Chapter 1&8 ECO 202
Suppose the country of Burondo is one of the poorest countries in the world. Its economy is heavily reliant on income from the export of oil. There are only two oil-extracting companies in Burondo. Both are owned by the government. A large part of the earnings from oil exports goes toward financing the president's lifestyle and entourage. Burondo has not had a single democratic election ever since it gained independence 50 years ago. Although Burondo is said to have abundant oil resources, only a small proportion is extracted every year because the extraction process is so inefficient. Transporting goods in and out of the country is costly, as Burondo is surrounded by lofty mountain ranges. School enrollment in this country is very low and as a result, most of the adult population is illiterate. Life expectancy is also quite low. Agriculture is collectivized in Burondo and so food shortages are common in the country. Using the information given, distinguish between the fundamental and proximate causes of prosperity (or its absence) in Burondo. Proximate causes of Burondo's lack of prosperity are ___________. (Check all that apply.)
most of the adult pop, is illiterate, food shortages affect health
The potential process of political creative destruction could lead to extractive institutions because ____________.
new economic activities may fall outside of the control of existing rulers
The return-to-entrepreneurship curve shows the ____________.
number of entrepreneurs with at least a particular level of returns.
You have decided that you are going to consume 1000 calories of beer and snacks at a party Saturday night. A beer has 250 calories and a snack has 125 calories. Create a table that shows the various combinations of beer and snacks you can consume. To do this, calculate the number of snacks that you can consume for each amount of beer. (Round your responses to two decimal places.) Beer Snacks 0 nothing 1 nothing 2 nothing 3 nothing 4 nothing
8,6,4,2,0, 2
Given the information above, if the interest rate on your savings account was 33 percent a year, then the yearly opportunity cost of using this money for a down payment would be equal to
900
An economist observes that many students spend $100,000 to go to college. She could ask whether such spending is worth it, or she could assume that it is worth it. In other words, she could assume that students are optimizing and that the education system is in equilibrium. Her analysis also assumes that there are no other benefits to college besides higher income and there are no other costs besides monetary costs. Which of the following, if true, supports the economist's conclusion?
A college education increases the earnings of an individual by at least $100,000 over his or her lifetime.
Parts of the world that were relatively more prosperous 500 years ago have experienced a reversal of fortune and are relatively poorer today. What factors could explain this?
A&C only
Which of the following would not be considered one of the possible opportunity costs of a recent high school graduate starting their career right away by getting a full minus time job.
All of these is a possible opportunity cost.
Sometimes development aid goes toward disaster relief. For example, after the Indian Ocean tsunami of 2004, non-governmental organizations helped devastated countries to rebuild. Based on your understanding of the chapter, which of the following statements are true of foreign aid? (Select all that apply).
B. Foreign aid is inefficient when it is given directly to an extractive government. D. Foreign aid is efficient when it is directly used to rebuild capital and promote growth in an economy
Suppose the market price of corn is $5.50 per bushel. Which of the following is not one of the three conditions that will need to be satisfied for the corn market to be in equilibrium at this price?
Both the buyers and sellers of corn could benefit by making small changes to their market behaviors.
Initial phases of the growth process are often accompanied by increasing income inequality within a country. Using concepts developed in the chapter, explain why this might be the case.
Creative destruction creates economic winners and losers.
After the Second World War, Germany was divided into two parts, East Germany and West Germany. East Germany was controlled by the former Soviet Union while West Germany was controlled by the other Allied governments: the United States, the United Kingdom, and France. The war had destroyed most of Germany's economy. The Soviet Union as well as the Allied occupation forces sought to rebuild the economies of their respective parts. Before the fall of the Berlin Wall reunited East and West Germany in 1990, West Germany's economy grew at an annual average growth rate of 4.4 percent, which was about 3 times higher than East Germany's rate. Draw the parallel between the natural experiment discussed in the chapter and the case of East and West Germany. Based on the information given in the question and your own research, why do you think two otherwise similar areas had such divergent growth rates? East and West Germany likely had different growth rates because ____________.
East Germany's economic institutions mandated central planning
Which of the following statements about foreign aid is true?
Foreign aid does not have an impact on technology.
