distribute resources evenly across consumers.
Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being.
Which of the following statements about markets is most accurate? a. Markets are usually inferior to central planning as a way to organize economic activity. b. Markets are a good way to organize economic activity in developed nations, but not in less developed nations. c. Markets are usually a good way to organize economic activity. d. Markets fail and are therefore not an acceptable way to organize economic activity.
Markets are usually a good way to organize economic activity.
Suppose your university decides to lower the cost of parking on campus by reducing the price of a parking permit from $200 per semester to $5 per semester. What do you think would happen to the number of students desiring to park their cars on campus?
More students would wish to park on campus.
Suppose your university decides to lower the cost of parking on campus by reducing the price of a parking permit from $200 per semester to $5 per semester. Thinking in terms of opportunity cost, would the lower price of a parking permit necessarily lower the true cost of parking?
No, because we would have to factor in the value of our time spent looking for a parking place.
Suppose your university decides to lower the cost of parking on campus by reducing the price of a parking permit from $200 per semester to $5 per semester. Would the opportunity cost of parking be the same for students with no outside employment and students with jobs earning $15 per hour?
No. Students who could be earning money working are giving up more while looking for a parking place. Therefore, their opportunity cost is higher.
Suppose you find $20. If you choose to use the $20 to go to the football game, your opportunity cost of going to the game is nothing, because you found the money. $20 (because you could have used the $20 to buy other things). $20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game. $20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game plus the cost of the dinner you purchased at the game. none of the above.
$20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game.
Which of the following involve a trade-off? buying a new car going to college watching a football game on Saturday afternoon taking a nap All of the above involve trade-offs.
All of the above involve trade-offs
T/F Workers in the United States have a relatively high standard of living because the United States has a relatively high minimum wage.
False workers in the United States have a high standard of living because they are productive.
The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, you *should* go ahead and do so. The most you should pay to complete development is *$3 million.*
Because the $5 million your company invested in a new product has already been spent, it should not be considered in the decision of whether to finish development, according to the principle of thinking at the margin. In this case, the additional cost to finish development is $1 million, whereas the expected additional benefit of the new product is $3 million in profit (assuming that the company receives zero profit if the product remains unfinished). Therefore, your company should go ahead and finish the product. In fact, your company should be willing to pay up to $3 million to finish development, since that is the marginal benefit from doing so. See Section: Principle 3: Rational People Think at the Margin.
Which of the following situations describes the greatest market power? a farmer's impact on the price of corn Volvo's impact on the price of autos Microsoft's impact on the price of desktop operating systems a student's impact on college tuition
Microsoft's impact on the price of desktop operating systems
Which of the following describe some of the trade-offs faced by a member of Congress deciding how much to spend on national parks?
Money spent on national parks benefits park visitors, but alternatively the money could be spent on highways to benefit drivers. Congress can spend either a small amount on a lot of parks or a large amount on a single national park.
Is air scarce? Is clean air scarce?
No, you don't have to give up anything to get air. Yes, you can't have as much clean air as you want without giving up something to get it (pollution equipment on cars, etc.).
Suppose the state of Ohio increases the tax on a pack of cigarettes and, in response to the policy change, Ohio smokers decide to buy cigarettes in neighboring states. Which principle of economics does this illustrate?
People respond to incentives. This illustrates the idea that people respond to incentives. Because rational people make decisions by comparing costs and benefits, they respond to incentives.
You win $200 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 3% interest. Which of the following is in the opportunity cost of putting the $200 in a bank account for one year?
The value you can obtain from spending the money now.
In the short run, an increase in inflation temporarily increases unemployment. a decrease in inflation temporarily increases unemployment. inflation and unemployment are unrelated. the business cycle has been eliminated. None of the above is true.
a decrease in inflation temporarily increases unemployment.
One of the reasons that people tend to eat more in an "all you can eat" buffet is because the
marginal benefit from an extra plate of food is greater than the marginal cost of the additional food A rational decision maker does something only if the marginal benefit of the action exceeds the marginal cost of the action
A rational person does not act unless
the action produces marginal benefits that exceed marginal costs.
