Econ 120

Which of the following sayings best reflects the concept of opportunity cost?

"Time is Money"

Jacob and Mason go to a diner that sells burritos for $5 and tacos for $3. They agree to split the lunch bill evenly. Mason chooses a taco. The marginal cost to Jacob of ordering a burrito instead of a taco is

$1

Suppose the price of an airline ticket from Dallas to Boston costs $600. A bus ticket costs $150. Traveling by plane takes 6 hours compared with 51 hours by bus. Other things constant, an individual would gain by choosing air travel if, and only if, his time were valued at more than

$10 per hour

Complete the following statement on how international trade has influenced people's production levels and living standards. Trade channels goods to those who value them ____. Trade ______ specialization, the division of labor, and mass production and over the years trade has _____ living standards.

1. Most 2. encourages 3. improved

Suppose nominal GDP increased by 7% during a year, while the GDP deflator increased by 5%.

2%

Over the past century, the growth rate of real GDP in the United States has averaged approximately

3 percent

In 2012, the combined expenditures of federal, state, and local governments in the United States were approximately

38 percent of GDP

Suppose that the consumer price index (CPI) at year-end 2015 was 150 and by year-end 2016 it rose to 160. The inflation rate in 2016 will be _______.

7% Explanation: ((160-150)/150) x 100 = 7%

Suppose that the consumer price index at year-end 2008 was 140 and by year-end 2009 had risen to 150. What was the inflation rate during 2009?

7.1 percent

Which one of the following is a positive economic statement?

An increase in the minimum wage will reduce employment.

Which of the following individuals would be considered unemployed by the official government definition?

Darius, an auto worker vacationing in Florida during a layoff at a General Motors plant

Which of the following is true?

Decision makers are generally able to anticipate slow steady rates of inflation with a fairly high degree of accuracy.

Chick-fil-A's "Eat Mor Chikin" advertising campaign features three cows holding signs that say things like "Save the cows, eat more chicken." If consumers began eating more chicken and less beef, would the cattle populations increase or decrease?

Decrease. Because the cattle are privately owned, when the market demand for beef declines, suppliers will reduce their herds of cattle.

Chick-fil-A's "Eat Mor Chikin" advertising campaign features three cows holding signs that say things like "Save the cows, eat more chicken." Evaluate the following statement. True or False: If consumers began eating more chicken and less beef, the cattle population would increase.

False

Private owners tend to be careless with what they own.

False

True or False: Economizing behavior involves spending as little money as possible, even if it means that wants and needs are not fulfilled.

False

True or False: Government control of economic functions leads to social cooperation and greater economic efficiency.

False

True or False: Marginal analysis involves comparing the average benefit derived from consuming several units of a product or service to the average cost of consuming those units of the product or service.

False

True or False: People in business get ahead by exploiting the needs of their consumers. The gains of business are at the expense of suffering imposed on their customers.

False

True or False: Public policy is necessary to protect the average citizen from the power of vested interest groups. In the absence of government intervention, regulated industries such as airlines, railroads, and trucking will charge excessive prices; products will be unsafe; and the rich will oppress the poor. Government curbs the power of special interest groups.

False

True or False: Special interest issues provide substantial widespread benefits to citizens while imposing a large individual cost only on the wealthiest citizens.

False

When an economic function is turned over to the government, social cooperation replaces the pursuit of personal self-interest.

False

Suppose an economy is operating at its maximum sustainable output rate. Neither recession nor economic boom are present. Which of the following would be true?

The economy would be considered at full employment.

Economic analysis assumes that

changes in the personal benefits and costs associated with a choice will exert a predictable influence on human behavior.

When the expenditure approach is used to measure GDP, the major components of GDP are

consumption, investment, government consumption and gross investment, and net exports

The type of unemployment caused by changes in the business cycle is

cyclical unemployment

Economists use the term "business cycle" to refer to

fluctuations in the level of real output and employment

The sometimes lengthy job search process that is a result of attempting to match worker skills with those needed for specific job openings is responsible for _________ unemployment.

frictional

If a firm or a nation desires to maximize its output, each productive assignment should be carried out by those persons who

have a comparative advantage in the productive activity

Frictional unemployment is the result of

imperfect information and temporary periods of unemployment while workers are changing jobs.

The labor force participation rate of women in the United States has been

increasing for several decades

If an economy is operating at a point inside the production possibilities curve,

its resources are not being used efficiently.

