Econ 210 Ch 2
Suppose Alyssa earns $650 per week working as jewelry appraiser for Classy's Jewelry Store. She uses $10 to buy a box of aspirin at Pillmart Pharmacy. Pillmart Pharmacy pays Tim $200 per week to work the cash register. Tim uses $250 to purchase necklace from Classy's Jewelry Store.
Alyssa earns $650 per week working for Classy's Jewelry Store. FACTOR Tim earns $200 per week working for Pillmart Pharmacy. FACTOR Tim spends $250 to purchase necklace from Classy's Jewelry Store. PRODUCT In this scenario, households sell factors of production in factor markets when Alyssa supplies her labor to Classy's Jewelry Store and when Tim supplies his labor to Pillmart Pharmacy. Moreover, a firm sells goods and services to a household in product markets when Pillmart Pharmacy provides the aspirin to Alyssa and Classy's Jewelry Store provides the necklace to Tim.
All Americans should earn more than $25,000 per year. NORM Raising the minimum wage increases the rate of unemployment. POS The minimum wage should be raised to $15 per hour. NORM Raising the minimum wage reduces the number of employment opportunities for low skilled workers. POS Breast cancer is the fifth most common cause of cancer death. POS For women aged 60 to 69, breast cancer screening significantly reduces breast cancer mortality. POS Doctors should encourage women aged 60 to 69 to be screened for breast cancer. NORM The government should force doctors to encourage women aged 60 to 69 to be screened for breast cancer. NORM Taxes are too high. NORM In some circumstances, if taxes are lowered, government revenues actually increase. POS It is immoral for a government to redistribute money from one person to another. NORM When the government increases taxes, rates of tax evasion increase. POS
A positive statement is one that seeks to describe the world as it is. . A normative statement is one that offers an opinion as to the way the world should be. Note that describing a statement as positive or normative is not the same as describing it as true or false. Positive statements may be false (for example, "You are the king of Spain"), and normative statements may reflect the value judgments of a large majority of people (for example, "It is wrong to kill innocent children"). However, positive statements can always be supported or refuted by data, while normative statements require a larger philosophical framework to evaluate. It's quite easy to prove that you are not the king of Spain, but to argue that it is wrong to kill innocent children, you must appeal to a larger moral framework. Such a framework is based on values and cannot be confirmed or refuted by evidence.
Which of the elements of this scenario represent a flow from a household to a firm? This could be a flow of dollars, inputs, or outputs. Check all that apply.
Alyssa's labor The $250 Tim spends to purchase necklace from Classy's Jewelry Store When Alyssa (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 aspirin is provided to Alyssa (a household), the aspirin is an output that flows from a firm to a household. Pillmart Pharmacy (a firm) pays Tim (a household) $200 for his labor. Therefore, the $200 is a payment that flows from a firm to a household. Tim (a household) pays Classy's Jewelry Store (a firm) $250 for necklace. Therefore, the $250 is a payment that flows from a household to a firm.
Suppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship: P=A×M P=Price Level M=Money Supply A=Composite of other factors, including real GDP, that change very slowly over time. How might an economist gather empirical data to test the proposed relationship between money and the price level?
An economist would look for data on past changes in the money supply and note the resulting changes in the price level. Much like researchers in other sciences, such as physics and biology, economists develop theories and models to describe the world based on observed phenomena. Methods of testing such theories, however, differ greatly based on the applicability and feasibility of controlled lab experiments. Unlike physicists and biologists, economists typically cannot run controlled laboratory experiments to generate data to test their models and theories. This is especially true of models describing the macro economy, such as those relating to the price level, the inflation rate, and the unemployment rate. If an economist wanted to test the model relating the price level to the money supply, it is unlikely the Federal Reserve would allow the economist to vary the money supply (and potentially drastically affect the economy) simply to test an economic theory. Rather, an economist would likely have to look at available data on previous changes in the money supply and how the price level changed in response.
