Econ 201- Exam 1

When the WVU Mountaineers football team is up big after halftime, they often play their second and third team players. One of your friends notices that when the third team plays that WVU wins by a bigger margin than when just the first team plays. He recommends that the third team see more playing time as a result. Having taken an economics class, what do you say to him? a. "Statistically, more points are scored in the second half." b. "Sit down and be quiet - the third string only plays when the other team is terrible. That is why they score a lot of points." c. "They score a lot because they are young and have lots of energy." d. "Who died and made you Neil Brown? Just eat your pepperoni roll and enjoy the fact that we will get to sing Country Roads."

"Sit down and be quiet - the third string only plays when the other team is terrible. That is why they score a lot of points."

Which of the following sayings best reflects the concept of opportunity cost? a. "You can't teach an old dog new tricks." b. "Time is money." c. "I have a baker's dozen." d. "There's no business like show business."

"Time is money."

Sarah, a wheat farmer, is deciding whether or not to add fertilizer to his crops. If he adds 1 pound of fertilizer per acre, the value of the resulting crops rises from $80 to $100 per acre. According to marginal analysis, Harry should add fertilizer if it costs less than: a. $12.50 per pound b. $20 per pound c. $80 per pound d. $100 per pound

$20 per pound

If the price of a pie is $12, what is the maximum number of pies she could buy in a week?

$24/$12 = 2 pies.

If the price of a magazine is $4 each, what is the maximum number of magazines she could buy in a week?

$24/$4 = 6 magazines.

Kelly is an attorney and also an excellent typist. She can type 120 words per minute, but she is pressed for time because she has all the legal work she can handle at $100 per hour. Kelly's friend Todd drives a taxi and would like some typing work but can only type 60 words per minute. According to the law of comparative advantage, Kelly should hire Todd to do her typing if and only if his wage rate is less than a. $10 per hour b. $50 per hour c. $60 per hour d. $100 per hour

$50 per hour

Residents of the town of Smithfield like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount of ham the residents can consume in a month?

100 people / 10 people per ham = a maximum of 10 hams per month if all residents produce ham. Since consumption is limited by production, the maximum number of hams residents could consume per month is 10.

Susan wishes to buy gasoline and have her car washed. She finds that if she buys 9 gallons of gasoline at $1.50 per gallon, the car wash costs $1, but if she buys 10 gallons of gasoline, the car wash is free. For Susan, the marginal cost of the tenth gallon of gasoline is a. zero b. 50 cents c. $1 d. $1.50

50 cents

A balanced federal budget and a balance of trade are considered secondary goals of macroeconomics, while growth in the standard of living (for example) is considered a primary goal. Why do you think that is so?

A Balanced federal budget and the balance of trade do not have direct effects on the well-being of individuals. While we can argue about what their long term effects are, the standard of living (as measured by economic growth, for example) is directly responsible for how well off people are within an economy, so that is what economists care about.

Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it.

A choice above the PPF is not possible because the PPF already illustrates the maximum amount of production. Producing at a point inside the PPF is inefficient because more production could be achieved at no additional cost.

Correlation vs. Causation

A correlation between variables, however, does not automatically mean that the change in one variable is the cause of the change in the values of the other variable. Causation indicates that one event is the result of the occurrence of the other event; i.e. there is a causal relationship between the two events.

Which of the following represents a positive statement? a. A higher income tax rate will reduce the amount of time that people spend working b. Teenage unemployment should be reduced. c. We should raise the standard of living for the elderly. d. A decrease in tax rates is needed to help the poor.

A higher income tax rate will reduce the amount of time that people spend working

Explain why individuals make choices that are directly on the budget constraint, rather than inside the budget constraint or outside it.

A point inside the budget constraint indicates that the individual could have more of one good without have to give up any of the other. This is inefficient. A point outside the budget constraint is one that the individual cannot afford, as much as he might like to. The budget constraint line represents the set of all allocations of resources that are both efficient and possible.

Which of the following is most clearly consistent with the basic postulate of economics- namely that incentives matter: a. People buy more beef in response to a rise in the price of beef b. A politician votes in favor of a bill because most of her constituents are strongly in favor of it c. Farmers produce fewer bushels of wheat in response to an increase in the price of wheat. d. People drive more because of higher gas prices.

A politician votes in favor of a bill because most of her constituents are strongly in favor of it

What is the difference between a positive and a normative statement?

A positive statement simply describes an actual result or situation. "If the government raises the minimum wage, some jobs will be lost" is a positive statement. A normative statement is a recommendation of a particular policy as either being a good or bad idea. "The government should raise the minimum wage" is a normative statement.

Can you think of any examples of free goods, that is, goods or services that are not scarce?

Air for breathing is, in most cases, not scarce. Of course, for the scuba diver or the astronaut, this is far from the case. Even goods that are not scarce for most practical purposes can become scarce under certain circumstances.

Which of the following observations is consistent with the law of comparative advantage? a. Gwen is a highly paid lawyer. She can type 80 words per minute, yet still hires a secretary who can only type 50 words per minute. b. College-educated mothers are less likely to stay home with their children than are less educated women. c. Sean earns a high salary as a computer software consultant. Even though Sean is a gourmet cook, he often eats out and rarely cooks. d. All of the above are consistent with the law of comparative advantage e. A and C

All of the above are consistent with the law of comparative advantage

Which of the following is an example of a rational decision? a. Jim enjoys the feeling of wind in his hair enough to ride his motorcycle without a helmet, even though he fully realizes the potential for injury it creates by not wearing one in the unlikely event he is in an accident. b. Frank decides to not pay attention to his health and well-being because every male in his family has died before the age of forty. c. Brandon, a drug user, chooses to buy his cocaine from Pablo, because Pablo's cocaine is as good as the cocaine from other dealers, but Pablo has lower prices. d. All of the above are examples of rational choices

All of the above are examples of rational choices

It is clear that productive inefficiency is a waste since resources are being used in a way that produces less goods and services than a nation is capable of. Why is allocative inefficiency also wasteful?

Allocative inefficiency is wasteful because it means that a nation is producing goods that are not the most highly demanded. Not only does this result in goods piling up on store shelves, but it means that people have to pay higher prices for the relatively scarce goods they actually want.

What are the three ways that societies can organize themselves economically?

As a command economy, a market economy, or a mixture of the two.

How did John Maynard Keynes define economics?

As a method of thinking that help people draw correct conclusions.

Would a research study on the effects of soft drink consumption on children's cognitive development be considered a positive or normative statement?

Assuming that the study is not taking an explicit position about whether soft drink consumption is good or bad, but just reporting the science, it would be considered positive.

Return to the example in Figure. Suppose there is an improvement in medical technology that enables more healthcare to be provided with the same amount of resources. How would this affect the production possibilities curve and, in particular, how would it affect the opportunity cost of education?

Because of the improvement in technology, the vertical intercept of the PPF would be at a higher level of healthcare. In other words, the PPF would rotate clockwise around the horizontal intercept. This would make the PPF steeper, corresponding to an increase in the opportunity cost of education, since resources devoted to education would now mean forgoing a greater quantity of healthcare.

