eco251 Chapter 2 homework

Manuel (a household) pays Flyaway Airlines (a firm) $125 for air travel to Hawaii. Therefore, the $125 is a payment that

flows from a household to a firm. CHECK

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

The disagreement between these economists is most likely due to

differences in values

A normative statement is one that offers an opinion as to the way the world should be.

normative statement

Despite their differences, with which proposition are two economists chosen at random most likely to agree?

-Rent ceilings reduce the quantity and quality of available housing.

Which of the elements of this scenario represent a flow from a firm to a household? This could be a flow of dollars, inputs, or outputs. Check all that apply. -Teresa's labor -The $150 Sam spends to purchase air travel to Hawaii from Flyaway Airlines -The $400 per week Sam earns working for Dinah's Diner -The breakfast Teresa receives

-The $400 per week Sam earns working for Dinah's Diner -The breakfast Teresa receives When Teresa (a household) supplies her labor to any firm, labor is an input (a factor of production) that flows from a household to a firm. When the breakfast is provided to Teresa (a household), the breakfast is an output that flows from a firm to a household. Dinah's Diner (a firm) pays Sam (a household) $400 for his labor. Therefore, the $400 is a payment that flows from a firm to a household. Sam (a household) pays Flyaway Airlines (a firm) $150 for air travel to Hawaii. Therefore, the $150 is a payment that flows from a household to a firm.

Points located on the production possibilities frontier, represent efficient output combinations.

At these points, it is impossible to increase the production of one good without producing less of the other.

Points located inside the production possibilities frontier (PPF), represent *inefficient* output combinations.

At these points, it is possible to increase the production of both goods because some resources are unemployed.

Suppose South Africa produces two types of goods: agricultural and capital. The following diagram shows its current production possibilities frontier for barley, an agricultural good, and cars, a capital good.

Because of the improvement in soil quality, more bushels of barley can be produced on any given amount of land; however, there is no reason to think that the maximum amount of cars that can be produced would change. For instance, when you look at the vertical axis, you see that if South Africa produces zero bushels of barley, it can initially produce a maximum of 210,000 cars per year. Because the improvement in soil quality does not affect the number of cars South Africa can produce, you should have left the point at 210,000 cars per year. Similarly, when you look at the horizontal axis, you see that if South Africa produces zero cars, it can initially produce a maximum of 120 million bushels of barley per year. Because the improvement in soil quality increases the amount of barley South Africa can produce, you should have moved the point to 160 million bushels of barley per year.

Based on this model, households earn income when firms purchase factors in factor markets.

In the circular-flow model of an economy, households own all the factors of production. Households earn their income when firms purchase or rent these factors of production to use them to produce goods and services. Firms, in turn, earn revenue when households buy goods and services.

Suppose Teresa earns $750 per week working as work as a flight attendant for Flyaway Airlines. She uses $10 to have breakfast at Dinah's Diner. Dinah's Diner pays Sam $400 per week to work as a short-order cook. Sam uses $150 to purchase air travel to Hawaii from Flyaway Airlines. -Sam spends $150 to purchase air travel to Hawaii from Flyaway Airlines. -Teresa spends $10 to have breakfast. -Sam earns $400 per week working for Dinah's Diner.

Product, product, factor In this scenario, households sell factors of production in factor markets when Teresa supplies her labor to Flyaway Airlines and when Sam supplies his labor to Dinah's Diner. Moreover, a firm sells goods and services to a household in product markets when Dinah's Diner provides the breakfast to Teresa and Flyaway Airlines provides the air travel to Hawaii to Sam.

Points located outside the production possibilities frontier, represent output combinations that are unattainable, given current resources and technology.

Recall that each point on the production possibilities frontier shows the maximum quantity of barley Argentina can produce if it also wants to produce the given quantity of tablets.

Despite their differences, with which proposition are two economists chosen at random most likely to agree? -Lawyers make up an excessive percentage of elected officials. -Tariffs and import quotas generally reduce economic welfare. -Minimum wage laws do more to harm low-skilled workers than help them.

Tariffs and import quotas generally reduce economic welfare. While many economic questions are open to debate, the field is largely in agreement on some points. For example, two economists chosen at random are most likely to agree that tariffs and import quotas generally reduce economic welfare. Indeed, one survey that 93% of economists agree with this proposition. It would be harder to find two randomly chosen economists who both agree with either of the other propositions.

The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Which of the following is true regarding this economic model? a) Because it does not take into account the role of government, the circular-flow diagram is useless for the purposes of modeling how dollars and resources move throughout an economy. b) Because it does not take into account international trade, the circular-flow diagram is useless for the purposes of modeling how dollars and resources move throughout an economy. c) While simple, the circular-flow diagram can still be useful for the purposes of modeling how dollars and resources move throughout an economy. d) Because, in reality, the economy is very large, the simplicity of the circular-flow diagram makes it useless for the purposes of modeling how dollars and resources move throughout an economy.

While simple, the circular-flow diagram can still be useful for the purposes of modeling how dollars and resources move throughout an economy. -Scientists of all types make assumptions in their models to simplify the complex world they are trying to describe. These simplifying assumptions allow scientists to focus on only the most important and generalizable components of the topic of study. Economists also make simplifying assumptions to focus on only the most important and generalizable aspects of the economy. Indeed, economies typically consist of millions of individuals interacting in many different ways. However, no model can include every detail of a system as complex as an economy. To make sense of all of the different aspects of an economy, economists must make simplifying assumptions and generalizations in order to focus on only the most important economic ideas. By grouping all individuals into households and firms and all markets into markets for goods and services and markets for factors of production, economists can model how dollars and resources flow back and forth among agents in the economy. The simplicity of the model allows those without formal backgrounds in economics to understand, at a high level, the economic activities that take place in an economy.

Suppose that Yakov, an economist from a business school in Georgia, and Ana, an economist from a school of industrial relations, are arguing over government bailouts. The following dialogue shows an excerpt from their debate: Ana: Thanks to recent financial crises, the concept of bailouts is a hot topic for debate among everyone these days. Yakov: Indeed, it's gotten crazy! A government bailout of severely distressed financial firms is unnecessary because free markets will properly price assets. Ana: I don't know about that. Without a bailout of severely distressed financial firms, the economy will experience a deep recession. The disagreement between these economists is most likely due to

differences in scientific judgements -There are two main reasons that economists tend to disagree: differences in values and differences in scientific judgments. In this case, the economists disagree due to differences in scientific judgments because they disagree about a factual matter: the type of policy needed to keep the economy functioning smoothly during a period of financial distress. In contrast, disagreement due to differences in values reflect differing assessments on fairness or equity.

When Poornima (a household) supplies her labor to any firm,

labor is an input (a factor of production) that flows from a household to a firm. CHECK

-The effect of an increase in the money supply on the rate of inflation -The effect of government regulation on a monopolist's production decisions -The effect of a large government budget deficit on the economy's price level

macro micro macro Microeconomics is the study of how prices and quantities are determined through interactions between buyers and sellers (individuals and firms) in individual markets. Therefore, microeconomists are more likely to create models to analyze the decisions of firms (such as pricing) and those of consumers (such as shopping choices), as well as how government policies affect those decisions. Macroeconomics is the study of factors that affect the entire economy. Therefore, macroeconomists tend to create models to analyze how aggregate phenomena such as growth, inflation, and unemployment respond to policy decisions of governments and central banks, changes in aggregate spending or savings, and supply or demand shocks.

A positive statement is one that seeks to describe the world as it is.

positive statement

Microeconomics

the study of how households and firms make decisions and how they interact in markets