Econ Chapter 1 and 2 Quiz

It is often costly to obtain the information necessary to make good decisions. Yet your own interests can best be served by rationally weighing all options available to you. This requires informed decision making. Does this mean that making uninformed decisions is irrational? How do you determine how much information is the right amount?

Rational decision makers will continue to acquire information as long as the benefit of the additional information exceeds the additional costs. Often times, we are willing to pay others to gather and digest this information for us.

Because some college majors pay nearly twice as much as others, why would students pursuing their rational self-interest choose a lower paying major?

Students decide majors for a variety of reasons and expected pay is just one of them. Some students might have higher interests in lower paying fields. Some students may not have the aptitude to succeed in the giver paying majors. And many students may be unaware of the pay difference when they decide on a major.

In response to an influx of undocumented workers, Congress made it a federal offense to hire them. How do you think this measure affected the U.S. production possibilities frontier? Do you think all industries were affected equally?

Such a law should cause the PPF to shift inward, because fewer resources would be available to the United States economy. The more labor-intensive industries, such as agriculture and services, would be hurt the most, especially those requiring unskilled labor.

Suppose I observe that communities with lots of doctors tend to have relatively high rates of illness. I conclude that doctors cause illness. What's wrong with this reasoning?

The casualty is in the other direction. Doctors will tend to locate where there is a lot of disease, thus a higher need for medical care

Under what conditions would an economy be operating inside its PPF? On its PPF? Outside its PPF?

The economy is inside its PPF if some resources are idle (unemployed) or if resources are allocated inefficiently. An economy is producing on its PPF if all resources are employed efficiently. An economy cannot operate outside of its PPF. Points outside the PPF represent unattainable combinations, given the resources, rules of the game, and the technology available.

You can either spend spring break working at home for $100 per day for five days or go to Florida for the week. If you stay home, your expenses will total about $120. If you go to Florida, the airfare, hotel, food and miscellaneous expenses will total about $1,000. What's your opportunity cost of going to Florida?

The opportunity cost is the total cost of going to Florida and includes dollar costs incurred as well as the forgone opportunity of working. Assuming you would work for five days if you stayed home, the cost of going to Florida would total $1,380: the $1,000 cost of going to Florida plus the net value of what you could have earned $380 ($500 in earnings less expenses of $120) if you stayed home.

Suppose you go to a restaurant and buy an expensive meal. Halfway through, despite feeling full, you decide to clean your plate. After all, you think, you paid for the meal, so you are going to eat all of it. What's wrong with this thinking?

This question highlights the importance of ignoring sunk costs in marginal decision making. Once you have purchased the meal, you cannot get your money back whether or not you finish the meal. There is no benefit to overeating

a. taxi b. computer software c. one hour of legal counsel d. a parking lot e. a forest f. the Mississippi River g. an individual introducing new ways to market products on the internet

a. capital: a manufactured item to produce a service b. capital: a manufactured item to produce a service c. labor: human effort d. capital and natural resources: the parking lot is on natural resource (land) but the land has undergone capital improvement e. natural resource f. natural resource g. entrepreneurial ability

What basic economic questions must be answered in a barter economy? In a primitive economy? In a capitalist economy? In a command economy?

All of the listed types of economies face the same three basic questions: what goods and services to produce, how to produce those goods and services, and for whom the goods and services should be produced.

what good is economic theory if it can't predict the behavior of a specific individual?

Economics attempts to explain human behavior. But it cannot measure and control all factoring behavioral influences. The behavior of a particular individual cannot be predicted or explained, but the behavior of groups of people can be. We can't predict an individuals response to a sale, but we can predict the total selling volume of a sale.

During the Vietnam War period, colleges and universities were overflowing with students. Was this bumper crop of students caused by a greater expected return on a college education or by a change in the opportunity cost of attending college? Explain.

During the Vietnam War period, the armed forces were populated with male draftees. A male college student, however, received a deferment for the period during which he was a full-time student. Therefore, the opportunity cost of entering college, at least for the vast majority of young males, no longer included the civilian salary that one could have earned. For females, on the other hand, the opportunity cost may well have increased because of the labor shortage created by the draft and the increase in college attendance among males.

If behavior is governed by rational self interest, who do people make charitable contributions of time and money?