If Matt trades two candy bars to Andy in exchange for one baseball card, a. Matt must have valued the baseball card more than the two candy bars. b. Andy must have valued the two candy bars more than the baseball card. c. Matt must lose an equal amount if Andy gains. d. Both a and b are correct, c is incorrect.

Both a and b are correct, c is incorrect.

What are the similarities between a consumer's budget constraint and society's production possibilities frontier, not just graphically but analytically?

Both the budget constraint and the PPF show the constraint that each operates under. Both show a tradeoff between having more of one good but less of the other. Both show the opportunity cost graphically as the slope of the constraint (budget or PPF).

Budget Constraint Equation

Budget = Q1 x P1 + Q2 x P2, etc.

Which of the following is true? a. Changes in personal costs and benefits will exert a predictable influence on the choices of people. b. If one individual gains from an economic activity, then someone else must lose. c. If a good is provided free to an individual by government, its production will not consume valuable scarce resources. d. If the intentions behind a policy are good, you can be assured that the outcome will be desirable.

Changes in personal costs and benefits will exert a predictable influence on the choices of people.

There are more guns in the United States than people. In an attempt to reduce the number of guns and therefore gun-related violence, many cities have gun buy-back programs, where they offer individuals gift cards or cash for their guns. Which of the following actions by citizens is most likely to undermine the purpose of the program, consistent with the idea of unintended consequences? a. Criminals bringing more guns into the area to replace the guns removed from the street. b. Citizens trading in old guns and using the gift cards or cash to buy a new gun. c. People being angry at the thought of government removing guns from circulation. d. The gift cards being for Wal-Mart.

Citizens trading in old guns and using the gift cards or cash to buy a new gun

What is comparative advantage?

Comparative advantage is when a country can produce a good at a lower cost in terms of other goods or when a country has a lower opportunity cost of production.

The image below showS the correlation between the number of people who drown falling into a pool annually plotted against the films Nicholas Cage appeared in. The correlation is 0.66. What is the best answer for this relationshIp? a. Completely spurious relationships that often occur in nature. b. There are more people alive every year (and thus more accidents in total even though per capita they are constant) and Nicholas Cage keeps making more movies. c. Nicholas Cage is evil. d. People are distracted by the phenomenon that is Nicholas Cage.

Completely spurious relationships that often occur in nature.

Consumer Choice

Consumer choice refers to the decisions that consumers make with regard to products and services. When we study consumer choice behavior, we examine how consumers decide which products to purchase or consume over time.

The following image shows the correlation between the number of people who drowned after falling out of a fishing boat and the marriage rate in Kentucky. They track each other closely over time from 1999 to 2010. What is this an example of? a. Trade-offs b. Equilibrium c. Karma d. Correlation not causation

Correlation not causation

What are diminishing marginal returns?

Diminishing marginal returns describe the decreased utility of additional units of a good or service. To take an extreme example, purchasing a haircut when you have not had one in a while is quite beneficial, but purchasing a second haircut on the same day is unlikely to yield very high utility.

Suppose we extend the circular flow model to add imports and exports. Copy the circular flow diagram onto a sheet of paper and then add a foreign country as a third agent. Draw a rough sketch of the flows of imports, exports, and the payments for each on your diagram.

Draw a box outside the original circular flow to represent the foreign country. Draw an arrow from the foreign country to firms, to represents imports. Draw an arrow in the reverse direction representing payments for imports. Draw an arrow from firms to the foreign country to represent exports. Draw an arrow in the reverse direction to represent payments for imports.

Why is it unfair or meaningless to criticize a theory as "unrealistic?"

Economic models and the accompanying theories typically employ simplifying assumptions that, by definition, make the models less than perfectly realistic. If the models are good ones, they are still useful for understanding how a system works, in the same way that a physicist might assume an absence of friction to simplify his understanding of how a ball rolls across a surface. By making models simple, we can understand the basic mechanisms of how things like supply and demand work without having to worry too much about all the real world complications

What are four responses to the claim that people should not behave in the way described in this chapter?

Economics describes behavior as it is, not as we would like it to be; Self-interest can be represented as personal choice and freedom; Self-interest results in economic efficiency, which ultimately leads to better standards of living; Self-interest does not imply that people are never charitable or selfless.

What are three reasons to study economics?

Economics factors into every major policy decision, economics encourages good citizenship, and economics makes for a well-rounded education.

Which of the following is most consistent with economizing behavior? a. If you get the same satisfaction from a steak sandwich and a fish sandwich, you should purchase the one that costs the most. b. Even if you know how to paint, hiring someone to do the job is consistent with economizing behavior, if your opportunity cost is high enough. c. If the government provides a good free to citizens, the opportunity cost of the good is zero. d. If you get the same satisfaction from going to the opera and walking in the woods, it makes no difference which you choose.

Even if you know how to paint, hiring someone to do the job is consistent with economizing behavior, if your opportunity cost is high enough.

Which of the following most accurately states the economic significance of exchange? a. Physical goods have value because they exist; exchange can neither increase nor decrease their value. b. Production of physical goods creates value; exchange merely redistributes this value. c. Exchange creates value by moving goods from parties who value them less to parties who value them more d. Exchange reduces value since it consumes resources without adding to the physical supply of goods.

Exchange creates value by moving goods from parties who value them less to parties who value them more

"If Tom had twice as much money, he could consume twice as much. If everyone had twice as much money, they could consume twice as much." This quote is an example of correlation not causation.

False

Are firms primarily buyers or sellers in the goods and services market? In the labor market?

Firms are primarily sellers in the goods and services market, offering their wares to consumers. They are primarily buyers in the labor market, hiring employees to produce for them.

Give the three reasons that explain why the division of labor increases an economy's level of production.

First, division of labor allows for specialization, in which workers do what they do best, second, workers learn to be more efficient, and third, businesses can take advantage of economies of scale.

Given freedom of movement for both goods and resources, if Florida producers specialize in oranges and Georgia producers specialize in peaches, it would be reasonable to conclude that a. the opportunity cost of growing oranges is higher in Florida than in Georgia. b. Georgia has a comparative advantage in producing oranges. c. Florida has a comparative advantage in producing oranges d. total output will be expanded when Georgia allocates more resources to producing oranges and Florida allocates more resources to producing peaches.

Florida has a comparative advantage in producing oranges

During the Second World War, Germany's factories were decimated. It also suffered many human casualties, both soldiers and civilians. How did the war affect Germany's production possibilities curve?

Germany's PPF would have shifted inward, because the country's decrease in labor, capital and other inputs would reduce their ability to produce output at every allocation of resources.

What is globalization? How do you think it might have affected the economy over the past decade?

Globalization is an increase in connections and economic activity across international lines.Globalization allows small economies to take fuller advantage of the division of labor

Legislation to protect red-cockaded woodpeckers created incentives that resulted in premature harvesting of trees the woodpeckers like to nest in. This is an example of which of the following? a. Association is not causation. b. the fallacy of composition (what is true for the individual might not be true for everyone). c. the use of ceteris paribus (other things being equal)Êconditions in economic analysis. d. Good intentions do not always lead to desirable outcomes.