Fundamental causes, such as geographic, cultural, and institutional factors, have an impact on prosperity by affecting proximate causes, such as investment in human capital, physical capital, and technology
Fundamental, proximate
In July 2014, the founder of Facebook, Mark Zuckerberg, announced the launch of internet.org, a project aimed at spreading Internet access worldwide. Internet.org encourages mobile service providers to partner with Facebook to provide free, basic Internet services (including, of course, Facebook access) in developing countries. Over the long term, Zuckerberg hopes to deploy drones to expand access in remote areas. Which of the following statements is likely to be true of the impact of open Internet on proximate and fundamental sources of growth?
In the long run, free Internet will enhance productivity across industries and improve fundamental sources of growth.
Which of the following hypotheses best explains the differences in the economies of North and South Korea?
Institutions hypothesis
You are thinking about buying a house. You find one you like that costs $150 comma 000150,000. You learn that your bank will give you a mortgage for $120 comma 000120,000 and that you would have to use all of your savings to make the down payment of $30 comma 00030,000. You calculate that the mortgage payments, property taxes, insurance, maintenance, and utilities would total $nbsp 720 720 per month. Which of the following is true regarding your calculation of the cost of owning the house?
It should include the opportunity cost of the money used to make the down payment. This money could be earning interest in a bank.
How does microeconomics differ from macroeconomics?
Microeconomics is the study of how individuals, households, firms, and governments make choices, while macroeconomics is the study of the economy as a whole.
Suppose instead that you notice that the concert ticket cost you $10; previously, you had mistakenly believed the price was $100. Should learning this information affect your decision to go to the concert? ▼
No
If the price of a good in an equilibrium market is $112, all of the following statements are true except:
Producers know that if they colluded, they could increase the price.
Based on your understanding of the chapter, which of the following statements is likely to be true of institutions and growth?
Productivity-enhancing SOEs will facilitate the development of entrepreneurship in an economy.
How are the proximate causes of prosperity different from the fundamental causes of prosperity?
The fundamental causes of prosperity are the factors that explain the levels of the proximate cause of prosperity
Some of Singapore's SOEs have focused on developing shipping and transportation infrastructure. Given this information, which of the following is likely to happen to the opportunity cost of entrepreneurship when compared with your answer in the previous question?
The opportunity cost of entrepreneurship will decrease.
Since gaining independence from Malaysia in 1965, Singapore has had impressive growth performance, achieving an average annual growth rate of GDP per capita of 7.46 percent. State-owned enterprises (SOEs) have featured prominently in its burgeoning economy; even today, many of its powerful companies are partially controlled by the highly centralized government. Which of the following is a likely effect of the presence of SOEs on the returns to entrepreneurship and the opportunity cost of entrepreneurship?
The opportunity cost of entrepreneurship will increase, and there will be a leftward shift in the returns-to-entrepreneurship curve.
Which of the following is one of the three important elements that define institutions?
They are determined by individuals
Which of the following statements would not be considered a positive statement?
Tuition at 4 - year universities is too high and should be lowered
One part of Nogales lies in the United States, in Arizona, and the other part lies in Sonora, Mexico. Life in Nogales, Mexico is very different from life in Nogales, Arizona. The average income in Nogales, Mexico is about one-third the average income in Nogales, Arizona. Education levels, life expectancy, and health conditions are better in Nogales, Arizona than in Nogales, Mexico. Unlike Nogales in Arizona, Nogales in Mexico has only recently adopted political reforms, bringing it closer to functioning as a democracy. Crime rates are also lower in Nogales, Arizona than in Nogales, Mexico. Since both cities are located so close to each other, they share similar geographical conditions and climate. The inhabitants of both cities also share a common ancestry and enjoy the same type of food and music. Based on this information, Nogales, Arizona is likely more prosperous than Nogales, Mexico because ____________.
US citizens can hold their government responsible for its actions
Which of the following is more susceptible to the free-rider problem: government minus funded symphonies or public roads?
Use of public roads is more susceptible since even those who don't pay taxes still benefit, while government minus funded symphonies can charge for admission, so that everyone who goes pays their share.
The costs of many prescription drug regulations can be calculated in dollars, but the benefits often are in terms of lives saved (mortality) or decreases in the incidence of a particular disease (morbidity). What does this imply about the cost-benefit analysis of prescription drug regulations?