Suppose Ana earns $750 per week working as work as a flight attendant for Flyaway Airlines. She uses $9 to order a mojito cocktail at Little Havana. Little Havana pays Yakov $450 per week to wait tables. Yakov uses $375 to purchase air travel to Hawaii from Flyaway Airlines. Identify whether each of the following events in this scenario occurs in the factor market or the product market.
Ana spends $9 to order a mojito cocktail. PRODUCT Ana earns $750 per week working for Flyaway Airlines. FACTOR Yakov earns $450 per week working for Little Havana. FACTOR In this scenario, households sell factors of production in factor markets when Ana supplies her labor to Flyaway Airlines and when Yakov supplies his labor to Little Havana. Moreover, a firm sells goods and services to a household in product markets when Little Havana provides the mojito to Ana and Flyaway Airlines provides the air travel to Hawaii to Yakov.
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.
Based on this model, firms earn revenue when households purchase goods and services in product 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.
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.
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 South Africa produces two types of goods: agricultural and capital. The following diagram shows its current production possibilities frontier for alfalfa, an agricultural good, and construction vehicles, a capital good.
Because of the drought, fewer bushels of alfalfa can be produced on any given amount of land; however, there is no reason to think that the maximum amount of construction vehicles 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 alfalfa, it can initially produce a maximum of 180,000 construction vehicles per year. Because the drought does not affect the number of construction vehicles South Africa can produce, you should have left the point at 180,000 construction vehicles per year. Similarly, when you look at the horizontal axis, you see that if South Africa produces zero construction vehicles, it can initially produce a maximum of 30 million bushels of alfalfa per year. Because the drought decreases the amount of alfalfa South Africa can produce, you should have moved the point to 20 million bushels of alfalfa per year.
Suppose the United Kingdom produces two types of goods: agricultural and capital. The following diagram shows its current production possibilities frontier for corn, an agricultural good, and industrial robots, a capital good.
Because of the flu epidemic, less labor is available for the production of both corn and industrial robots. For instance, when you look at the vertical axis, you see that if the United Kingdom produces zero bushels of corn, it can initially produce a maximum of 90,000 industrial robots per year. Because the flu epidemic decreases the number of industrial robots the United Kingdom can produce, you should have moved the point to 60,000 industrial robots per year. Similarly, when you look at the horizontal axis, you see that if the United Kingdom produces zero industrial robots, it can initially produce a maximum of 210 million bushels of corn per year. Because the flu epidemic decreases the amount of corn the United Kingdom can produce, you should have moved the point to 140 million bushels of corn per year.
Despite their differences, with which proposition are two economists chosen at random most likely to agree?
Employers should not be restricted from outsourcing work to foreign nations. 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 employers should not be restricted from outsourcing work to foreign nations. Indeed, one survey that 90% 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.
Suppose Japan produces only two goods: corn and laptops. The following graph shows Japan's current production possibilities frontier, along with six output combinations represented by black points (plus symbols) labeled A to F.
Every output combination on the production possibilities frontier shows an efficient output combination for Japan. The points on the production possibilities frontier represent all combinations of output produced using all of the nation's available resources and its current technology, such that the nation cannot produce more of one good without producing less of the other. Points located inside the production possibilities frontier, such as A and B, represent inefficient output combinations. At these points, it is possible to increase the production of both goods because some resources are unemployed. For example, point A is inefficient because it is possible for Japan to produce at point F instead, where the economy is producing both more corn and more laptops. Points located on the production possibilities frontier, such as E and F, represent efficient output combinations. At these points, it is impossible to increase the production of one good without producing less of the other. For instance, if Japan is currently producing at point F and decides that it wants to produce more corn, it must produce fewer laptops. Points located outside the production possibilities frontier, such as C and D, 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 corn Japan can produce if it also wants to produce the given quantity of laptops. For example, compare point F (41 million laptops and 41 million bushels of corn) with point D (41 million laptops and 75 million bushels of corn). Because point F is on Japan's production possibilities frontier, you can see that if Japan is producing 41 million laptops, it can produce at most 41 million bushels of corn. Therefore, point D must be unattainable, given current resources and technology.