Rational self interest is not blind materialism, pure selfishness, or greed, Rational self interest means we choose the option that maximizes expected benefits with a given cost. People will give more to charities when the contribution is tax deductible. The lower the personal cost of helping others the more we are willing to help and contribute.

True, false, or uncertain a. The opportunity cost of an activity is the total value of all the alternatives passed up b. Opportunity cost is an objective measure of cost c. When making choices, people carefully gather all available information about the costs and benefits of alternative choices d. A decision maker seldom knows the actual value of a forgone alternative and therefore must make decisions based on expected values

a. FALSE. The opportunity cost is the value of only the single best alternative forgone b. FALSE. Opportunity cost is a subjective measure of cost. Only the individual can estimate the expected benefits and costs to himself or herself c. FALSE. Information is gathered only as long as the expected benefits from information gathering exceed the expected costs. Acquiring information about alternatives is costly and time consuming. Individuals usually make their choices based on limited and incorrect information because that was what was available given their time and cost constraints d. TRUE. For example, you can guess that you will enjoy a movie and then find it too violent for your tastes

how might it affect the opportunity cost of going to a movie night a. you have a final exam tomorrow b. school will be out for a month starting tomorrow c. the same movie will be on tv next week d. the Super Bowl in on tv

a. This greatly increases the opportunity cost. Your opportunity cost includes the ticket price plus the value of the loss of study time and loss of sleep that may have a negative effect on your final exam grade tomorrow b. This significantly lowers the opportunity cost. Your opportunity cost includes the ticket price plus the value of any other activity you might have engaged in tonight instead, such as, staying home and watching TV c. This leaves the opportunity cost unchanged, but the movie becomes a less attractive alternative d. This may increase or decrease the opportunity cost, depending on whether or not you are a football fan

rational self interest on each of these: a. whether to attend college full time or enter the work force b. whether to but a new or used textbook c. whether to attend a local college or an out of town one

a. individuals will compare the expected benefits and costs if they were to attend college full time. One benefit may be that his or her stock of knowledge will grow thus expanding their productivity, giving them the opportunity to earn a higher wage job. Costs include not only the tuition but also money that could have been earned working. If the expected benefits outweigh the costs, then the rational person will chose to attend college b. individuals will compare the expected benefits from a new textbook with the higher costs of a new one. Benefits include not being confused by a previous owners markings and a higher resale. However, the price of a new book will be higher than a used one. If the expected benefits outweigh the costs, then the rational person will chose the new textbook c. individuals will compare the expected benefits and cost of both colleges and will chose the college where the benefits are greater than the costs. The cost of attending an out of town college may include greater traveling costs, but the benefits will be learning about a new region

What determines whether or not a resource is scarce? Why is the concept of scarcity important to the definition of economics?

A resource is scarce when the amount people desire exceeds the amount available at a price of zero. The concept of scarcity is important to the definition of economics because scarcity forces people to chose how they will use their resources in an attempt to satisfy their unlimited wants and desires. Economics is about making choices. Without scarcity there would be no economic problem.

Under what conditions is it possible to increase production of one good without decreasing production of another good?

An economy can produce more of one good without sacrificing production of another good if it is operating inside its PPF. The economy is inside the PPF when some resources are idle or when they are allocated inefficiently. Therefore, production can increase by using more of the idle resources or by allocating resources more efficiently.

What are the major differences between a pure capitalist system and a pure command system? Is the United States closer to a pure capitalist system or to a pure command system?

Laws about resource ownership and the extent to which the government attempts to coordinate economic activity vary among economic systems from the most free (the capitalist system) to the most regimented (command system). A pure capitalist system is characterized by private ownership of all resources and coordination of all economic activity based on prices generated in free markets. A pure command economy is characterized as government control of both resources and production. The United States represents a mixed system with government accounting for about one third of all economic activity. In addition, government regulates the private economy in a number of ways (e.g., laws affecting antitrust, workplace safety, zoning, and illegal activities.)

Some economists believe that in order to understand macroeconomics, you must first understand microeconomics. How does microeconomics relate to macroeconomics?

Microeconomics studies the behavior and choices made my an individual. The behavior and choices made by these individuals is added together to determine the economy-wide or macroeconomics measures, such as total production and unemployment. Microeconomics studies the individual pieces of the economic puzzle; macroeconomics fits those pieces together.

Explain how the specialization of labor can lead to increased productivity.