We must first translate the mortality and morbidity data into dollars in order to compare it to the costs of the regulations.
Suppose there are three activities in which you could participate: 1. The opportunity cost of the first activity is missing 3 hours of work. 2. The opportunity cost of the second activity is missing a concert that you have tickets to. 3. The opportunity cost of the third activity is missing the afternoon nap that you take every day. Given this information, for which of these activities would you be able to compare opportunity costs?
You can compare all the activities after you translate all the missed activities into dollar amounts.
All of the following were characteristics of eighteenth-century Britain that supported the Industrial Revolution except ____________.
a newly-designed market system
The statement that the U.S. government should increase carbon taxes to reduce carbon emissions that cause global warming is ___________.
a normative statement, since it describes what ought to be done and is therefore not possible to confirm with data.
Which of the following is subject to the free-rider problem?
all of the above
Which of the following would be considered a scarce resource for producers? A. Machinery B. Land C. High minus skill labor. D. All of the above.
all of the above
When a cost-benefit analysis is done:
all relevant options must be considered.
A surge in cocoa prices is ▼ the cause an effect and a pest attack on the cocoa crop is ▼ an effect the cause .
an effect, the cause
Identify the cause and effect in the following examples: Lower infant mortality is ▼ the cause an effect and an improvement in nutrition is ▼ an effect the cause .
an effect, the cause
An economic enterprise that defines and upholds property rights incentivizes citizens to work and save. This example of an institutional cause of prosperity more efficiently utilizes factors of production in order to move from a labor-intensive society to a capital-intensive society.
an institutional, labor-intensive, capital-intensive
When making your decision about which activity to choose, you should consider the monetary cost ▼ but not as well as the opportunity cost of the activities. The goal is to choose the option that offers the greatest ▼ overall net benefit.
as well as, net
Since the inputs used to produce goods are scarce, the total amount produced of most goods is ▼ equal to above below the amount that consumers would like to buy. To allocate the goods produced to the people who value them the most, we use ▼ government mandates the price mechanism market inversion .
below, the price mechanism
You are trying to decide how to spend $4040 you earned last night. You could buy a new shirt or go out to dinner and a movie with a friend. You could also go to the movie, not have popcorn, and buy a less expensive shirt. Taken together these things form your ▼ budget allocation budget constraint .
budget constraint
All of the following are principles of economics except:
categorization
Which of the following is not an item studied under macroeconomics?
cigarette taxes
The geography hypothesis states ____________.
climate is responsible for differences in prosperity.
Studies on urbanization and prosperity suggest extractive economic institutions were set up to ____________.
control relatively developed civilizations.
Simply looking at the differences in income or economic growth between democracies and non-democracies would be focusing on ▼ causation correlations , not ▼ correlations causation .
correlations, causation
Assume every semester after finals you fly back to your hometown using a $300 ticket you buy online. You have 40,000 frequent flier miles. You could exchange your miles for a round-trip ticket to Bermuda over spring break. If you choose to exchange your airline miles for a free trip to Bermuda over spring break, then your trip _________.
cost $300, since your next-best alternative for your miles was to use them to fly home at the end of the semester.
The existence of extractive institutions discourages entrepreneurship in an economy by ____________.
creating barriers to entry.
Firms and individuals that lose from ▼ creative destruction political creative destruction might be ▼ less more willing to support extractive economic institutions.
creative destruction, more
Which of the following would an economist use when conducting empirical analysis?
data
Extractive economic institutions ▼ decrease increase the return for entrepreneurs by ▼ decreasing increasing what must be paid to the government in order to set up the business. This in turn ▼ decreases increases the opportunity cost of going into business.
decrease, increasing, increases
Suppose you have a part-time job and earn $400 a month. Suppose you decide to spend your income buying new shoes and jeans. The chart below shows the possible combinations that could be purchased in a month. Assume jeans cost $50 each and shoes cost $100 each. Budget Pairs of Shoes Purchased Pairs of Jeans Purchased $400 4 0 400 3 2 400 2 4 400 1 6 400 0 8 The table above shows that for a given budget if you increase the amount of one type of good that you buy, you must ▼ not change increase decrease the amount of the other good that you buy. Therefore, a budget constraint implies that the consumer faces ▼ rising benefits fixed consumption trade-offs .
decrease, trade-offs
Suppose your New Year resolution is to get back in shape. You are considering various ways of doing this: you can sign up for a gym membership, walk to work, take the stairs instead of the elevator, or watch your diet. How would you evaluate these options and choose an optimal one?
do a cost-benefit analysis to compare the alternatives
Political creative destruction refers to ____________.
economic growth destabilizing political regimes.
