Practice Set I (Ch 01)
Suppose you are currently employed as an assistant coach on a college lacrosse team and earn an hourly wage of $22. One night you decide to miss an optional one-hour practice and go to the bowling alley instead, which costs $15. The total dollar cost of missing work and going to the bowling alley, including the opportunity cost of your time, is - .
$37 Explanation: 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 $22 per hour, so this is the opportunity cost of your time. You also choose to pay $15 to get into the bowling alley. So your opportunity cost in dollars is $22+$15=$37
Suppose that Amaia is a diligent first-year college student. One Wednesday, she decides to start the day by working through 250 sample multiple choice problems to study for her computer science class. She starts work at 7:00 AM and uses a table to keep track of her progress throughout the day. She notices that as she the hours pass, it takes her more time to solve the problems. Time Total 7:00 AM 8:00 AM1 9:00 AM 10:00 AM 11:00 AM Problems Solved 0 100 175 225 250 The marginal, or additional, gain from Amaia's second hour spent working, from 8:00 AM to 9:00 AM, is - problems. The marginal gain from Amaia's fourth hour spent working, from 10:00 AM to 11:00 AM, is - problems. The following week, Amaia's computer science faculty advisor gives her some advice. In all their years of teaching they claim to observe that working on 87.5 multiple choice questions boosts a student's test score by about the same amount as spending an hour reviewing lecture notes. For simplicity, assume students are able to review lecture notes at a constant pace during each hour spent studying. Given this information, in order to use her 4 hours of time spent studying to get the highest possible test score, h
75, 25. Explanations: By 8:00 AM, Amaia has answered 100 problems. By 9:00 AM, Amaia has answered 175 problems. So the marginal, or additional, gain from her work between 8:00 AM and 9:00 AM is 175−100=75 problems. By 10:00 AM, Amaia has answered 225 problems. By 11:00 AM, Amaia has answered 250 problems. So the marginal gain from the fourth hour, 10:00 AM to 11:00 AM, is 250−225=25 1 hour working on problems, 3 hours reading (100 within the first hour, 75 in second hour which is under 87.5) Explanation: Amaia should make her decision at the margin. Each hour, she should select the option that will improve her exam grade by the largest amount. If she can do more than 87.5 problems in an hour, working on problems will help raise her grade more for that hour than reviewing lecture notes would. The marginal gain from the first hour is 100 problems. She will stop there, because she will get only 75 problems done if she spends the second hour working on problems. Therefore, she should stop working on problems after 1 hour and spend her remaining time reviewing lecture notes.
Deborah registered a startup graphic design company. About a month after opening, Deborah strikes a deal to revamp a law firm's brand image in exchange for a tax lawyer's help filing for the upcoming year. Which of the following principles of economic interaction best describes this scenario? All costs are opportunity costs. Trade can make everyone better off. Markets allocate goods effectively. When markets do not achieve efficiency, government intervention can improve overall welfare.
Trade can make everyone better off. Explanation: When tasks are divided according to who can provide them at the lowest cost, specialization occurs—which can lead to greater output. Economists refer to this concept as gains from trade.
Suppose that an increasing number of traffic collisions observed on state roads lead the governor to implement the rule that all registered vehicles must be equipped with front and side airbags. These airbags reduce the probability of serious injury in a motor vehicle collision by 62%. The new airbags - the probability that a driver will be injured in a traffic collision, but also give motorists an incentive to drive more -, which could potentially - the number of car accidents that occur on state roads.
decrease, recklessly, increase. Explanation: Although the new airbags may have the direct effect of reducing the probability of injury via car accidents, this reduction in the probability of injury 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 no airbags, 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 airbags, however, change these incentives by altering the cost-benefit analysis that a driver would undertake. If the airbags all but guarantee safety even in the event of a crash, the marginal benefits of driving safely are reduced, giving drivers an incentive to drive less cautiously (or more recklessly). 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.
Suppose that, in an attempt to combat severe unemployment, the government decides to increase the amount of money in circulation in the economy. This monetary policy action - demand for goods and services in the economy, leading to - prices for products. In the short run, the change in prices induces firms to produce - goods and services. This, in turn, leads to a -unemployment level. Based on this analysis, the economy faces the following trade-off between inflation and unemployment: Higher inflation leads to - unemployment.
increases, higher, many, lower. lower Explanation: When the government uses monetary policy to increase the quantity of money, then the demand for goods and services increases. This change in the demand will lead to higher prices, causing firms to produce more goods and services—which requires more workers. Therefore, higher prices lead to lower unemployment levels in the short run. In the long run, however, an increase in the quantity of money will lead only to an increase in the price levels but will have no effect on the unemployment level. 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.
Kyoko is training for a biathlon, a winter racing sport that combines cross-country skiing and rifle shooting. Consider the following scenario: Because her ski training sessions are helping her quickly improve at skiing, Kyoko plans to reduce the time she spends training at the shooting range by an hour, and increase the time she spends skiing by an hour. However, her training partner says that she should pause all shooting practice and spend the entire 15 hours this week in the pool. Which basic principle of individual choice does Kyoko's plan illustrate that her training partner's advice does not? Many decisions are made on the margin. People usually exploit opportunities to make themselves better off. Resources are scarce. All costs are opportunity costs.