The basic difference between macroeconomics and microeconomics is that

macroeconomics is concerned with the forest (aggregate markets), while microeconomics is concerned with the individual trees (subcomponents).

Most voters will likely be concerned with

only a few special issues (those that exert the most impact on the voters' personal welfare)

The expression, "There's no such thing as a free lunch," implies that

opportunity costs are incurred when resources are used to produce goods and services

When goods are produced privately, but the cost of their purchase is paid for by the taxpayer or some other third party,

private producers of such goods will have little incentive to control costs and provide them at low prices.

If you wanted to measure whether the output of an economy was increasing or decreasing across time periods, you would use the real GDP data rather than the nominal GDP data because

real GDP adjusts for changes in the general level of prices, but nominal GDP does not

The primary value of real GDP is its ability to measure year to year changes in

real output

Suppose that Rina is the incumbent candidate who will be going up for reelection in the state of Puromix. Complete the following statement. Several project options are available and Rina votes against all projects that have clearly outlined current costs but yield future benefits. This can best be described as _____________.

the shortsightedness on the part of Rina

Which of the following is GDP designed to measure?

the total market value of goods and services produced domestically during the year

Which of the following would be included in this year's GDP?

the value of a new domestic automobile, at its sale price

The rational-ignorance effect is a result of

the expectation of individual voters that their vote will not be decisive.

What is the source of frictional unemployment? Check all that apply.

-Available workers are not fully aware of the jobs being offered by employers. -Employers are not fully aware of all available workers and their job qualifications.

In recent years, the child tax credit has been increased in the United States. How would the birthrate be affected by policies that reduce the taxes imposed on those with children? Check all that apply.

-Ceteris paribus, the birthrate should rise. -People will have an incentive to have more children.

What impact will high and variable rates of inflation have on the economy? Check all that apply.

-Less productive use of resources -Reduced investment -Distortion of the information delivered by prices

Why do special-interest groups play such an important role in elections? Check all that apply.

-Politicians use the funding from special-interests to campaign to voters who are largely unaware of -The producers who benefit from these programs use their wealth and political clout to help politicians who support their interests. -Unlike the special-interest voters, most voters are rationally ignorant and so voters end up voting for special-interest candidates.

Does frictional unemployment indicate that an economy is working poorly?

No, because the job search process typically leads to improved economic efficiency and a higher real income for employees.

The following table presents the receipts and year of release of the five movies with the largest nominal box office revenues, along with the CPI data of each year. Assume that the receipts for each of the movies were derived during their year of release. Complete the table by converting the receipts for each to real dollars for the year 2015 (2015 CPI = 237.0). Which movie had the smallest real box office receipts?

The nominal value of Box Office Receipts of "Avatar" in 2009 was $760.5 million. To convert this figure to the purchasing power of the dollar in 2015, you need to multiply the $760.5 million by the ratio of the CPI in 2015 divided by the CPI in 2009: $760.5 million×237214.5=$760.5 million×1.105=$840.27 million. The remaining values for real box office receipts can be obtained similarly. See section: APPLICATIONS IN ECONOMICS: Converting Prior Data to Current Dollars: The Case of Gasoline.

Suppose there was a country with an adult (age 16 and over) population of 1,000, of which 100 were unemployed and 700 were employed. Which of the following is true?

The unemployment rate is 12.5 percent.

Marginal analysis involves the additional or extra benefit derived from consuming an additional unit of product or service to the additional cost of consuming that the unit of the product or service.

True

People are classified as unemployed if they are not currently working at a job and if they made an effort to find a job during the past four weeks. Evaluate the following statement. The unemployed workers have not yet found jobs that meet their skill sets and desired wages.

True

True or False: High and variable rates of inflation will also increase the risk of accompanying long-term contracts and related business decisions.