Economics is all about making choices. The reason we have to choose one thing over another is:
economic resources are scarce
Statement 3 deals with ____________.
empiricism, because it describes behavior using real-world data.
Unlike extractive economic institutions, inclusive economic institutions ____________
enforce contracts
Which of the following is not an example of causation?
lucky socks
Clara visits the local bakery shop several times a week and knows the owner, Sam, very well. Her favorite cupcakes, chocolate cream, sell for $22 each. She buys them regularly. The $22 charged per cupcake is the _________________ price. If Sam raised the price to $2.502.50, Clara would buy her favorite cupcake from the coffee shop down the street for $2.252.25, which would be the _____________________ price for her.
equilibrium, optimum
Zimbabwe, formerly known as Rhodesia, was a British colony for around ninety years. It became independent in 1980. The prime minister of newly formed Zimbabwe, Robert Mugabe, implemented a forced land redistribution policy, where commercial farms were confiscated from white farmers. Mugabe also proceeded to confiscate shares in companies owned by whites. In the following years, agricultural production in the country fell sharply. Zimbabwe, the country that used to be called the breadbasket of Africa, is now seeing food shortages in certain parts of the country. Would Zimbabwe be considered to have extractive or inclusive institutions? Explain your answer.
extractive institutions, because it doesn't protect property rights
Suppose a country has well-enforced private property rights for entrepreneurs, but a large fraction of the population does not have access to education and thus cannot become entrepreneurs. Moreover, their productivity as workers is low. This country is likely to have ▼ inclusive extractive economic institutions, which will likely ▼ prevent allow not affect its ability to achieve a high level of economic development.
extractive, prevent
Which of the following areas are addressed in the study of economics? (Check all that apply.)
financial markets, the costs associated with a decision, prices, optimal tax policies
Inclusive economic institutions ____________.
have low barriers to market entry.
You have already purchased (non-refundable and unsellable) tickets to a concert on Friday night. A friend also invites you to her birthday party on Friday. While you like your friend, you politely decline because you really want to go to the concert. Suppose you learn that your friend is serving flank steak at her party; all-you-can eat and at no charge. Flank steak is your favorite food. Your opportunity cost of going to the concert is now ▼ higher lower than you had previously thought.
higher
Foreign aid often ▼ increases decreases the power of extractive economic institutions and ▼ increases decreases overall inequality within the country.
increases, increases
To say that private property rights are well-enforced in an economy means that ____________.
individuals can securely hold assets
Extractive economic institutions ____________.
interfere with the workings of markets.
Which of the following is true regarding the concept of causation?
it describes how one event can bring about change in another
For most people, one of the biggest challenges involved in studying economics is:
it looks beyond simple cause and effect to the many possible long term effects of an action
In his book The Elusive Quest for Growth, development economist William Easterly discusses the relationship between foreign aid and investment in poor countries. He posits that to establish the effectiveness of aid in promoting investment, two tests should be passed: First, there should be a positive statistical association between aid and investment; second, aid should pass into investment 1 for 1, that is, a 1 percent (of GDP) increase in aid should result in a 1 percent (of GDP) increase in investment. Using a data set of 88 countries from 1965 to 1995, he finds that only 17 of 88 countries pass the first test, and of them, only 6 pass the second. Based on the information in the chapter, and perhaps your own reading, explain why foreign aid designed to spur investment usually does not work.
it may strengthen extractive political institutions
Suppose you are ready to check out and see two lines: Line A has three people, while Line B has five people. Assume people choose lines at random and have not yet had a chance to switch lines. The situation will move toward equilibrium if the ▼
last person from the longer line switches to the shorter line
Assume that all eight shoppers are optimizing (i.e., they had a chance to switch lines) and the situation is in equilibrium. Given this information, you could infer that the behavior of the ▼ third person in the five-person line last person in the five-person line last person in the three-person line is most informative.