Suppose your university decides to lower the cost of parking on campus by reducing the price of a parking permit from $200 per semester to $5 per semester. What do you think would happen to the amount of time it would take to find a parking place?
It would take much longer to find a parking place.
When economic benefits are distributed uniformly across society = *Equality* When a society gets the most it can from its scarce resources = *Efficiency*
Efficiency means that society is utilizing its scarce resources to attain the maximum possible benefits. Equality, on the other hand, means that those benefits are distributed evenly among all members of society. Efficiency can be thought of as the size of the economic pie, while equality describes how that economic pie is divided into individual slices.
What can the government do to boost living standards?
Encourage research and development to ensure workers have access to the best available technology. Improve education and expand literacy among its citizens to ensure workers are well educated. The government can boost living standards by raising workers' productivity. This can be achieved by ensuring that workers are well educated, have the tools they need to produce goods and services, and have access to the best available technology. See Section: Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.
A goal for a society is to distribute resources more equally and fairly. How might you distribute resources if everyone were equally talented and worked equally hard? What if people had different talents and some people worked hard, while others did not?
Fairness might require that everyone get an equal share because they were equally talented and worked equally hard. Fairness might require that people not get an equal share because they were not equally talented and did not work equally hard.
True or False: Society can receive a "free lunch" when it builds new factories.
False Society does not receive a "free lunch" when it builds new factories, since people must reduce their spending in order to save more. Hence, they gain higher incomes in the future at the cost of consuming fewer goods in the present. See Section: Principle 1: People Face Trade-offs.
T/F An auto manufacturer should continue to produce additional autos as long as the firm is profitable, even if the cost of the additional units exceeds the price received.
False a manufacturer should produce as long as the marginal benefit exceeds the marginal cost.
T/F In the short run, a reduction in inflation tends to cause a reduction in unemployment.
False a reduction in inflation tends to raise unemployment.
T/F An individual farmer is likely to have market power in the market for wheat.
False a single farmer is too small to influence the market.
T/F The United States will benefit economically if we eliminate trade with Asian countries because we will be forced to produce more of our own cars and clothes.
False all countries gain from voluntary trade.
T/F Adam Smith's "invisible hand" concept describes how corporate business reaches into the pockets of consumers like an "invisible hand."
False the "invisible hand" refers to how markets guide self-interested people to create desirable social outcomes.
T/F When the government redistributes income with taxes and welfare, the economy becomes more efficient.
False the economy becomes less efficient because it decreases the incentive to work hard.
Farmer Jones has 100 acres of land. He can plant corn, which yields 100 bushels per acre, or he can plant beans, which yield 40 bushels per acre. He chooses to plant corn. what would likely be given up to obtain each of the items listed below?
Farmer Jones gives up 4,000 bushels of beans.
Because poor people are *less* likely to have adequate healthcare, guaranteeing everyone in society the best healthcare would likely *increase* equality. Paying laid-off workers unemployment benefits until they find a new job will likely *decrease* efficiency because this would *reduce* their effort searching for a job.
Guaranteeing everyone in society the best healthcare possible will increase equality if poor people are less likely to have adequate healthcare. However, the economy would be less efficient because it would give people more healthcare than they would choose to pay for. Similarly, unemployment benefits will likely increase equality by providing laid-off workers with some income until they can find new jobs, but decrease efficiency as these benefits encourage unemployment. Thus, there is a trade-off between equality and efficiency. See Section: Principle 1: People Face Trade-offs.
Which of the following describe some of the trade-offs faced by a recent college graduate deciding whether to go to graduate school?
If she goes to graduate school, she won't be able to start a new job and repay her existing student loans. Graduate school means fewer years of on-the-job experience.
Which of the following government activities is motivated by a concern about efficiency?
Instituting laws against driving while intoxicated Breaking up Standard Oil (which once owned 90% of all oil refineries) into several smaller companies Prohibiting smoking in public places Efficiency means that society is getting the maximum benefits from its scarce resources. In this case, regulating cable TV prices and breaking up Standard Oil into several smaller companies are measures designed to address inefficiency associated with market power. Prohibiting smoking in public places and instituting laws against driving while intoxicated are measures designed to address inefficiencies associated with negative externalities. See Section: Principle 1: People Face Trade-offs.