Good intentions do not always lead to desirable outcomes.

Which of the following is a statement of positive economics? a. Government control of rent is a fair way to help poor people afford housing. b. Government control of rent keeps landlords from charging too much rent. c. Government control of rent decreases the number of new apartments constructed. d. Government control of rent is an injustice.

Government control of rent decreases the number of new apartments constructed.

Which one of the following statements is correct? a. Policymakers have good intentions and therefore their proposals will create good outcomes. b. Potential secondary effects do not need to be considered when deciding whether to implement a new government program. c. A good outcome is guaranteed from a government program if it is created with good intentions. d. Government programs can be implemented with good intentions but can lead to undesirable outcomes because of unintended consequences.

Government programs can be implemented with good intentions but can lead to undesirable outcomes because of unintended consequences.

What are the three main goals of macroeconomics?

Growth in the standard of living, low unemployment and low inflation.

John takes 10 minutes to iron a shirt and 20 minutes to type a paper. Harry takes 10 minutes to iron a shirt and 30 minutes to type a paper. Which of the following statements is correct? a. Harry has a comparative advantage in ironing b. Harry has a comparative advantage in typing c. John has a comparative advantage in ironing d. Neither can gain from a specialization and exchange

Harry has a comparative advantage in ironing

Are households primarily buyers or sellers in the goods and services market? In the labor market?

Households are primarily buyers in the goods and services market, as they use their income to purchase food, housing, education, transportation and many other items. Households are typically sellers in the labor market, offering their labor for a salary or hourly wage in order to earn a living.

There is a high degree of correlation in major cities between ice cream sales and homicides. Based on economic reasoning, what is most likely going on that explains this observed relationship? a. Ice cream vendors are more likely to be serial killers. b. Ice cream sales and murders both increase in the summer but they are not causally related. c. People often have ice cream at funerals. The high murder rate increases ice cream sales. d. Most major cities only let ice cream sales in dangerous neighborhoods.

Ice cream sales and murders both increase in the summer but they are not causally related.

Concern over the problem of released prisoners finding employment so they do not recidivate, especially among domestic minorities, has led policymakers to pass "ban the box" policies that prevent employers from asking about a candidate's criminal history until late in the hiring process. Economists Jennifer Doleac and Benjamin Hansen studied the effect of these policies and found that ban the box policies decreased the probability of being employed by 5.1 percent if you were a young African-American male. What is the best economic explanation for this finding? a. The study is bad. b. Employers are more racist in states that banned the box. c. If employers can't treat applicants as individuals, they use group attributes, and our criminal justice system incarcerates a large number of African-American males. d. Fallacy of composition.

If employers can't treat applicants as individuals, they use group attributes, and our criminal justice system incarcerates a large number of African-American males.

Which of the following statements about exchange is false? a. The expectation of gain motivates people to engage in trade. b. If a party to a potential exchange does not believe that it will lead to personal gain, he or she can chose not to engage in the trade. c. Voluntary exchange is generally mutually advantageous to the trading partners. d. If one trading partner gains, the other must lose.

If one trading partner gains, the other must lose.

Which of the following is a statement of positive economics? a. Too much government spending is the biggest problem facing the U.S. economy. b. Creating jobs is the most serious problem facing the U.S. economy. c. Raising taxes provides additional revenue that should be used to finance health care. d. If taxes are over 50 percent of national income, job creation falls.

If taxes are over 50 percent of national income, job creation falls.

Do economists have any particular expertise at making normative arguments? In other words, they have expertise at making positive statements (i.e., what will happen) about some economic policy, for example, but do they have special expertise to judge whether or not the policy should be undertaken?

In order to make a normative statement, there must be an underlying assumption about what the goal of the policy is, or what is right. A normative statement of sort "If your only goal is for fewer people to smoke, you should raise cigarette taxes" may be within an economist's realm of expertise, but typically these sorts of statements contain a moral component that lies outside the domain of economics.

Suppose, as an economist, you are asked to analyze an issue unlike anything you have ever done before. Also, suppose you do not have a specific model for analyzing that issue. What should you do? Hint: What would a carpenter do in a similar situation?

In this situation, most economists would attempt to construct a model to describe the issue in question, using observation and reasonable assumptions. This model can then be applied to the problem to get a consistent answer.

Which one of the following statements most accurately indicates the basic motivation for behavior? a. Which one of the following statements most accurately indicates the basic motivation for behavior? b. Individuals are motivated primarily by humanitarian concerns; therefore, personal costs and benefits exert little influence on most of their actions. c. Individuals are motivated by a variety of forces; however, changes in personal benefits and costs influence the choices of both selfish and humanitarian individuals d. Individuals are motivated by a variety of forces; however, changes in personal benefits and costs affect behavior only when individuals are motivated by selfishness

Individuals are motivated by a variety of forces; however, changes in personal benefits and costs influence the choices of both selfish and humanitarian individuals

What are examples of individual economic agents?

Individuals, households and businesses are all economic agents.

Which of the following is most inconsistent with economizing behavior? a. If you derive the same satisfaction from eating pizza and walking in the woods, you should eat pizza b. It can make sense to not invest the time and energy to become fully informed on all of the issues and candidates in a local election. c. It never makes sense to hire someone to do something for you that you could do yourself. d. As something becomes cheaper, people tend to consume more of it

It never makes sense to hire someone to do something for you that you could do yourself.

Why do you think that most modern countries' economies are a mix of command and market types?

Markets have historically been very good at creating wealth and innovation, but the governments of most modern countries have decided that certain market outcomes, for extreme wealth inequality, are undesirable, and therefore intervene for the sake of what they view as fair or humane treatment of their citizens

What is the difference between microeconomics and macroeconomics?

Microeconomics focuses of individual actors within an economy, whereas macroeconomics focuses on the economy as a whole, or the sum of all individual actions.

Could a nation be producing in a way that is allocatively efficient, but productively inefficient?

No. Allocative efficiency requires productive efficiency, because it pertains to choices along the production possibilities frontier.

Is the economic model of decision-making intended as a literal description of how individuals, firms, and the governments actually make decisions?

No. Economic models use simplifying assumptions to help us understand complex systems. These are useful, but are not intended as a literal representation of actual behavior.

We see white t-shirts, identical except for the logo, selling for different prices. A white t-shirt with an small green duck on the pocket sells for twice the price of a t-shirt that has a small yellow bird. What are we to make of this as economists? a. People are bizarre, on average. b. People must really value small green ducks compared to little yellow birds. c. Advertising needs to be banned. d. Green duck logos are costly to produce

People must really value small green ducks compared to little yellow birds.

Which of the following is a normative statement? a. A decrease in price leads to an increase in quantity consumed. b. Incomes grow more rapidly in high-tax states than low-tax states. c. People would be better off if government expenditures were higher. d. People will buy less butter at $1.50 per pound than they will at $1 per pound.

People would be better off if government expenditures were higher.

