Chapter 1 Economics foundations and models
Normative analysis
Analysis concerned with what ought to be
Today, which of the following countries has a centrally planned economy?
North Korea
Productive efficiency
a situation in which a good or service is produced at the lowest possible cost
Market
A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
Which of the following statements about a hypothesis is correct?
A hypothesis is a statement that could in principle turn out to be incorrect
Economic model
A simplified version of reality used to analyze real-world economic situations
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
Voluntary exchange
A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction
Which of the following statements is true?
All individuals face a scarcity of time and need to make choices how to allocate it
Positive analysis
Analysis concerned with what is
Which of the following statements about economics as a social science is correct?
Economics studies the actions of individuals
In a market system, what determines how goods and services will be produced?
Firms determine how goods and services will be produced.
Which of the following is a correct statement about a mixed economy?
In a mixed economy, most economic decisions are made in markets but the government plays a significant role in the allocation of resources.
Which of the following areas of economics studies issues such as whether government intervention is capable of reducing the severity of recessions?
Macroeconomics
Which of the following statements about microeconomics and macroeconomics is correct?
Macroeconomics is the study of the economy as a whole
Which of the following is not a step that economists use in developing a useful economic model?
Make a value judgement about the merits of the hypothesis.
Efficiency means that goods are distributed in a way that ________ while equity means that goods are distributed in a way that_____________-
Maximizes benefits to society, is fair
Economic variable
Something measurable that can have different values such as the incomes of doctors
An incentive that doctors would have to NOT accept the patient-provided information is that
They may doubt the accuracy of information provided directly by patients
Warren Buffet is the Chief Executive Officer of the investment firm Berkshire Hathaway and one of the wealthiest people in the world. In an editorial in the Wall Street Journal, Buffet argued that economic policies in the United States should be designed so that people who are willing to work receive enough income to live a "decent lifestyle." He argued that an expansion of the Earned Income Tax Credit (EITC) would be superior to an increase in the minimum wage as a means to reach this goal. The EITC is a program under which the federal government makes payments to low-income workers.
This is a normative economic question, so the answer is a matter of the norms or values of the person answering
Which of the following best describes scarcity?
Unlimited wants exceed the limited resources available.
The three economic questions that every society must answer are
What goods will be produced, how will they be produced, and who will receive the goods?
In a market system, how does society decide who will receive the goods and services produced?
Who receives the goods and services produced depends largely on how income is distributed.
Productive efficiency means that
a good or service is produced at the lowest possible cost
If a firm is productively and allocatively efficient, it earns ________ if it is not it____________
a profit; suffers a loss
Which of the following statements about an economic variable is correct?
an economic variable is something measurable that can have different values
How are economic resources allocated in a market economy?
by the decisions of households and firms interacting in markets
A news story on declining attendance at college football games noted that schools in the central time zone had particular problems with attendance at games that started at 11 a.m. The athletic director at the University of Illinois was quoted as saying, "I'm a big fan of evening games." Playing games in the late afternoon or evening, rather than in the morning, would
change the opportunity cost for students whose alternative activities vary throughout the day
Any attempt to determine whether or not this is a good system must focus on its
costs and benefits
Scarcity is central to the study of economics because it implies that
every choice involves an opportunity cost.
Microeconomics is the study of
how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
Consider an organization that exists to help the poor. The members of the organization are discussing alternative methods of aiding the poor, when a proponent of one particular method asserts that: "If only one poor person is helped with this method, then all our time and money would have been worth it." If you were a member of the organization, what reply best represents clear economic thinking? This attitude
ignores the fact that the cost of helping that one person has an opportunity cost of what those funds could have been used for to help other people.
A firm operating in a market economy has a strong incentive to be productively efficient and allocatively efficient because the former enables it to____________ while the latter ensures it of ________________
minimize production costs; ample revenues
The price of coffee at Starbucks is too high. This represents
normative analysis
When the federal government crafts environmental policies that make it less expensive for firms to follow green initiatives,
the policies are consistent with economic incentives.