The government declares marijuana and cocaine illegal. The price of illegal drugs increases, creating more gangs and gang warfare. Due to the high price of illegal drugs, fewer street drugs are consumed. determine which result was likely the intended result and which was the unintended consequence
Intended: Fewer street drugs are consumed. Unintended: More gangs and gang warfare.
The government bans imports of sugar from South America. South American sugar beet growers can't repay their loans to U.S. banks and turn to more profitable crops such as coca leaves and marijuana. U.S. sugar beet growers avoid a financial crisis. determine which result was likely the intended result and which was the unintended consequence
Intended: Improve the financial condition of U.S. sugar beet growers. Unintended: Cause South American growers to grow marijuana and coca leaves.
The government prohibits the killing of wolves. The wolf population increases. Sheep and cattle herds suffer losses. determine which result was likely the intended result and which was the unintended consequence
Intended: Increase the wolf population. Unintended: Damage to sheep and cattle herds.
The government places rent controls on apartments restricting rent to $300 per month. Few landlords are willing to produce an apartment at this price causing more homelessness. Some low-income renters are able to rent an apartment more cheaply. determine which result was likely the intended result and which was the unintended consequence
Intended: Low-income renters get a cheap apartment. Unintended: Some people find no apartment at all causing more homelessness.
The government raises the minimum wage to $15 per hour. Some workers find jobs at the higher wage making these workers better off. Some workers find no job at all because few firms want to hire low-productivity workers at this high wage. determine which result was likely the intended result and which was the unintended consequence
Intended: Raise the wage of low-productivity workers. Unintended: Some workers are unemployed at the higher wage.
The government raises the tax on gasoline by $2 per gallon. The deficit is reduced, and people economize on their use of gasoline. There is a boom in bicycle sales. determine which result was likely the intended result and which was the unintended consequence
Intended: Reduce the deficit and use less gasoline. Unintended: Bicycle sales increase.
When the government implements programs such as progressive income tax rates, which of the following is likely to occur?
equality is increased and efficiency is decreased.
Bakers are much *less* likely to supply pastries to the market if property rights are not enforced.
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. For example, without enforcement of property rights, bakers will be less likely to produce pastries, as any pastries produced can potentially be stolen without compensation paid to the bakers. On the other hand, if property rights are enforced, bakers can be more confident that they will be compensated for their pastries and thus will be more likely to produce pastries in the first place. In this way, the enforcement of property rights can help move the market toward a more efficient level of production of goods and services.
In the Wealth of Nations, Adam Smith said, "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 do you think he meant?
The butcher, brewer, and baker produce the best food possible, not out of kindness, but because it is in their best interest to do so. Self-interest can maximize general economic well-being.
You have $20 in your wallet. You have a choice between using this amount to enter a baseball pool, which will give you the opportunity to win $80, and spending the money on buying something else.
The value you could obtain by spending the money on buying something else. The opportunity cost of an item is what you give up to get that item. In this case, by entering a baseball pool, you give up spending the money on buying something else. See Section: Principle 2: The Cost of Something Is What You Give Up to Get It.
Which of the following government policies is *least* likely to increase the standard of living in the United States? -Investment in education and skills training for workers -Investment in tools and capital for workers -Raising the minimum wage paid to workers -Investment in technology
Raising the minimum wage paid to workers 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. Therefore, if the goal of public policy is to increase the standard of living in the United States (or any other country), the policy must result in an increase in productivity. Policies aimed at increasing the education and skills of workers, increasing the tools and capital available to workers, and improving technology will all allow workers to produce more goods and services, thereby increasing productivity and the standard of living. 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.
Which of the following best summarizes a basic difference between market economies and centrally- planned economies?
Self-interest and prices serve to allocate resources in a market economy while a central planner typically attempts to allocate resources in a centrally-planned economy. Market economies allocate resources through the interaction of households and firms acting in their own self-interest. Centrally-planned economies allow the government to organize economic resources. Market economies tend to be more efficient but may also have a "less equal" distribution of resources.