Statistical data provided by the U.S. Department of Transportation shows that the median income of individuals traveling on the nation's bus systems is $18,000 compared to $65,000 for those who normally travel by air. This finding is best explained by which of the following statements? a. Persons with high income are more likely to fly because the opportunity cost of their time is generally higher than those with lesser income. b. Traditionally, lower income groups prefer slower methods of transportation. c. Wealthy individuals own stock in the airlines and, therefore, receive preferential treatment. d. Low-income groups are generally located near bus stations; wealthy groups congregate around airports.

Persons with high income are more likely to fly because the opportunity cost of their time is generally higher than those with lesser income.

Which of the following most clearly distinguishes between positive and normative economics? a. Positive economics is the study of what ought to be; normative economics is concerned with the facts. b. Positive economics is the study of the facts; normative economics is concerned with what ought to be. c. Positive economics is the study of supply and demand in narrowly defined markets such as the market for shoes; normative economics focuses on highly aggregated markets such as the market for all consumer products. d. Positive economics is the study of goods that are scarce; normative economics is concerned with goods that are not scarce.

Positive economics is the study of the facts; normative economics is concerned with what ought to be.

What is productive efficiency? Allocative efficiency?

Productive efficiency means that it is impossible to produce more of one good without producing less of some other good. Allocative efficiency means that the combination of goods being produced represents the mix of goods most desired by society.

The chapter defines private enterprise as a characteristic of market-oriented economies. What would public enterprise be? Hint: It is a characteristic of command economies.

Public enterprise means the factors of production (resources and businesses) are owned and operated by the government.

Which of the following will most likely occur under a system of clearly defined and enforced private property rights? a. Resource owners will fail to conserve vital resources, even if they expect their supply to be highly limited in the future. b. Resource owners will ignore the wishes of others, including others who would like to use the resource that is privately owned. c. Resource owners will fail to consider the wishes of potential future buyers when they decide how to employ privately owned resources. d. Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.

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

Harold, a delivery man, washes and irons his own shirts. Sarah, his boss, sends her clothes to a laundry. Which is the most plausible economic explanation for this difference? a. Harold must enjoy ironing more than Sarah does b. Harold must be better at ironing than Sarah is c. The opportunity cost of ironing is greater for Harold d. Sarah has a higher opportunity cost of laundering her clothes than Harold does

Sarah has a higher opportunity cost of laundering her clothes than Harold does

What is scarcity? Can you think of two causes of scarcity?

Scarcity means human wants for goods and services exceed the available supply. Supply is limited because resources are limited. Demand, however, is virtually unlimited. Whatever the supply, it seems human nature to want more.

A consultant works for $200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?

She is very productive at her consulting job, but not very productive growing vegetables. Time spent consulting would produce far more income than it what she could save growing her vegetables using the same amount of time. So on purely economic grounds, it makes more sense for her to maximize her income by applying her labor to what she does best (i.e. specialization of labor).

Would an op-ed piece in a newspaper urging the adoption of a particular economic policy be considered a positive or normative statement?

Since an op-ed makes a case for what should be, it is considered normative.

Explain why scarcity leads to tradeoffs.

Since the supplies of virtually all goods are limited, and since human wants are unlimited, there is competition between individuals. If you want a certain good, you have to give up something else to get it, whether that be time, money, labor or another good offered in trade.

Why is a production possibilities frontier typically drawn as a curve, rather than a straight line?

Some inputs are better suited to one area of production than another. As these are diverted towards less efficient uses, some amount of production is lost, causing the PPF to bend.

Can you think of ways that globalization has helped you economically? Can you think of ways that it has not?

Some people may have benefitted from the inexpensive and diverse goods made available through global trade, while others may feel that they have lost jobs or opportunities due to competition from producers in foreign countries.

It always seems like the PRT always breaks down when you are on the way to an important test. What is the best explanation for this relationship? a. The PRT is more likely to get overloaded because more people going to class on exam days. b. PRT operators want people to do poorly on their finals. c. The PRT breaks down occasionally. You are more likely to remember those breakdowns when they are associated with important and stressful things in your life, like exams. d. Exams are more likely to occur in the morning and PRT breakdowns are more likely to occur in the morning before everything has warmed up.

The PRT breaks down occasionally. You are more likely to remember those breakdowns when they are associated with important and stressful things in your life, like exams.

Why might Belgium, France, Italy, and Sweden have a higher export to GDP ratio than the United States?

The United States is a large country economically speaking, so it has less need to trade internationally than the other countries mentioned. (This is the same reason that France and Italy have lower ratios than Belgium or Sweden.) One additional reason is that each of the other countries is a member of the European Union, where trade between members occurs without barriers to trade, like tariffs and quotas.

Suppose you have a team of two workers: one is a baker and one is a chef. Explain why the kitchen can produce more meals in a given period of time if each worker specializes in what they do best than if each worker tries to do everything from appetizer to dessert.

The baker and the chef have specialized skills that allow them to be more productive in certain areas than in others. The baker will be able to make a pie faster than the chef, and the chef will be better at cooking the main course. By each worker doing what he does best, productivity and efficiency are maximized and total output is greater.

Which of the following is false? a. Human choice is influenced by changes in incentives. b. What is true for the individual is never true for the group as a whole. c. Using scarce resources to meet one need reduces our ability to meet needs in other areas. d. The economic way of thinking stresses that good intentions lead to sound economic policy.

The economic way of thinking stresses that good intentions lead to sound economic policy.

A computer systems engineer could paint his house, but it makes more sense for him to hire a painter to do it. Explain why.

The engineer is better at computer science than at painting. Thus, his time is better spent working for pay at his job and paying a painter to paint his house. Of course, this assumes he does not paint his house for fun!

Which one of the following items best reflects the concept of opportunity cost? a. The fact that many of the best college basketball players drop out of college to pursue a professional career. b. Star Trek replicators, a machine that can create items out of nothing. c. The world's best ballerina mowing her lawn, even though she hates it. d. Giving 110 percent.

The fact that many of the best college basketball players drop out of college to pursue a professional career.

The economic principle that states that individuals or nations can gain by specializing in the production of goods that they produce cheaply and exchanging for other desired goods that they could only produce at a higher cost is a. The law of absolute advantage b. The law of comparative advantage c. The law of production possibilities d. The exchange maximum principle

The law of comparative advantage

What assumptions about the economy must be true for the invisible hand to work? To what extent are those assumptions valid in the real world?

The main assumptions behind the invisible hand are that people are rational, meaning they act in their own best interests, and that they have perfect information about the goods and services they buy. The first assumption is generally true except in the case of the seriously mentally ill. The second is rarely true in the real world.

Which of the following is an example of a normative economic statement? a. The inflation rate in the United States decreased from 4 percent last year to 3 percent this year as a result of lower energy prices. b. The economy grew at an annual rate of 5 percent during the first quarter of this year. c. If two automobile companies merge, it is likely that the price of automobiles will rise. d. The minimum wage should be increased so that low income workers can afford to keep up with the cost of living.

The minimum wage should be increased so that low income workers can afford to keep up with the cost of living.

Suppose Alphonso's town raises the price of bus tickets from $0.50 to $1 and the price of burgers rises from $2 to $4. Why is the opportunity cost of bus tickets unchanged? Suppose Alphonso's weekly spending money increases from $10 to $20. How is his budget constraint affected from all three changes? Explain.