True

Use the following data to calculate (a) the labor force participation rate, (b) unemployment rate, and (c) the employment/population ratio: Population (aged 16 and over) 10,000 Labor force 6,000 Not currently working 4,500 Employed full-time 4,000 Employed part-time 1,500 Unemployed 500

a. 60 percent; b. 8.3 percent; c. 55 percent

The following table shows the nominal salary paid to the president of the United States and data for the consumer price index (CPI) for various years. Year Presidential Salary CPI (dollars) (2000 = 100) 1920 75,000 11.6 1940 75,000 8.1 1960 100,000 17.2 1980 200,000 47.9 2000 400,000 100.0 2015 400,000 137.6 a) The president's real salary in the year 2000, measured in the purchasing power of the dollar in 2000 is__________. b) The real presidential salary was the lowest in ___________. c) The real presidential salary was the highest in ___________. d) The president's nominal salary was constant between 2000 and 2015. This means that the real salary ____________. e) The president's nominal salary was constant between 1920 and 1940. This means that the real salary ____________.

a) 400,000.00 b) 2015 c) 1940 d) decreased e) increased

The GDP deflator is designed to

adjust nominal GDP for changes in the price level

Public choice analysis can be defined as _______.

an application of economics to the operation of the political process.

"Now that Terrance paints the broad surfaces and I do the trim work, we can paint a house in three-fourths the time that it took for each of us to do both." This statement most clearly reflects

the law of comparative advantage

With voluntary exchange,

both the buyer and seller will be made better off.

Public choice theory suggests politicians will be most likely to favor redistribution of income from

unorganized taxpayers to well-organized interest groups.

Three basic decisions must be made by all economies. What are they?

what will be produced, how goods will be produced, and for whom goods will be produced

Which one of the following states a central element of the economic way of thinking?

Incentives matter--human choice is influenced in predictable ways by changes in personal costs and benefits.

Which of the following accurately defines the law of comparative advantage?

Individuals, firms, regions, or nations can gain by specializing in the production of goods that they produce at a low opportunity cost and exchanging them for goods they produce at a high opportunity cost

When full employment is present, will the rate of unemployment be zero?

No, the rate of unemployment will be "normal" considering both frictional and structural factors.

Current tax rates are insufficient to finance the benefits promised by both the Social Security and Medicare programs. Are these unfunded promises surprising according to economic theory?

No, the unfunded promises reflect the shortsighted nature of the political process.

Which of the following is most clearly consistent with the basic postulate of economics regarding the reaction of people to a change in incentives.

People will buy less gas if the price of gas increases by $.20 per gallon.

Suppose that the nominal value of GDP increased by approximately 2 percent during a given year, but real GDP decreased by 3 percent. Which of the following best explains these events?

Prices increased by approximately 5 percent.

Which of the following will most likely occur under a system of clearly defined and enforced private property rights?

Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.

Which of the following is true about a market economy?

Resources are rationed through the price mechanism.

What do economists mean when they state that a good is scarce?

The amount of the good that people would like exceeds the supply freely available from nature.

How would an increase in the rental rates of apartments affect the decision to build additional rental housing units?

The increase in rental rates would make it more likely that additional rental houses will be built.

What is full employment?

The level of employment that results from the efficient use of the labor force. Explanation: Full employment is the level of employment that results from the efficient use of the labor force taking into account the normal (natural) rate of unemployment due to information costs, dynamic changes, and the structural conditions of the economy. Economists define full employment as the level of employment that results when the rate of unemployment is "normal," considering both frictional and structural factors. See section: Full employment and the natural rate of unemployment.

Surveys indicate that huge numbers of voters are unable even to identify their own congressional representatives. Which of the following is a reason for this behavior?

The rational ignorance effect

A real estate salesperson sells a house in 2011 that was built in 1994. How does this transaction get counted in the GDP statistics?

The real estate salesperson's commission but not the price of the house is included in 2011's GDP.

Suppose that the government raises the permissible minimum wage to $15 per hour. Which of the following describes a secondary effect that will likely result from this action?

The rise in the minimum wage may lead to a rise in the unemployment rate.

True or False: Although nothing new is created, this transaction can improve the welfare of people.

True

True or False: If a project's total benefits exceed total costs (is efficient), it would be possible to allocate the cost of the project in such a way as to provide net benefits to every voter.

True

Suppose that Caroline, who is a policymaker in the state of Motomix, believes that air and water pollution should be reduced to zero. Which of the following is true?

While it is admirable for a policymaker to want to reduce air and water pollution to zero, there will likely be unwanted secondary effects from this policy.

Assume you are discussing the economics of the political process with your classmate. Evaluate the following statement made by your classmate. Beth believes that even when the "right people" are elected to political positions, government efficiency may not much improve, due to pork-barrel legislation. Is she correct?