If the government printed twice as much money, what do you think would happen to prices and output if the economy were already producing at maximum capacity?
Spending would double, but since the quantity of output would remain the same, prices would double.
Susan can work full time or go to college. She chooses work. what would likely be given up to obtain each of the items listed below?
Susan gives up a college degree and the increase in income through life that it would have brought her (but doesn't have to pay tuition).
Susan can work full time or go to college. She chooses college. what would likely be given up to obtain each of the items listed below?
Susan gives up income from work (and must pay tuition).
Why is there a trade-off between equality and efficiency?
Taxes and welfare make us more equal but reduce incentives for hard work, lowering total output.
You win $100 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5% interest. Which of the following is the opportunity cost of spending $100 now?
The $105 you would have a year from now if you put it in the bank The opportunity cost of an item is what you give up to get that item. In this case, by spending the $100 now, you give up the money you would have a year from now if you put it in the bank account that pays 5% interest: $100×(1+0.05)=$105. See Section: Principle 2: The Cost of Something Is What You Give Up to Get It.
You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in dollars, but the benefits of the vacation are psychological. Suppose you had to work for one month in order to save enough for the vacation. Which of the following is true if you decide to take the vacation?
The benefits of going on the vacation exceed the cost of working for a month to pay for the vacation. It can be difficult to compare benefits to costs when costs are monetary but benefits are psychological. One way to achieve this is to determine the opportunity cost of going on vacation. The opportunity cost of an item is what you give up to get that item. For example, in this case you might give up a new television or a laptop. You can then compare the perceived benefit of the vacation with that of this alternative item. A second way to compare benefits to costs is to think about how hard you worked to earn the money to pay for the vacation. You can then decide whether the psychological benefits of the vacation are worth the cost of having to work for the money to pay for it. In this case, if you decide to take the vacation, it means that the benefits from going on the vacation exceeds the cost of working for a month to pay for the vacation. See Section: Principle 2: The Cost of Something Is What You Give Up to Get It.
Which of the following describe some of the trade-offs faced by a professor deciding how much time to spend preparing for class?
The better the lecture, the better his chances of tenure, but time spent preparing the lecture decreases the time he has available to work on research.
Jake is training for a triathlon, a timed race that combines swimming, biking, and running. Consider the following sentence: In order to swim for an hour, Jake must take time away from work, where he earns $9 per hour. This is in addition to paying a $5 entrance fee for the pool. Which basic principle of individual choice do these statements best illustrate?
The cost of something is what you give up to get it All choices have opportunity costs. The opportunity cost of a good or service measures what must be given up in order to obtain it. In this case, Jake is not only paying $5 for admission to the pool, but he is also giving up the $9 he could have earned by working instead of swimming. In this sense, the $5 price of admission alone does not capture what must be given up to swim. Jake must give up $5+$9=$14 , which represents the opportunity cost of swimming.
Prices in Greece doubled every few days in 1944. The term hyperinflation refers to situations of abnormally high inflation. Which of the following is the most likely reason for the Greek hyperinflation in 1944?
The government financed its expenditures by increasing the supply of money. Greece's 1944 hyperinflation was caused by the government funding its military expenditures during World War II by rapidly increasing the quantity of money within the country. See Section: Principle 9: Prices Rise When the Government Prints Too Much Money.
Water is necessary for life. Diamonds are not. Is the marginal benefit of an additional glass of water greater or lesser than an additional one-carat diamond? Why?
The marginal benefit of another glass of water is generally lower because we have so much water that one more glass is of little value. The opposite is true for diamonds.
The market failure causes by the concentration of oil refineries by Standard Oil is known as *market power*.
The market failure associated with Standard Oil is the firm's substantial market power that resulted from its control of over 90% of all oil refineries that enabled it to significantly influence prices in the industry. See Section: Principle 7: Governments Can Sometimes Improve Market Outcomes.