The opportunity cost is defined as the ratio of the prices of the two goods. Since the price of both goods doubles, the ratio stays the same and the opportunity cost for Alphonso remains 1/4 of a burger to buy one bus ticket. Once his income doubles as well, his budget constraint is unchanged because in both cases he can still choose 5 burgers, 20 bus tickets or any combination in between.

What is Marie's opportunity cost of purchasing a pie?

The opportunity cost of a pie is the (absolute value of the) slope of the budget line is 6/2 or 3 magazines.

Suppose Alphonso's town raised the price of bus tickets to $1 per trip (while the price of burgers stayed at $2 and his budget remained $10 per week.) Draw Alphonso's new budget constraint. What happens to the opportunity cost of bus tickets?

The opportunity cost of bus tickets is the number of burgers that must be given up to obtain one more bus ticket. Originally, when the price of bus tickets was 50 cents per trip, this opportunity cost was 0.50/2 = .25 burgers. The reason for this is that at the original prices, one burger ($2) costs the same as four bus tickets ($0.50), so the opportunity cost of a burger is four bus tickets, and the opportunity cost of a bus ticket is .25 (the inverse of the opportunity cost of a burger). With the new, higher price of bus tickets, the opportunity cost rises to $1/$2 or 0.50. You can see this graphically since the slope of the new budget constraint is flatter than the original one. If Alphonso spends all of his budget on burgers, the higher price of bus tickets has no impact so the horizontal intercept of the budget constraint is the same. If he spends all of his budget on bus tickets, he can now afford only half as many, so the vertical intercept is half as much. In short, the budget constraint rotates clockwise around the horizontal intercept, flattening as it goes and the opportunity cost of bus tickets increases.

What does a production possibilities frontier illustrate?

The production possibilities frontier is the set of every combination of goods that is both possible and efficient to produce.

Draw Marie's budget constraint with pies on the horizontal axis and magazines on the vertical axis. What is the slope of the budget constraint?

The slope is -3.

Which of the following is true? a. Trade does not produce anything new; therefore, it cannot create value. b. The value of a good generally depends on who uses it and circumstances such as when and where it is used. c. The value of a good is determined by the cost of the material resources required for its production. d. None of the above are true.

The value of a good generally depends on who uses it and circumstances such as when and where it is used.

What would be another example of a "system" in the real world that could serve as a metaphor for micro and macroeconomics?

There are many physical systems that would work, for example, the study of planets (micro) in the solar system (macro), or solar systems (micro) in the galaxy (macro).

What is an example of a problem in the world today, not mentioned in the chapter, that has an economic dimension?

There are many such problems. Consider the AIDS epidemic. Why are so few AIDS patients in Africa and Southeast Asia treated with the same drugs that are effective in the United States and Europe? It is because neither those patients nor the countries in which they live have the resources to purchase the same drugs.

Assembly Bil 5 in California goes into effect on January 1st. This bill forbids businesses from using independent contractors unless they can meet three stringent requirements. Targeted at Uber and Lyft, the legislation. In response, a number of online media companies, such as Vox, have announced that it will be laying off hundreds of freelancers in California. This is an example of what economic principle at work. a. Association is not causation. b. The fallacy of composition. c. Unintended consequences. d. Businesses are evil.

Unintended consequences.

In his autobiography (pp. 151-152), Mark Twain says the following:Once in Hartford the flies were so numerous for a time, and so troublesome, that Mrs. Clemens conceived the idea of paying George a bounty on all the flies he might kill. The children saw an opportunity here for the acquisition of sudden wealth. ... Any Government could have told her that the best way to increase wolves in America, rabbits in Australia, and snakes in India, is to pay a bounty on their scalps. Then every patriot goes to raising them.The response of citizens is an example of what economic principle? a. Unintended consequences. b. Supply creates its own demand. c. Opportunity cost. d. Thinking on the margin.

Unintended consequences.

Which of the following is true? a. Human choice is generally not influenced by changes in incentives. b. What is true for the individual must be true for the group as a whole. c. Using scarce resources to meet one need reduces our ability to meet needs in other areas d. The economic way of thinking stresses that good intentions usually lead to sound economic policy

Using scarce resources to meet one need reduces our ability to meet needs in other areas

Individuals may not act in the rational, calculating way described by the economic model of decision making, measuring utility and costs at the margin, but can you make a case that they behave approximately that way?

When individuals compare cost per unit in the grocery store, or characteristics of one product versus another, they are behaving approximately like the model describes.

Macroeconomics is an aggregate of what happens at the microeconomic level. Would it be possible for what happens at the macro level to differ from how economic agents would react to some stimulus at the micro level? Hint: Think about the behavior of crowds.

While the macroeconomy is ultimately the sum of individual actions, we can sometimes see a different result from collective action than we do for individual action. This can happen for a number of reasons, including crowd psychology, concentrated benefits and dispersed costs, and difficulties in coordination.

Why would division of labor without trade not work?

With no trade, each individual must produce all the goods and services he wants to consume. Therefore, by definition, he cannot specialize and so he can obtain the benefits of specialization. With trade, on the other hand, by specializing on what the individual does best, he can maximize product and income and trade for whatever else he wants to consume. In short, specialization results in a net gain rather than a loss.

Which of the following is true regarding private ownership? a. Relative to common ownership, private ownership generally leads to less conservation of resources. b. With private ownership, owners are generally held accountable for using their resources in a manner that harms the resources of others through liability laws. c. Private ownership generally gives the owner little incentive to find ways to use the resource wisely. d. With private ownership, resource owners have little incentive to consider the preferences of others when deciding how to employ a resource.

With private ownership, owners are generally held accountable for using their resources in a manner that harms the resources of others through liability laws.

Does voluntary exchange create wealth (value)? a. No, exchange cannot increase wealth since it simply moves goods around rather than expanding the number of goods in existence. b. No, if one person gains, the other party must lose an equal amount. c. Yes, because both parties gain more of what they value d. only if the trade results in the creation of additional goods and services.

Yes, because both parties gain more of what they value

Under a system of private property, could a 60-year-old owner of a tree farm benefit by planting and caring for a crop of Douglas firs, most of which will not be ready to cut for 50 years? a. No, the farmer will be dead before the crop will be ready for harvest. b. No, the value of the farmer's land will decline since he is taking it out of production for the next 50 years. c. Yes, the farmer will benefit because this action will increase the value of the land if and when the farmer decides to sell. d. Yes, but only if the project is subsidized by the government or private conservation groups.

Yes, the farmer will benefit because this action will increase the value of the land if and when the farmer decides to sell.