Yes

The primary benefit that results when a nation employs its resources in accordance with the principle of comparative advantage is

a larger output resulting from a more efficient use of resources.

Last year your job at the university cafeteria paid you $9 an hour and the price of a ten-minute long distance call to your girlfriend in California was $4. This year your cafeteria job pays $9.90 per hour and the ten-minute phone call now costs $4.10. You are clearly

better off because the phone call now costs less work.

In order to pay for services such as health care, education, and highways, governments

collect taxes

A policymaker who assumes that the effect that a policy has on one person will be the same effect that the policy will have on all people in the economy is

committing the fallacy of composition

Suppose a group of British investors finances the construction of a plant to manufacture skateboards in Houston, Texas. The construction of the plant will _______ U.S. GDP.

increase

Special-interest programs are highly attractive to vote-seeking politicians because

members of special interest groups favoring these programs feel strongly about them while most other voters are rationally uninformed about them.

Economic choice and competitive behavior are the result of

scarcity

Those who study public choice analysis _______________

study how economics can be applied to the operation of the political process

If national income accountants fail to make an adequate adjustment for increases in the quality of goods and services over time,

the GDP deflator will overestimate inflation.

Which of the following explains why managers of government agencies have little incentive to achieve operational efficiency?

-Public-sector managers need not fear bankruptcy when operational efficiency is not achieved. -Public-sector managers seldom receive personal benefits if they find ways to improve the efficiency of their operations. -Public-sector agencies typically do not face competition.

Why do governments and politicians sometimes support inefficient industries through programs like subsides, pride supports and quotas on foreign imports? Check all that apply.

-The producers who benefit from these programs use their wealth and political clout to help politicians who support their interests -The rational ignorance effect -These programs are usually enacted to benefit special-interest voters who provide significant financial funding for the candidates.

Amy is giving a speech and says the following: "The economic way of thinking stresses that good intentions lead to sound policy." How would you evaluate this statement? Check all that apply.

-The statement is false because sound economic reasoning is required to anticipate unintended consequences of policies that are motivated by good intentions. -The statement is false because a policy motivated by good intentions may have unintended negative consequences.

Which of the following are positive (rather than normative) statements? Check all that apply.

-There are two policies designed to reduce alcohol consumption. Policy A leads to a larger reduction in the consumption of alcohol than policy B. -An increase in the price of beer will lead to people drinking less beer.

Why do governments and politicians sometimes support inefficient industries through programs like subsidies, price supports and quotas on foreign imports? Check all that apply.

-These programs are usually enacted to benefit special-interest voters who provide significant -The producers who benefit from these programs use their wealth and political clout to help politicians who support their interests.

In a small state named Economix, Corporation X has just bribed local officials in order to "win" a large contract. Which of the following apply to this scenario? Check all that apply.

-This is an example of rent-seeking. -Economic efficiency will decrease as the corporation spends on bribery instead of production.

Why don't voters vote for candidates who will represent all people when they are elected, instead of voting for candidates who represent special-interest groups? Check all that apply.

-Voters do not always know in advance what a candidate will do once the candidate is elected. -Unlike the special-interest voters, most voters are rationally ignorant.

Which of the following is a form of rational ignorance on the part of the voters? Check all that apply.

-Voters realize that the probability that their vote will decide the election is very low. -In most cases, the views of the candidates on issues are generally the same.

Which of the following represents reasons why voters are not usually well informed on the issues and positions of candidates? Check all that apply.

-Voters tend to simply rely on information supplied to them by candidates via political advertising. -The rational ignorance effect.

The following table provides data on the cost of living for a few selected major cities. City Cost of living index (100 = U.S. City average) St. Louis, MO 80 New York, NY 175 San Francisco, CA 245 Suppose Rajiv has three job offers. He can earn $50,000 in St. Louis, MO; $70,000 in New York, NY; or $100,000 in San Francisco, CA. If Rajiv wants to maximize the purchasing power of his income, he should accept the offer in ________ . Which of the following best explains this choice?

1. St. Louis 2. While Rajiv's nominal earnings are twice as high in San Francisco, the cost of living in that area is more than double that of St. Louis.

___________ measures the impact of price changes on the cost of a typical bundle of goods purchased by households, whereas __________ measures the change in the average price of all goods and services included in GDP.