You work as an assistant coach on the university basketball team and earn $15 per hour. One day, you decide to skip the hour-long practice and go to the local carnival instead, which has an admission fee of $9. The total cost (valued in dollars) of skipping practice and going to the carnival (including the opportunity cost of time) is $24
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 $15 per hour, so this is the opportunity cost of your time. You also choose to pay $9 to get into the local carnival. So your opportunity cost in dollars is $15+$9=$24.
Now suppose you had been planning to spend the day binge watching your favorite show. What is the cost of going kayaking in this case?
The rental of any kayak equipment you need The value of your time spent watching television The fee for accessing the river in a national park In this case, the opportunity cost of going kayaking when your plan was to binge watch your favorite show again includes the fee for accessing the river in a national park and the rental of any kayak equipment you need. However, because you are giving up television time, your opportunity cost also includes the value of your time spent watching television. See Section: Principle 2: The Cost of Something Is What You Give Up to Get It.
You were planning to spend Saturday working at your part-time job, but a friend asks you to go kayaking. Which of the following are included in the true cost of going kayaking?
The rental of any kayak equipment you need The wages you forgo by going kayaking The fee for accessing the river in a national park The opportunity cost of an item is what you give up to get that item. The opportunity cost of going kayaking when your plan was to go to work includes the fee for accessing the river in a national park, the wages you forgo by going kayaking, and the rental of any kayak equipment you need. Your endurance splash pants are not included in the cost of going kayaking since you don't have to give up anything to use the pants you already own. See Section: Principle 2: The Cost of Something Is What You Give Up to Get It.
Which of the following is the reason behind the slow growth in U.S. incomes during the 1970s and 1980s?
There was a slowdown in productivity growth. Productivity is the primary determinant of living standards. The slow growth in U.S. incomes during the 1970s and 1980s was mainly due to flagging productivity growth in the United States during that period. See Section: Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.
Suppose one country is better at producing agricultural products (because they have land that is more fertile), while another country is better at producing manufactured goods (because they have a better educational system and more engineers). If each country produced their specialty and traded, would there be more or less total output than if each country produced all of their agricultural and manufacturing needs? Why?
There would be more total output if the two countries specialize and trade because each is doing what it does most efficiently.
People in the U.S. state of Iowa eat both corn and potatoes. It is technically possible for farmers to grow both corn and potatoes in Iowa, yet almost no farmers grow potatoes. Instead, every year, Iowa exports corn and imports potatoes from the U.S. state of Idaho, where farmers specialize in potatoes. Which of the following principles of economic interaction best describes this scenario?
Trade can make everyone better off. There are gains from trade when producers specialize. Idaho specializes in potatoes, and Iowa specializes in corn. Specialization allows the two states to produce more potatoes and corn as a whole than if both states attempted to produce everything. Trade ensures that people in both states have enough corn and potatoes to eat.
Why is a country better off not isolating itself from all other countries?
Trade can make everyone better off. Trade allows each person to specialize in the activities they do best and to enjoy a greater variety of goods at a lower cost.
T/F An unintended consequence of public support for higher education is that low tuition provides an incentive for many people to attend state universities even if they have no desire to learn anything.
True
T/F Rational people act only when the marginal benefit of the action exceeds the marginal cost.
True
T/F Sue is better at cleaning, and Bob is better at cooking. It will take fewer hours to eat and clean if Bob specializes in cooking and Sue specializes in cleaning than if they share the household duties evenly.
True
T/F To a student, the opportunity cost of going to a basketball game would include the price of the ticket and the value of the time that could have been spent studying.
True
T/F When a jet flies overhead, the noise it generates is an externality.
True
Why do we have markets, and according to economists, what roles should government play in them?
We have markets to organize economic activity to promote overall economic well-being. The governments role is to enforce property rights so individuals can own and control scarce resources.
If we save more and use it to build more physical capital, productivity will rise and we will have rising standards of living in the future. What is the opportunity cost of future growth?
We must give up consumption today.
A 1996 bill reforming the federal government's antipoverty programs limited many welfare recipients to only two years of benefits. This change gives people the incentives to find a job *more* quickly than if welfare benefits lasted forever. Under which arrangement would the economy be more efficient?