Rational Choice

a choice that uses the available resources to best achieve the objective of the person making the choice

production possibilities frontier (PPF)

a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.

circular flow diagram

a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market

The primary benefit that results when a nation employs its resources in accordance with the principle of comparative advantage is a. an expansion in investment resulting from a reallocation of resources away from consumption. b. a larger output resulting from a more efficient use of resources c. greater equality of income resulting from an increase in the number of workers. d. an increase in the profitability of business enterprises resulting from an increase in investment.

a larger output resulting from a more efficient use of resources

Goods and Service Market

a market in which firms are sellers of what they produce and households are buyers

goods and services market

a market in which firms are sellers of what they produce and households are buyers

underground economy

a market where the buyers and sellers make transactions in violation of one or more government regulations

The difference between a positive economic statement and a normative statement is that a. a positive statement must be true; a normative statement is often not true b. a normative statement must be true; a positive statement is often not true c. a positive statement can be verified; a normative statement cannot d. a normative statements can be verified; a positive statement cannot

a positive statement must be true; a normative statement is often not true

theory

a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation; more abstract representation than a model

When individuals reap the benefits of choices that increase the value of their resources and bear the costs of choices that reduce the value of their resources, decision makers have a. little incentive to acquire information about potential uses of the resources. b. little incentive to use the resources wisely. c. a strong incentive to use the resources now rather than conserve them for the future. d. a strong incentive to search for more efficient ways of using the resources.

a strong incentive to search for more efficient ways of using the resources.

rational decision making

a systematic process of defining problems, evaluating alternatives, and choosing optimal solutions

It has been said that all economists share a common ground. What is this common ground? a. the fallacy of composition - the idea that what is true for one individual will also be true for the group. b. economic theory based on the postulate that the effects of a policy will be good if the intentions of the policy makers are good c. the use of mathematics to explain highly aggregated markets d. a theoretical framework based on the premise that incentives influence behavior in a predictable manner

a theoretical framework based on the premise that incentives influence behavior in a predictable manner

Private property rights involve a. the right to exclusive use of the property. b. legal protection against those who would seek to use or abuse the property without the owner's permission. c. the right to transfer, sell, exchange, or mortgage the property. d. all of the above.

all of the above.

opportunity set

all possible combinations of consumption that someone can afford given the prices of goods and the individual's income

budget constraint

all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set

market economy

an economy where economic decisions are decentralized, resources are owned by private individuals, and businesses supply goods and services based on demand

command economy

an economy where economic decisions are passed down from government authority and where resources are owned by the government

law of diminishing returns

as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline

law of diminishing marginal utility

as we consume more of a good or service, the utility we get from additional units of the good or service tend to become smaller than what we received from earlier units

One of the best known principles in economics is the idea of unintended consequences. It is very difficult to anticipate all the ways that citizens will respond to a policy. The task of the economist is to try to tease out before hand why a policy might not work in addition to explaining after the fact why it failed to achieve its goals.In 1989, Mexico City's government passed a law that banned drivers from driving one day a week, based on the last digit of the vehicle's license plate. For example, people whose license plates ended in 2 might not be able to drive that car on Tuesdays.After the policy was enacted, the evidence suggests that air quality did not improve. Economist Lucas Davis studied why air pollution didn't decline. Based on your knowledge of unintended consequences and human behavior and incentives, what do you think he found? a. Cars don't pollute a lot so the policy had zero effect. b. People still had to get to work, so they substituted away from their cars to buses and taxis, which tended to be worse polluters. c. The police did not enforce the law. d. People bought an older second car to drive on the days their other car was illegal to drive. e. b and d.

b and d.

Trade

basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties.

Capital assets are significant pieces of property such as homes, cars, investment properties, stocks, bonds, and even collectibles or art. For businesses, a capital asset is an asset with a useful life longer than a year that is not intended for sale in the regular course of the business's operation. When private ownership rights are well-defined and enforced, owners of capital assets a. have no incentive to consider the desires of others. b. bear the opportunity cost of ignoring the wishes of others. c. are not responsible if the use of their assets imposes harm on others. d. have little incentive to take care of their assets.

bear the opportunity cost of ignoring the wishes of others.

"As soon as I announced my 'get tough on crime' policy, criminals got scared and the crime rate went down." Suppose that the lower crime rate was actually caused by freezing cold temperatures in January—it was just too cold for anybody to be out robbing other people. Which fundamental economic mistake did the politician make? a. believing that what's good for one person is good for the whole group (the fallacy of composition) b. failing to take into account the benefits of crime (the payoff fallacy) c. believing that association is the same as causation d. failing to understand the theory of comparative advantage

believing that association is the same as causation

The law of "comparative advantage" suggests that a. curtailing U.S. trade with other countries would make U.S. consumers worse off. b. everyone would be better off if they were self-sufficient. c. countries will tend to export commodities that they can produce at a relatively low opportunity cost. d. both answers a and c are correct.

both answers a and c are correct.

In an informed and voluntary exchange, a. both parties receive something they value more than what they gave up. b. both parties place an equal value on what they received and what they gave up. c. neither party can gain more than the other. d. one trader can gain only at the expense of the other.

both parties receive something they value more than what they gave up.

The most fundamental concept in economics is that: a. changes in incentives influence behavior in a predictable way—people will be less likely to choose an option as it becomes more expensive b. changes in incentives generally do not influence human behavior c. goods that are provided by government are free for society d. individuals generally do not consider other alternatives when making a choice

changes in incentives influence behavior in a predictable way- people will be less likely to choose an option as it becomes more expensive

If an airline company has several empty seats on a flight and the full price of an air ticket is $500 and the marginal cost per passenger is $100, then it will be profitable for the airline to: a. charge a stand-by (last second) passenger no less than the full fare of $500 b. charge a stand-by (last second) passenger less than $100 c. charge a stand-by (last second) passenger more than $100 d. fill the seats at the last minute for any price

charge a stand-by (last second) passenger more than $100

A private owner of a resource has a strong incentive to a. conserve the resource for the future, particularly if it is expected to increase in value. b. use the resource today even if its value is expected to increase substantially in the future. c. employ the resource in ways that impose harm on others. d. ignore the wishes of others when deciding how to employ the resource.

conserve the resource for the future, particularly if it is expected to increase in value.

sunk costs

costs that are made in the past and cannot be recovered

The Value of A Good

depends on many factors, including who uses it and under what circumstances; is subjective

When property rights are clearly defined and enforced, private owners will a. use their property for selfish ends because they have little or no incentive to consider the desires of others. b. develop and direct their property toward uses that others value highly because the market will generally reward them for doing so. c. have little or no incentive to take care of their property or conserve it for the future. d. be unable to derive personal gain if they are sensitive to the desires of others when deciding how to use their property.

develop and direct their property toward uses that others value highly because the market will generally reward them for doing so.

fiscal policy

economic policies that involve government spending and taxes

marginal analysis

examination of decisions on the margin, meaning a little more or a little less from the status quo

A student noted that the football team won by a larger margin when the third-string played more minutes. Therefore, he recommended that the third-stringers become the first team. His conclusion was probably erroneous because he a. confused positive and normative analysis. b. committed the fallacy of composition. c. failed to recognize that association is not causation. d. confused economics with sociology.

failed to recognize that association is not causation.