When it comes to assessing how this system affects the financial interests of doctors and the well being of consumers, it may be that the former gain more simply because
there are far fewer of them, hence each stands to gain much from supply restrictions
Economists use models
to answer questions and analyze issues
Economic data is used
to test models
Leonard Fleck, a philosophy professor at Michigan State University, has written, "When it comes to health care in America, we have limited resources for unlimited health care needs. We want everything contemporary medical technology can offer that will improve the length or quality of our lives as we age. But as presently healthy taxpayers, we want costs controlled." Is it necessary for all economic systems to limit services such as health care?
yes
Economists assume that the only reason people take the actions they do is in response to economic incentives.
False
Dr. Strangelove's theory is that the price of mushrooms is determined by the activity of subatomic particles that exist in another universe parallel to ours. When the subatomic particles are emitted in profusion, the price of mushrooms is high. When subatomic particle emissions are low, the price of mushrooms also is low. Is it possible to test this theory?
No
What type of economic analysis is concerned with the way things ought to be?
Normative Analysis
The federal government should spend more on AIDS research. This represents
Normative analysis
When does productive efficiency occur?
Productive efficiency occurs when a good or service is produced at the lowest possible cost.
A news story discussing Sanadu's prospects for success selling its home medical devices observes, "Another challenge will be getting doctors on board with the idea of patients bringing them information from home." An economic incentive for doctors to accept information supplied by their patients is that it would
Reduce the amount of time spent testing and evaluating the patients' condition in the office or hospital where they were treated
Equity
The fair distribution of economic benefits
Opportunity cost
The highest valued alternative that must be given up to engage in an activity
Trade off
The idea that, because of scarcity, producing more of one good or service means producing less of another good or service
Suppose economists develop an economic model and find that "it works great in theory, but it fails in practice." Which of the following should the economists do next?
They should revise the model in light of its failure to explain or predict real world events.
Allocative efficiency
a state of the economy in which production is in accordance with consumer preferences in particular every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
Which of the following statements is correct?
an innovation is the practical application of an invention
Marginal analysis
analysis that involves comparing marginal benefits and marginal costs
Allocative efficiency means that
every good or service is produced up to the point where marginal benefit is equal to marginal cost.
What do economists mean by the word "marginal"?
extra or additional
Which of the following statements about normative analysis is correct?
normative analysis is concerned with what ought to be
Rising paper prices will increase textbook prices. This represents
positive analysis
Macroeconomics is the study of
the economy as a whole, including topics such as inflation, unemployment, and economic growth.
Economists believe that an activity should be continued up to the point where
the marginal benefit from the activity is equal to the marginal cost.
According to Forbes magazine, in 2015 Bill Gates was the world's richest person with wealth of $79.2 billion. Does Bill Gates face scarcity?
Yes, because even though billionaires' financial resources enable them to afford a much greater array of goods and services than those less wealthy, their financial resources are not infinite.
Indicate whether each of the following is primarily a microeconomic issue or a macroeconomic issue. -the effect of higher cigarette taxes on the quantity of cigarettes sold. this is a _________ issue -The effect of higher income taxes on the total amount of consumer spending. this is a ________ issue -The reasons for the economies of east asian countries growing faster than the economies of sub-Saharan African countries. This is a _______ issue -The reasons for low rates of profit in the airline industry. This is a _____ issue
-microeconomic -macroeconomic -macroeconomic -microeconomic
Three Key economic ideas
1. People are rational 2.People respond to economic incentives 3.Optimal decisions are made at the margin
When does allocative efficiency occur?
Allocative efficiency occurs when production is in accordance with consumer preferences.
Mixed economy
An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant roll in the allocation of resources
Market Economy
An economy in which the decisions of households and firms interacting in markets allocate economic resources
Centrally planned economy
An economy in which the government decides how economic resources will be allocated
Why are models based on assumptions?
Because models have to be simplified to be useful
In a market system, how does society decide what goods and services will be produced?
Consumers, firms, and the government determine what goods and services will be produced by the choices they make
The Making the Connection explains that there are both positive and normative elements to the debate over whether medical schools should charge tuition and whether hospitals should continue to pay residents who pursue primary care but not residents who specialize. Which of the following economic statistics would be the most useful in evaluating the positive elements in this debate?
E. All of the above
Consider the following statement: "The problem with economics is that it assumes that consumers and firms always make the correct decisions. But we know that everyone makes mistakes." What is the most correct response to this statement?
Economics assumes that consumers and firms are rational, not that they always make the right decisions.
Which of the following statements is correct?