1. The CPI 2. the GDP deflator

Suppose the plant generates $100,000 in corporate profits this year. These profits will ______ U.S. GDP for which of the following reasons?

1. increase 2. Profits earned in the domestic economy are counted as part of GDP under the resource cost-income approach.

People ______ better off if there were no middlemen because middlemen _______ truncation costs.

1. would not be 2. reduce

While waiting in line to buy two tacos at 75 cents each, and a medium drink for 80 cents, Emma notices that the restaurant has a value meal containing three tacos and a medium drink all for $2.50. For Emma, the marginal cost of purchasing the third taco would be

20 cents

During the last four decades, entrepreneurs like Steve Jobs, Sam Walton, and Elon Musk have earned billions of dollars. Evaluate the following statement. The average American is worse off as the result of the economic activities of these individuals because they donate too much money, thus discouraging the less-privileged part of the population.

False

Efficient projects are always favored by a majority of voters.

False

Governments should own things like forests, which take decades to develop, because governments have shorter term outlooks.

False

In the town of Dogland, the local government is building a new bridge. However, some voters believe that the money should have been invested in local schools instead. Which of the following statements applies to this scenario?

If the legislative majority decides on a particular policy, the minority must accept the policy and help pay for it, even if they strongly object.

Classify each of the following as employed, unemployed, or not in the labor force: a) Brown is not working; she applied for a job at Walmart last week and is awaiting the result of her application. b) Martinez is vacationing in Florida during a layoff at a General Motors plant due to a model changeover, but he expects to be recalled in a couple of weeks. c) Green was laid off as a carpenter when a construction project was completed. He is looking for work but has been unable to find anything except a $10-per-hour job, which he turned down. d) West works 70 hours per week as a homemaker for her family of nine. e) Carson, a 17-year-old, works six hours per week as a delivery person for the local newspaper. f) Chang works three hours in the mornings at a clinic and for the last two weeks has spent the afternoons looking for a full-time job.

Individuals (e) and (f) would be classified as employed; (a), (b), and (c) would be classified as unemployed; (d) is not in the labor force.

If you have private-ownership rights to something, what does this mean?

It means that you can transfer, sell, or mortgage the good.

Which of the following provides the best summary of the basic idea of public choice analysis?

Public choice analysis applies the principles of economics to political science topics.

The average person is more likely to make a well-informed choice when purchasing a personal computer than when voting for a congressional candidate. Which of the following is a reason for this behavior?

The rational ignorance effect.

Which of the following accurately defines transaction costs?

The time, effort, and other resources needed to seek out, negotiate, and complete an exchange.

According to the law of comparative advantage, what should be the distinguishing characteristic of the goods a nation produces?

They have the lowest opportunity costs.

Suppose that Kate makes the following statement: "Our agricultural policy should not involve the subsidization of farmers. That money should be spent on other projects." Is this a positive statement or a normative statement?

This is a normative statement.

What is the major function of the middleman?

To reduce transaction costs

Evaluate the following statement about how private ownership influences the incentive of individuals to conserve resources for the future. True or False: People have a much stronger incentive to conserve privately owned property than they do commonly owned property.

True

True or False: When policies are based on user charges, then government policy has a sound economic basis. Policies that benefits special interest groups at the expense of rationally uninformed voters, however, often are adopted even though they are inefficient.

True

When the costs that voters pay and the benefits that they derive are closely linked, then government policy has a sound economic basis. Policies that benefit special-interest groups, however, often lead to economically inefficiently outcomes.

True

True or False: Real GDP is an imperfect measure of current output and income because the introduction of new products complicates the use of GDP as a measuring rod.

True Explanation: Real GDP, which adjusts for changes in the price level, is an imperfect measure of current output and income because it (1) excludes production that does not involve market transactions (e.g., household production), (2) omits underground economic activities (e.g., payments for illegal products), (3) fails to take leisure and human costs into account, (4) adjusts imperfectly for the introduction of new products and product improvements, and (5) doesn't account for harmful side effects or economic "bads." See section: Problems with GDP as a measuring rod.

Does private ownership give you the right to do anything you want with the things that you want?

Yes, as long you do not use it in a manner that invades or infringes on the rights of others

The opportunity cost of an option

is the highest-valued alternative that must be given up as the result of choosing the option.

When voters pay taxes in proportion to the benefits they receive from government projects,

projects that are efficient will tend to be favored by an overwhelming majority of voters.