The economic way of thinking suggests that if the government imposed a $500 tax on owners of red automobiles: A. fewer red automobiles would be produced and sold b. more red automobiles would be produced and sold c. there would be no change in the number of red automobiles produced and sold d. red automobiles would cease to exist

fewer red automobiles would be produced and sold

If a college enforces a new policy where anyone caught cheating is immediately expelled, the basic postulate of economics suggests that: a. cheating will be completely eliminated b. fewer students will attempt to cheat c. the amount of cheating will be unaffected d. any of the above is possible because student behavior is unpredictable

fewer students will attempt to cheat

"Bill Gates has made billions of dollars producing and marketing computer software. Many workers and consumers must have suffered in order for Gates to amass such enormous wealth." The person who made this observation a. has failed to understand the principle of opportunity cost. b. has failed to comprehend the fallacy of composition. c. has failed to understand that voluntary exchange generally results in mutual economic gain. d. has utilized the economic way of thinking by thinking the gains of producers are made primarily at the expense of consumers and workers.

has failed to understand that voluntary exchange generally results in mutual economic gain.

Your friend notices that U.S. auto production and U.S. population growth have moved together over several decades. He reasons that one way to slow population growth is for the government to order the auto makers to cut back on production. You gently point out to him that he a. is correct only when the economy is in a recession b. has mistakenly inferred causation from observed correlation c. has ignored secondary effects d. is correct only when the United States enjoys economic growth

has mistakenly inferred causation from observed correlation

Which of the following was a key belief of Adam Smith? a. he felt that human goodness would provide adequate goods and services to everyone. b. he stressed that limited exchange and command economies would prevent the exploitation of the poor. c. he believed that individuals pursuing their own interests would direct economic activity in the most advantageous way. d. he lectured about the importance of gold and silver in providing a stable monetary system.

he believed that individuals pursuing their own interests would direct economic activity in the most advantageous way

A restaurant offers an "all you can eat" lunch buffet for $12. Jim has eaten three servings and is trying to decide whether or not to go back for a fourth. The economic way of thinking suggests that Jim should go back for the fourth serving if and only if a. his marginal benefit of the additional serving is greater than zero. b. his marginal benefit of the additional serving is at least $3. c. his marginal benefit of the additional serving is $12 or more d. his total value from the meal exceeds $12

his marginal benefit of the additional serving is greater than zero.

invisible hand

idea that self-interested behavior by individuals can lead to positive social outcomes

Regulation

imposition of rules by government, backed by the use of penalties that are intended specifically to modify the economic behavior of individuals and firms in the private sector; rules that limit who can enter a business (entry controls) and what prices they may charge (price controls).

The economic way of thinking stresses that: a. changes in personal costs and benefits generally fail to exert much impact on behavior b. incentives matter— individuals respond in predictable ways to changes in personal costs and benefits c. if one individual gains from an economic activity, then someone else must lose and in the same proportion d. if a good is provided by the government, its production will not consume valuable scarce resources

incentives matter- individuals respond in predictable ways to changes in personal costs and benefits

Economics is the study of how: a. individuals make choices because of incentives and scarcity. b. to succeed in business. c. to make money in the stock market. d. the morals and values of people are formed.

individuals make choices because of incentives and scarcity.

market

interaction between potential buyers and sellers; a combination of demand and supply

"After every fall election, the weather starts to turn cold, therefore elections cause cold weather." This statement a. is correct as a causal statement. b. gets the causation backwards c. is a function of US elections being held primarily in November. d. is wrong as a factual matter.

is a function of US elections being held primarily in November.

The law of comparative advantage implies that a nation, individual, or region should trade for those economic goods for which it a. has an absolute advantage b. has a comparative advantage c. is a low opportunity cost producer d. is a high opportunity cost producer

is a high opportunity cost producer

According to Adam Smith, individual self-interest a. is a powerful force for economic progress when it is directed by competitive markets. b. is a powerful force for economic progress when individuals are wisely directed by a strong central government. c. is a major factor in retarding the economic progress of humankind. d. could be either a positive or negative force for economic progress, depending on the moral influences of political leaders.

is a powerful force for economic progress when it is directed by competitive markets.

The statement, "Violent crime has decreased in the last five years," a. is obviously wrong and, therefore, cannot be a positive statement. b. is normative since it can be answered by simply looking at the facts. c. is positive because it is testable. d. is not very interesting because all normative issues are of little importance.

is positive because it is testable.

The opportunity cost of an activity a. includes only the direct monetary cost of whatever is chosen. b. is subjective and can only be determined by the person who chooses the alternative c. is the value of all alternatives that must be forgone as the result of the choice. d. is relevant only in cases where the choice involves alternatives that would be considered undesirable.

is subjective and can only be determined by the person who chooses the alternative

The opportunity cost of an alternative a. includes only the direct monetary cost of whatever is chosen. b. is subjective and can only be determined by the person who chooses the alternative. c. is the value of all alternatives that must be forgone as the result of the choice. d. is relevant only in cases where the choice involves alternatives that would be considered undesirable.

is subjective and can only be determined by the person who chooses the alternative.

When economists say an individual has made a rational choice, they mean the individual has a. made the choice by weighing their own subjective costs and benefits. b. made a "good" decision, one that reasonable outside observers would have also made. c. neglected to consider the unintended consequences arising from their decision d. ignored their own personal interests and made the choice that is best for society.

made the choice by weighing their own subjective costs and benefits.

Doris, a burglar who breaks into houses, decides to break into the house at 265 Elm Street, rather than the house next door because the house next door has a sign in the yard that says "home protected by a security system." To an economist, Doris is a. making an irrational choice. b. making a rational choice c. not fully considering the personal costs and benefits of her decision d. not responding to the incentives she faces.

making a rational choice

gross domestic product (GDP)

measure of the size of total production in an economy

opportunity cost

measures cost by what is given up in exchange; opportunity cost measures the value of the forgone alternative

According to marginal analysis, you should spend more time studying economics if the extra benefit from an additional hour of study a. is positive b. outweighs the extra cost c. exceeds the benefits of the previous hour of study d. will raise your exam score

outweighs the extra cost

When economists say that people choose rationally, this means a. they gather all relevant information before making their purchases b. once a pattern of behavior has been established, people tend to become set in their ways c. people respond in predictable ways to changes in costs and benefits d. people rarely make errors when they are permitted to make transactions

people respond in predictable ways to changes in costs and benefits

Because information is costly to acquire, a. people will rationally choose not to become fully informed when making decisions. b. people will generally choose to become as fully informed as possible when making decisions c. people will generally choose to acquire no information that would be relevant to their decisions. d. none of the above are true.

people will rationally choose not to become fully informed when making decisions.

monetary policy

policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing

The difference between positive economic statements and normative economic statements is that a. positive statements are based on opinion while normative statements are based on fact b. positive statements are true and normative statements are often false c. positive statements are based on fact while normative statements are based on opinion d. positive statements are often false and normative statements are true

positive statements are based on fact while normative statements are based on opinion