Many decisions are made on the margin. Explanation: Kyoko's decision about skiing time versus shooting time is a how-much decision. Both skiing time and shooting time can help improve her race time. Because ski time seems to be having a greater effect at the moment, it makes sense for her to spend a bit more time skiing and a bit less time on shooting. However, this does not mean that it makes sense for her to spend all her time on skis and no time at the range. If she cut out all training on shooting, the value of the first hour of shooting might be higher than the value of the last hour of ski training. Kyoko does not treat shooting versus skiing as an all-or-nothing decision. She makes small changes at the margin in the number of hours spent training for each activity.
Which of the following government policies is least likely to increase the standard of living in the United States? Investment in technology Investment in education and skills training for workers Raising the minimum wage paid to workers Investment in tools and capital for workers
Raising the minimum wage paid to workers Explanation: 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 enable 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.
Suppose that Ciana is deciding whether or not to buy a pair of sneakers that she has been researching online, and also the best place to make her purchase. Three different stores in the area sell the sneakers she likes, but some stores are more convenient for Ciana to reach than others. One option is her local shoe store located only 15 minutes away from where she works, where they charge a marked-up price of $113 for the sneakers: Store Travel Time Each Way (Minutes); Price of a Sneakers (Dollars per sneakers) Local Shoe Store 15; 113 Different Neighborhood in Town 30; 100 Rural Outlet 60; 73 Ciana earns an hourly wage of $16 at her job. In order to purchase her sneakers she will have to take time off work, so each hour away from her job costs her $16 in lost income. Assume that Ciana's travel time is the same each way (to and from the store) and that it will take her 30 minutes once she reaches a store to complete her shopping. Assume throughout the question that Ciana incurs no additional costs other than the sneakers, such as gas.
Store: Local Shoe Store Opportunity Cost of Time 16.00 Price of a Sneakers 113 Total Cost 129.00 Store: Different Neighborhood in Town Opportunity Cost of Time 24.00 Price of a Sneakers 100 Total Cost 124.00 Store: Rural Outlet Opportunity Cost of Time 40.00 Price of a Sneakers 73 Total Cost 113.00 Explanation: The opportunity cost of driving to each location is what Ciana gives up to make the trip. Getting to the local shoe store takes her 15 minutes, and returning to work takes her 15 minutes (a total of 30 minutes). Shopping takes her another 30 minutes. Since she loses $16 per hour by not working, the opportunity cost of her time is (0.5×$16)+(0.5×$16)=$160.5×$16+0.5×$16=$16. Because the price she pays at this store is $113, she faces a total cost of $16+$113=$129$16+$113=$129. If Ciana buys her sneakers at the store in the different neighborhood in town, the opportunity cost of her time is 90 minutes: 30 minutes each to drive there, shop, and return to work. The price she pays is $100, so she faces a total cost of (1.5×$16)= $24. $24+$100=$124$24+$100=$124. (1.5×$16) Finally, if Ciana buys her sneakers at the store in the rural outlet, the opportunity cost of her time is 2.5 hours: 60 minutes to drive there, 30 minutes to shop, and 60 minutes to return to work. The price she pays is $73, so she faces a total cost of (2.5×$16)= $40 $40+$73=$113$40+$73=$113. Assume that Ciana considers both her opportunity costs and the price of sneakers when making her shopping decision. Ciana will minimize her cost of buying the sneakers if she shops at the rural outlet. Explanation: Ciana will base her decision on the total cost of the sneakers, including the opportunity cost of the time required to obtain the sneakers and the price of the sneakers. In this scenario, she incurs the lowest total cost if she buys her sneakers from the rural outlet.
All societies face a trade-off between efficiency and equality. If the government raises income taxes on Americans in the top one percent of earners, while increasing welfare payments to citizens with incomes below the federal poverty threshold, the most likely result is - in efficiency and - in equality in the United States. Match each definition to its appropriate concept. Definition When economic benefits are distributed uniformly across society When a society gets the most it can from its scarce resources
a decrease, an increase. Explanation: 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. When economic benefits are distributed uniformly across society (Equality) When a society gets the most it can from its scarce resources (Efficiency) Explanation: 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.
Musicians are much - likely to supply recordings to the market if property rights are enforced. Public policy can improve economic efficiency in the presence of market failures. Complete the following table by classifying the source of market failure in each case. Market Failure A student using an e-cigarette in a library emits clouds of vapor that disrupt others working close to them. There is only one bike rental location servicing a large section of recreational trails, giving the company the ability to influence the price of bike rentals.
more Explanation: 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, musicians will be less likely to produce recordings, as any recordings produced can potentially be stolen without compensation paid to the musicians. On the other hand, if property rights are enforced, musicians can be more confident that they will be compensated for their recordings and thus will be more likely to produce recordings 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. A student using an e-cigarette in a library emits clouds of vapor that disrupt others working close to them. (Market power) There is only one bike rental location servicing a large section of recreational trails, giving the company the ability to influence the price of bike rentals. (Externality) Explanation: 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 rental company is the only source of bike rentals, the rental company faces no competition from other potential suppliers, enabling the rental company the ability, or market power, to restrict the output of bike rentals and charge higher prices. In short, the market power of the rental company prevents the invisible hand from guiding the market to the efficient outcome. An externality is an impact, positive or negative,