Welfare benefits last for only two years If welfare benefits lasted forever, there would be little incentive to find work once one became unemployed. However, if benefits last only two years, there is a greater incentive for people to find work before the two years are up and they stop receiving financial support from the government. This change in the government's antipoverty program reduces equality in the distribution of income, since those who cannot find a job will get no income at all; however, the economy is more efficient, given the increased incentive for the unemployed to find work and contribute to the nation's output. See Section: Principle 4: People Respond to Incentives.
Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, this leads to *faster* growth in productivity because workers will have *more* equipment with which to work.
When Americans save more, which leads to more spending on factories, there will be an increase in productivity because workers will have more equipment to work with. See Section: Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.
All societies face a trade-off between equality and efficiency. If the United States government raises the income taxes on the wealthiest Americans, while increasing welfare payments to the poorest Americans, the result will likely be a *decrease* in efficiency and an *increase* in equality in the United States.
When governments design policies aimed at increasing equality, society must also be prepared to accept a decrease in efficiency. For example, if the U.S. government increases income taxes on the wealthiest Americans, and redistributes the resulting tax revenue to the poorest Americans, equality would increase as the difference between the (after-tax) income of the wealthy and the poor would decrease. In other words, the slices of the economic pie would become more evenly cut. At the same time, however, government redistribution of income from the wealthy to the poor reduces people's incentives to work hard to produce goods and services. The result is fewer goods and services produced for society overall. In other words, the economic pie gets smaller and the economy becomes less efficient.
Suppose that, in an attempt to combat severe inflation, the government decides to decrease the amount of money in circulation in the economy. This monetary policy *decreases* the economy's demand for goods and services, leading to *lower* product prices. In the short run, the change in prices induces firms to produce *fewer* goods and services. This, in turn, leads to a *higher* level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Lower inflation leads to *higher* unemployment.
When the government uses monetary policy to decrease the quantity of money, then the demand for goods and services decreases. This change in the demand will lead to lower prices, causing firms to produce fewer goods and services—which requires fewer workers. Therefore, lower prices lead to higher unemployment levels in the short run. The economy faces a trade-off between inflation—an increase in the overall price levels—and unemployment in the short run. In particular, higher inflation rates usually correspond to lower unemployment levels, while lower inflation rates correspond to higher levels of unemployment.
In the presence of market failures, public policy can improve economic efficiency. A single public utilities company is responsible for supplying electricity for an entire state. As a result, the utilities company can set the price of electricity. = *Market Power* A manufacturing plant dumps chemical waste into a nearby river, poisoning the water supply for a small town downstream. = *Externality*
While markets, guided by the invisible hand, usually produce efficient outcomes, there are instances in which markets do not allocate resources efficiently and thus fail to maximize the size of the economic pie. Economists use the term market failure to refer to situations in which the market, left to itself, fails to allocate resources efficiently. Two common sources of market failures are externalities and 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. In this case, because the public utilities company is the only source of electricity, the public utilities company faces no competition from other potential suppliers, enabling the public utilities company the ability, or market power, to restrict the output of electricity and charge higher prices. In short, the market power of the public utilities company prevents the invisible hand from guiding the market to the efficient outcome. An externality is an impact, positive or negative, of one individual's activities on the well-being of a bystander. In this case, since the town residents, as bystanders, are harmed by the activities of the manufacturing plant, the chemical waste causes a negative externality. The presence of externalities can cause markets to produce too much or too little of a good or service, leading to an inefficient allocation of resources. In cases of externalities and market power, the government can intervene to promote efficiency in the market.
Your car needs to be repaired. You have already paid $500 to have the transmission fixed, but it still doesn't work properly. You can sell your car "as is" for $2,000. If your car were fixed, you could sell it for $2,500. Your car can be fixed with a guarantee for another $300. Should you repair your car? Why?
Yes, because the marginal benefit of fixing the car is , and the marginal cost is $300. The original repair payment is not relevant.
The willingness of citizens to pay for vaccinations does not include the benefit society receives from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as
an externality.