The Secretary of Labor states that wage rates in the country have risen by 2 percent this past year. The head of a local labor union states that wage gains should have been higher. The Secretary's statement is a (n) ______ economic statement, and the labor head's statement is a (n)______ economic statement. a. normative; normative b. normative; positive c. positive; normative d. positive; positive

positive; normative

"Here in East Abalone, we are proud of our ability to be self-sufficient. We do not trade with other nations." From an economic perspective, citizens of this (mythical) nation can be expected to a. gain materially from this policy because they can consume more goods over time than if they engaged in trade with foreigners. b. produce less total value than they could if they specialized and engaged in trade with other nations. c. gain from more rapid growth since home markets are reserved for home producers d. be just as well off without trade since the value of what is sent to other nations in trade just equals the value of what is received in trade.

produce less total value than they could if they specialized and engaged in trade with other nations.

imports

products (goods and services) made abroad and then sold domestically

exports

products (goods and services) made domestically and sold abroad

Adam Smith believed that if people were free to pursue their own interests, a. public interest would be served quite well b. less would be produced than if altruism were the guiding principle. c. they would generally apply their talents to unproductive activities that would generate little value to society. d. they would have little incentive to undertake productive activities.

public interest would be served quite well

utility

satisfaction, usefulness, or value one obtains from consuming goods and services

The unintended consequences of an economic change that are not immediately identifiable but are felt only with time are known in economics as a. opportunity costs. b. marginal effects. c. secondary effects. d. scarcity constraints.

secondary effects.

model

see theory; a more applied or empirical representation of a model

When economists say an individual displays economizing behavior, they simply mean that she is: a. making a lot of money. b. buying only those products that are cheap and of low quality. c. learning how to run a business more effectively. d. seeking the lowest cost method to accomplish her objectives.

seeking the lowest cost method to accomplish her objectives.

A marginal change usually is a a. change that involves little, if anything, that is important b. large, significant adjustment c. change for the worse, and so it is usually a short-term change d. small, incremental adjustment

small, incremental adjustment

The law of comparative advantage explains why a. specialization and exchange will make it possible for trading partners to expand their joint output. b. there will be an inverse relationship between the price of a product and the quantity of it that will be demanded. c. larger firms will have lower per unit costs than smaller firms. d. an increase in the price of a good will lead to an expansion in the quantity supplied by business firms.

specialization and exchange will make it possible for trading partners to expand their joint output.

normative statement

statement which describes how the world should be

positive statement

statement which describes the world as it is

The student government associations at several universities have experimented with purchasing bicycles to leave around campus for everyone's use. Anyone who needs the bike can use it, and they are not allowed to lock the bike up or take it home, but rather must leave it on campus for someone else to use. Economic theory would predict that a. students will take better care of these commonly owned bicycles than they do their own bicycles. b. students will take equally as good care of these commonly owned bicycles as they do their own bicycles. c. students will not take as good of care of these commonly owned bicycles as they do their own bicycles. d. because universities have a lot of money, these bikes will be better maintained than the ones owned privately by college students who tend to have little money.

students will not take as good of care of these commonly owned bicycles as they do their own bicycles.

private enterprise

system where the means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals

Absolute Advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

microeconomics

the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms

macroeconomics

the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance.

In economics, the term marginal refers to: a. the change or difference between two alternatives b. man-made resources as opposed to natural resources c. the satisfaction a consumer receives from a good d. holding everything else constant in the analysis

the change or difference between two alternatives

People are willing to pay more for a diamond than for a bottle of water because a. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water c. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices d. water prices are held artificially low by governments, since water is necessary for life

the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water

A rational decision maker takes an action if and only if a. the opportunity cost of the action is zero b. the marginal cost of the action is zero c. the marginal cost of the action exceeds the marginal benefit of the action d. the marginal benefit of the action exceeds the marginal cost of the action

the marginal benefit of the action exceeds the marginal cost of the action

Labor Market

the market in which households sell their labor as workers to business firms or other employers

labor market

the market in which households sell their labor as workers to business firms or other employers

Hutch Technology makes computer monitors, which sell for $500 each. What is the opportunity cost of producing ten monitors? a. $5,000 b. the other goods that could be produced with the resources that produce the ten monitors c. the profits that Hutch earns when it sells the ten monitors d. the profits that Hutch loses if it does not produce the monitors

the other goods that could be produced with the resources that produce the ten monitors

Beginning in the early 1990s, private landowners in Zimbabwe have started fencing in large areas of land that contain black rhinos, which were on the verge of extinction. These private owners charge fees for a stay at the lodges on the property (eco-tourism) and also sell hunting safaris and photo safaris. As a result, a. the population of black rhinos has fallen substantially. b. the population of black rhinos has increased. c. many black rhinos are being poached. d. the incomes of residents in Zimbabwe has fallen substantially.

the population of black rhinos has increased

Production

the process of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (output)

economics

the study of how humans make choices under conditions of scarcity

In economics the term utility refers to a. the highest valued alternative that must be sacrificed when a choice is made. b. the fact that human desire for goods is unlimited while the resources available to meet those desires is limited. c. the number of possible uses for a resource d. the subjective benefit or satisfaction a person expects to receive from a choice or course of action.

the subjective benefit or satisfaction a person expects to receive from a choice or course of action.

globalization

the trend in which buying and selling in markets have increasingly crossed national borders

unintended consequences

the unexpected and unplanned results of a decision or action

The fact that some people love tomatoes while others dislike them illustrates that a. tomatoes have a value that is determined by their cost of production rather than by the value to the consumer of the tomatoes. b. the value of a tomato cannot be determined by the person consuming it. c. the value created by a good does not depend on who consumes it. d. the value of a good is subjective.

the value of a good is subjective.

The opportunity cost of going to college is: a. the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses. b. the value of the best opportunity a student gives up to attend college. c. zero for students who are fortunate enough to have all of their college expenses paid by someone else d. zero, since a college education will allow a student to earn a larger income after graduation

the value of the best opportunity a student gives up to attend college.

The opportunity cost of an action is: a. the monetary payment the action required b. the total time spent by all parties in carrying out the action c. the value of the best opportunity that must be sacrificed in order to take the action d. the cost of all alternative actions that could have been taken, added together

the value of the best opportunity that must be sacrificed in order to take the action

division of labor

the way in which the work required to produce a good or service is divided into tasks performed by different workers

traditional economy

typically an agricultural economy where things are done the same as they have always been done

Secondary effects

unintended consequences of economic actions that may develop slowly over time as people react to events

Just before class, Jim tells Stuart, "Stuart, you shouldn't skip class today because you have paid tuition to enroll in the class." Stuart ignores Jim's advice, and instead makes the decision of whether to attend based on what he feels he'd be missing that day in class relative to his value of the extra time he could have to finish the video game he is playing. To an economist, Stuart is a. using marginal decision making. b. ignoring the total value of attending class. c. ignoring the concept of opportunity cost d. likely going to fail.

using marginal decision making.

The subjective benefit (or satisfaction) that an individual expects to derive from an activity is called a. opportunity cost b. utility. c. marginal cost d. scarcity

utility

comparative advantage

when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production

scarcity

when human wants for goods and services exceed the available supply

productive efficiency

when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)

economies of scale

when the average cost of producing each individual unit declines as total output increases

allocative efficiency

when the mix of goods being produced represents the mix that society most desires

specialization

when workers or firms focus on particular tasks for which they are well-suited within the overall production process