People are assigned various tasks according to their individual skills, that is, their comparative advantages. Also, people become better at a task the more they practice it; no time is lost in moving from one task to another. Specialization allows a more efficient organization of the production process and the introduction of more efficient production methods. With specialization, it is possible for a group of people to produce much more than the group could if each person produced the entire product herself or himself

"If society decides to use its resources efficiently (that is, to produce on its production possibilities frontier), then future generations will be worse off because they will not be able to use these resources." If this assertion is true, full employment of resources may not be a good thing. Comment on the validity of this assertion.

The answer to this question depends on how the resources are used. If resources are used to produce consumer non-durables and if little capital is produced, then future generations will be worse off. If society's resources are used to produce capital goods and research, then economic growth in the future will be faster, making future generations better off. The key to this question is the realization that most of society's productive resources are reproducible and that full employment can promote growth.

Which group of economic decision makers play the leading role in the economic system? Which groups play supporting roles? In what sense are they supporting actors?

The main decision makers are households, with firms, governments, and the rest of the world helping them out. Households are considered to be the lead actors since they supply resources used in production, and demand goods and services produced by firms, government and the rest of the world. Firms, governments, and the rest of the world are supporting actors because they use the resources that the households supply and use them to produce and supply the goods that the household demands

"You should never buy precooked frozen foods because the price you pay includes the labor costs of preparing the food." Is this conclusion always valid, or can it be invalidated by the law of comparative advantage?

This statement conflicts with the idea of comparative advantage. If your opportunity cost of preparing food is higher than the cost of buying prepared food, the law of comparative advantage would direct you to buy the product with the lowest opportunity cost. There will be some people with very high time costs (e.g., surgeons), who will make the decision not to cook. The fact that prepared foods have become popular indicates that they are fulfilling a need. This need arises from the increasing opportunity cost of preparing one's own food. The increasing opportunity cost is caused by the fact that the value of time to the professional person is rising faster than the cost of precooked frozen food.

explain why each of the following would not be "free" for the economy as a whole: a. food vouchers b. U.S aid to developing countries c. corporate charitable contributions d. nonviable television programs e. public high school education

a. even if the food is free for the person using the voucher, the resources used to make the food had a cost b. while U.S aid is free to the receiving country, it costs the U.S to use resources of their own to hep c. the corporations pays for these gifts d. "free" tv is paid for by the consumers through the higher prices of the products advertised there. The cost of advertising id passed on to consumers. e. Public high school is paid for by the citizens, either by taxes or borrowing

Micro vs Macro a. what price to charge for an automobile b. measuring the impact of tax policies on total consumer spending in the economy c. your family's decision about what to buy d. a worker's decision regarding how much to work each week e. designing a government policy to increase total employment

a. micro- refers to the price of an individual good b. macro- refers to the economy as a whole c. micro- refers to an individual's decision d. micro- refers to an individual's decision e. macro- refers to the economy as a whole

The owner of a small pizzeria is deciding whether to increase the radius of delivery area by one mile. What considerations must be taken into account if such a decision is to increase profitability?

By increasing the delivery radius, the store will have more sales. However, the marginal revenue must be balanced with the cost of the extra expenses, such as greater consumption of pizza ingredients, more gasoline for the delivery truck, and possibly the need to hire additional labor and increase advertising.

normative vs positive a. the US unemployment rate was below 9.0 percent in 2012 b. the inflation rate in the United States is too high c. the US government should increase the minimum wage d. US trade restrictions cost consumers $100 billion annually

a. positive-its a fact b. normative- the statement reflects someone's opinion c. normative- the statement reflects someones opinion d. positive- it is a fact

Define the fallacy or mistake: a. raising taxes always increases government revenue b. whenever there is a recession, imports decrease. Therefore to stop a recession, we should increase imports c. Raising the tariff on imported steel helps the US steel industry. Therefore, the entire economy is helped d. gold sells for about $1,700 per ounce. Therefore, the US government could sell all of the gold in Fort Knox and reduce the national debt

a. this assertion is a mistake because the secondary effects of taxes on production and the labor supply are ignored. If the tax rate was raised so high, people wouldn't want to work b. this is a fallacy that association implies causation. it is more likely that a recession causes a change in imports than the other way around c. this is a fallacy of composition. True, the tariff may help the steel industry, but it hurts the purchasers of steel, thus causing an unpredictable effect on the economy d. this is a fallacy on composition because attempts to sell so much gold at once could push the price down