Economists use the terms firm, company, and business interchangeably
Which of the following statements about microeconomics and macroeconomics is correct?
Microeconomics involves the study of how households and firms make choices
Which of the following areas of economics studies issues such as ways to reduce teenage smoking?
Microeconomics
A primary difference between macroeconomics and microeconomics is
Microeconomics examines individual markets while macroeconomics examines the economy as a whole
Assuming that these statistics are available or could be gathered, are they likely to resolve the normative issues in this debate?
No, because normative issues involve value judgments that incorporate an individual's full range of experiences, beliefs, and emotions.
A 50-cent-per-pack tax on cigarettes will reduce smoking by teenagers by 12 percent. This represents
Positive analysis
Which of the following statements about positive analysis is correct?
Positive analysis is concerned with what is
Microeconomics
The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices
Economics
The study of the choices people make to attain their goals, given the scarce resources
Suppose you were building an economic model forecasting the number of physicians and physicians assistants likely to be needed in 2020. Should your model take into account the growth of the home medical device industry?
Yes because the greater the growth in the use of home medical devices, the less patients will require the services of physicians and physician assistants
Alberto Chong of the University of Ottawa and several colleagues conducted an experiment to test the efficiency of government postal services around the world. They mailed letters to nonexistent businesses in 159 countries and kept track of how many of the letters were returned. Was this test most relevant to evaluating the productive efficiency or the allocative efficiency of these postal services? This test that Albert Chong and his colleagues carried out was most relevant for evaluating the
allocative efficiency of these postal services because the test was designed to measure how often and how quickly the letters sent were returned.
Relative to a market economy, a centrally-planned economy would be expected to be
better at neither productive efficiency nor allocative efficiency because the absence of market-imposed competition negates the need of firms to satisfy consumer wants or produce using the lowest-cost methods.
In the United States, to receive a medical license, a doctor must complete a residency program at a hospital. Hospitals are not free to expand their residency programs in a particular medical specialty without approval from a Residency Review Committee (RRC), which is made up of physicians in that specialty. A hospital that does not abide by the rulings of the RRC runs the risk of losing its accreditation from the Accreditation Council for Graduate Medical Education (ACGME). The ACGME and the RRCs argue that this system makes it possible to ensure that residency programs do not expand to the point where they are not providing residents with high-quality training. This system may help protect consumers by ensuring that
future doctors receive high-quality training
Centrally planned economies allocate resources based on decisions by ________while market economies answer these questions through decisions made by .
government, households and firms
Scarcity implies that every society and every individual face trade-offs because scarcity means that
human wants are greater than what available resources can produce.
What goods and services will be produced, how the goods and services will be produced, and who will receive the goods and services are determined:
in market economies partly by the decisions of buyers and sellers interacting in markets and partly by the government.
The level of total investment by firms in new machinery and equipment helps to determine how rapidly the economy grows. This is a________ issue. However, to understand how much new machinery and equipment firms decide to purchase, one must analyze the incentives individual firms face, which is a __________ issue
macroeconomic, microeconomic
The Food and Drug Administration (FDA) is part of federal government's Department of Health and Human Services. Among its other functions, the FDA evaluates the safety and effectiveness of drugs and medical devices. FDA approval had to be granted before OraSure was allowed to market its home HIV test. In a centrally planned economy, the government decides how resources will be allocated. In a market economy, the decisions of households and firms interacting in markets allocate resources.
market economy because the drug development, and the resources allocated to the development, occurs in the market
Productive efficiency occurs when a good or service (such as the distribution of tickets) is produced at the lowest possible cost. Is this an efficient way to distribute the tickets?
no
Suppose that your local police department recovers 100 tickets to a big NASCAR race in a drug raid. It decides to distribute these to residents and announces that tickets will be given away at 10 A.M. Monday morning at City Hall. Suppose that your college decides to give away 1,000 tickets to the football game against your school's biggest rival. The athletic department elects to distribute the tickets by giving them away to the first 1,000 students who show up at the department's office at 10 a.m. the following Monday.
the groups of people that are most likely to get the tickets will be those for whom the expected marginal benefits of going to the department's office on Monday morning are greater than the expected marginal costs What is the actual cost and also the opportunity cost of distributing the tickets this way? D. all of the above
A market system prevents people from getting as many goods and services as they want due to which of the following?
their income