last person in the five-person line
In the context of this chapter, what is meant by an institution?
laws
Michael has a statistics final exama statistics final exam tomorrow morning and he needs to decide how many hours to studyhow many hours to study. The benefits column shows how many more points he expects to earn because of increased knowledgeincreased knowledge. The cost column shows how many points he will lose because of careless errors due to lack of sleep. (The "marginal" columns show the effect of each additional hour. These numbers are the differences of the "total" columns.) Hours Spent StudyingHours Spent Studying Total Benefit Marginal Benefit Total Cost Marginal Cost 1 10 10 0 0 2 14 4 3 3 3 19 5 7 4 4 22 3 12 5 5 24 2 18 6 Using the marginal benefits and marginal costs analysis, if Michael studiesstudies for three hoursthree hours, the outcome will be ▼ non-optimal optimal because ▼ marginal benefit will equal marginal cost marginal benefit will be greater than marginal cost marginal benefit will be less than marginal cost .
optimal, marginal benefit will equal marginal cost
Consider the following three statements: Statement 1: You can either stand during a college football game or you can sit. You believe that you will see the game very well if you stand and others sit but that you will not be able to see at all if you sit and others stand. You therefore decide to stand. Statement 2: Your friend tells you that he expects many people to stand at football games. Statement 3: An economist studies photos of many college football games and estimates that 75 percent of all fans stand and 25 percent sit. Which of these statements deals with optimization, which deals with equilibrium, and which deals with empiricism? Explain. Statement 1 deals with ____________.
optimization, because you are choosing your best feasible option.
Free riding occurs when ▼ firm's external benefits people's private benefits are out of sync with ▼ government policies the public interest .
people's private benefits, the public interest
Making a prediction today about the world's population in twenty years based on current growth trends is an example of ▼ positive normative prescriptive economics. Advising the residents of a town to choose a toll road over a freeway extension due to a limited budget and high trucking usage is an example of ▼ positive normative prescriptive economics.
positive, normative
All of the following are examples of empiricism except:
predicting human behavior
Private property rights foster economic development by ____________.
providing incentives to invest.
Assume that all eight shoppers are optimizing (i.e., they had a chance to switch lines) and the situation is in equilibrium. Given this information, you could infer that the shorter line will move ▼ slower than faster than the longer line.
slower than
The culture hypothesis states ____________.
societal values are responsible for differences in prosperity
Which of the following values or cultural beliefs might negatively impact economic performance?
superstition
The geography hypothesis claims that large differences in prosperity across the world are determined by all of the following except ____________.
technology
Which of the following would be considered an opportunity cost of spending time to go to the movies with your friends?
the amount of money you would have made had you worked instead
A budget constraint represents _________.
the bundles of goods or activities that a consumer can choose given her limited budget.
One reason free-riders exist could be that
the private benefit exceeds the private cost
All of the following would fall under the study of microeconomics except:
the stock market's response to an interest rate increase
The concept of opportunity cost is a measure of _________.
the value of the best alternative use of a resource.
The institutions hypothesis explains the difference in prosperity among nations is due to ____________.
the way societies encourage people to innovate
Fundamental causes of Burondo's lack of prosperity are ____________. (Check all that apply.)
there were few constraints to the exercise of power, the geography is not favorable, the agricultural industry is collectivized
Why would a government undertake policies that would adversely affect the lives of its citizens?
to maintain its power
According to the geography hypothesis, incomes in poor countries are ____________.
unlikely to be changed, because climate is largely out of their control.
uppose the return and cost of entrepreneurship curves are described by the following equations (with numbers measured in the thousands): R=1,100-100N C=200+150N, where R=returns to entrepreneurship, C=cost of entrepreneurship, and N=number of entrepreneurs. Based on the equations given, the cost-of-entrepreneurship curve differs from the one drawn in the chapter because it is
upward sloping, indicating the opportunity cost of entrepreneurship increases with the number of entrepreneurs 3.6 740 3.4 760
The opportunity cost of entrepreneurship is the ____________.
value to a potential entrepreneur of her best alternate activity
Statement 2 deals with ____________.
equilibrium, because your friend presumes everyone is behaving optimally.