The effect of federal government spending on the national unemployment rate MACRO The effect of government regulation on a monopolist's production decisions MICRO The optimal interest rate for the Federal Reserve to target MACRO The effect of a cigarette tax on the quantity of cigarettes sold MICRO The effect of a large government budget deficit on the economy's price level MACRO A consumer's optimal choice when buying a flat-screen TV MICRO A firm's decision about the size of its new factory MICRO The effects of government tax policy on long-term economic growth MACRO A consumer's optimal choice when buying a flat-screen TV MICRO
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.
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. 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 rent ceilings reduce the quantity and quality of available housing. 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.
Despite their differences, with which proposition are two economists chosen at random most likely to agree?
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.
Which of the elements of this scenario represent a flow from a household to a firm? This could be a flow of dollars, inputs, or outputs. Check all that apply.
The $100 Shen spends to purchase tax services from A-Plus Accountants The breakfast Valerie receives Valeries labor When Valerie (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 Valerie (a household), the breakfast is an output that flows from a firm to a household. Dinah's Diner (a firm) pays Shen (a household) $325 for his labor. Therefore, the $325 is a payment that flows from a firm to a household. Shen (a household) pays A-Plus Accountants (a firm) $100 for tax services. Therefore, the $100 is a payment that flows from a household to a firm.
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.
The $450 per week Yakov earns working for Little Havana Ana's labor The $375 Yakov spends to purchase air travel to Hawaii from Flyaway Airlines The mojito Ana receives
Suppose that Jacques, an economist from an AM talk radio program, and Kyoko, an economist from a nonprofit organization on the West Coast, are arguing over saving incentives. The following dialogue shows an excerpt from their debate: Kyoko: I think it's safe to say that, in general, the savings rate of households in today's economy is much lower than it really needs to be to sustain an improvement in living standards. Jacques: I think a switch from the income tax to a consumption tax would bring growth in living standards. Kyoko: You really think households would change their saving behavior enough in response to this to make a difference? Because I don't.
The disagreement between these economists is most likely due to difference sin scientific judgement. 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 responsiveness of saving rates to changes in tax regimes. In contrast, disagreement due to differences in values reflect differing assessments on fairness or equity.
Suppose that Jacques, an economist from a university in Arizona, and Kyoko, an economist from a school of industrial relations, are arguing over government bailouts. The following dialogue shows an excerpt from their debate: Kyoko: Thanks to recent financial crises, the concept of bailouts is a hot topic for debate among everyone these days. Jacques: Indeed, it's gotten crazy! A government bailout of severely distressed financial firms is unnecessary because free markets will properly price assets. Kyoko: 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.
Suppose that Dmitri, an economist from a research institute in Texas, and Frances, an economist from a university in Massachusetts, are arguing over health insurance. The following dialogue shows an excerpt from their debate: Frances: A popular topic for debate among politicians as well as economists is the idea of providing government assistance for health benefits. Dmitri: I think it is oppressive for the government to tax people who take care of themselves in order to pay for health insurance for those who are obese. Frances: I disagree. I think government funding of health insurance is useful to ensure basic fairness.
The disagreement between these economists is most likely due to differences in values . 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 values because they disagree about a normative issue: the extent of the moral obligation that one human or citizen has to another. In contrast, differences in scientific judgments are due to differing opinions about factual matters, e.g., the relative merits of competing theories or the values of economic parameters.
Consider the following production possibilities frontier model for an economy that produces only two goods: alfalfa and smartphones. Which of the following is true regarding this economic model?
The fact that there are only two goods produced in this theoretical economy is a simplifying assumption that still allows economists to demonstrate key economic concepts. Scientists, of all types, make assumptions in their models to simplify the complex world they are trying to describe. Making these simplifying assumptions allows scientists to focus on only the most important and most generalizable components of the topic of study. Economists are no different. Economists make simplifying assumptions in all economic models in order to focus on the most important economic variables in a given situation. In this case, although much of the practical application of the production possibilities frontier (PPF) model is lost when only two goods are allowed, many key insights can more easily be demonstrated because of the simplicity of the model. This simple PPF model can still be used to model important economic concepts, such as opportunity cost, efficiency, feasibility, and technological change.
Suppose Jacques buys a new tool that enables him to produce twice as many trucks per hour as before, but it doesn't affect his ability to produce balls. Use the green points (triangle symbol) to plot his new PPF on the previous graph. Because he can now make more trucks per hour, Jacques's opportunity cost of producing balls is higher than it was previously.
The new tool causes Jacques's PPF to pivot to the right. In other words, for each point on his PPF, the vertical coordinate is the same as before, but the horizontal coordinate is twice its initial value. For example, under combination D, Jacques spends 2 hours producing trucks and 6 hours producing balls. Before he bought the new tool, he could have produced one truck and 19 balls, so (1, 19) was a point on his initial PPF. With the new tool, the same allocation of time results in two trucks and 19 balls, so (2, 19) is a point on his new PPF. Notice that one point is the same on the initial PPF and the new PPF. Because the new tool helps Jacques make only trucks, the tool does not change his output when he spends all of his time making balls. This occurs at output combination E. The shift in Jacques's PPF is reflected in a corresponding change in his opportunity costs. Again, consider combination D, and consider the effects of moving from there to combination E. Both before and after Jacques buys the tool, he can produce 19 balls if he devotes 6 hours to producing them and 20 balls if he devotes 8 hours to producing them. Therefore, spending his last 2 hours producing balls results in one additional ball. Before he bought the tool, he would have to give up one truck. However, now that he has the tool, it means giving up two trucks. Therefore, Jacques's increased ability to produce trucks increases his opportunity cost of producing balls.
Suppose Valerie earns $550 per week working as an analyst for A-Plus Accountants. She uses $8 to have breakfast at Dinah's Diner. Dinah's Diner pays Shen $325 per week to work as a short-order cook. Shen uses $100 to purchase tax services from A-Plus Accountants.
Valerie earns $550 per week working for A-Plus Accountants. FACTOR Valerie spends $8 to have breakfast. PRODUCT Shen spends $100 to purchase tax services from A-Plus Accountants. PRODUCT In this scenario, households sell factors of production in factor markets when Valerie supplies her labor to A-Plus Accountants and when Shen 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 Valerie and A-Plus Accountants provides the tax services to Shen.
Suppose Jacques is currently using combination D, producing one truck per day. His opportunity cost of producing a second truck per day is 3 balls per day. Now, suppose Jacques is currently using combination C, producing two trucks per day. His opportunity cost of producing a third truck per day is 5 balls per day. From the previous analysis, you can determine that as Jacques increases his production of trucks, his opportunity cost of producing one more truck increases .
When using combination D, Jacques is producing one truck and 19 balls per day. Producing a second truck per day would require him to move to combination C, reducing his production of balls to 16 per day. Since this change involves producing 3 fewer balls per day (19−16=319−16=3), the opportunity cost of producing the second truck per day is 3 balls per day. Similarly, using combination C, Jacques is producing two trucks and 16 balls per day. Producing a third truck per day would require him to move to combination B, reducing his production of balls to 11 per day. Since this change involves producing 5 fewer balls per day (16−11=516−11=5), the opportunity cost of producing the third truck per day is 5 balls per day. Jacques's opportunity cost of producing the second truck per day is 3 balls per day while the opportunity cost of producing the third truck per day is 5 balls per day. Hence, as Jacques increases his production of trucks, his opportunity cost of producing more trucks increases. This change is an example of the law of increasing opportunity costs.
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?
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. Economies typically consist of millions of individuals interacting in many different ways, and 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.
