Economics Ch.1 Study Guide

A rational person does not act unless

the action produces marginal benefits that exceed marginal costs

In most societies, resources are allocated by

the combined actions of millions of households and firms

Suppose you find $20. If you choose to use the $20 to go to the football game, your opportunity cost of going to the game is

$20 plus the value of your time spent at the game (because you could have used the $20/time to buy/do other things).

Referring to question 17, your decision rule should be to complete the hot-dog stand as long as the cost to complete the stand is less than Q17: You have spent $1,000 building a hot-dog stand based on estimates of sales of $2,000. The hot-dog stand is nearly completed, but now you estimate total sales to be only $800. You can complete the hot-dog stand for another $300. Should you complete the hot-dog stand?

$800

A society allocates its scarce resources to various uses. These scarce resources include

-Land -Machines -People -All of the above !!!!!

Which of the following statements best represents the principle represented by the adage, "there is no such thing as a free lunch"?

Dani must decide between going to Florida or Brazil for spring break. Because: to get more of something we like, we have to give up something else that we like. It is a TRADE OFF

Inflation and unemployment both increase as the money supply increases

False

T/F An individual farmer is likely to have market power in the market for wheat

False A single farmer is too small to influence the market

Which of the following products would be least capable of producing an externality?

Food

One of the 20th century's worst episodes of inflation occurred in

Germany in the 1920s

In the former Soviet Union, producers were paid for meeting output targets, not for selling products. Under those circumstances, what were the economic incentives for producers?

To produce enough to meet the output target, w/o regard for quality or cost

T/F High and persistent inflation is caused by excessive growth in the quantity of money in the economy.

True

High-school athletes who skip college to become professional athletes

Understand that the opportunity cost of attending college is very high. As in, college is worth a lot, ALMOST as much as becoming a professional athlete.

Workers in the United States enjoy a high standard of living because

workers in the United States are highly productive. -not b/c of high minimum wage...

You have spent $1,000 building a hot-dog stand based on estimates of sales of $2,000. The hot-dog stand is nearly completed, but now you estimate total sales to be only $800. You can complete the hot-dog stand for another $300. Should you complete the hot-dog stand? (Assume that the hot dogs cost you nothing.)

yes

Raising taxes and increasing welfare payments

improves equality at the expense of efficiency

Productivity can be increased by

improving the education of workers

Which of the following involve a trade-off?

a. buying a new car b. going to college c. watching a football game on Saturday afternoon d. taking a nap e. All of the above involve trade offs !!!!!

Suppose that a country has a high average wage level agrees to trade with a country that has a low average wage level. Which country can benefit?

both b/c trade usually makes both parties better off.

Something that induces a person to act is

called an incentive

Annie is an excellent baker and Sam has plentiful farm. If Sam trades eggs and butter to Annie for some of Annie's bread and pastries

Both Annie and Sam are made better off by trade

In a particular country in 1998, the average worker needed to work 40 hours to produce 100 units of output. In that same country in 2008, the average worker needed to work 36 hours to produce 72 units of output. In that country, the productivity of the average worker

Decreased between 1998 and 2008 so we would expect the standard of living to have decreased accordingly

T/F An auto manufacturer should continue to produce additional autos as long as the firm is profitable, even if the cost of the additional units exceeds the price received

False a manufacturer should produce as long as the marginal benefit exceeds the marginal cost

Foreign trade

allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home

Senator Bright, who understands economic principles, is trying to convince workers in her district that trade with other countries is beneficial. Senator Bright should argue that trade can be beneficial

because it allows specialization, which increases total output

An increase in the price of beef provides

information that tells producers to produce more beef.

Which of the following situations describes the greatest market power?

Microsoft's impact on the price of desktop operating systems

In the short run,

-a decrease in inflation temporarily increases unemployment. -a reduction in inflation tends to raise unemployment.

Which of the following activities is most likely to produce an externality?

A student has a party in her dorm room

Which of the following statements is true about a market economy?

Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being.

T/F The United States will benefit economically if we eliminate trade with Asian countries because we will be forced to produce more of our own cars and clothes.

False all countries gain from voluntary trade.

T/F A tax on liquor raises the price of liquor and provides an incentive for consumers to drink more

False higher prices reduce the quantity demanded.

T/F Adam Smith's "invisible hand" concept describes how corporate business reaches into the pockets of consumers like an "invisible hand."

False the "invisible hand" refers to how markets guide self-interested people to create desirable social outcomes

T/F When the government redistributes income with taxes and welfare, the economy becomes more efficient

False the economy becomes less efficient because it decreases the incentive to work hard

In a particular country in 1998, the average worker needed to work 25 hours to produce 40 units of output. In that same country in 2008, the average worker needed to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker

Increased by 6.25% between 1998-2008

The word "economy" comes from the Greek word oikonomos, which means

One who manages a household

Maureen's college raises the cost of room and board per semester. This increase raises Maureen's opportunity cost of attending college

Only if the amount she would have to pay for room and board if she didnt attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost reduces Maureen's incentive to attend college.

Suppose that a country that has a high level of output per person agrees to trade with a country that has a low level of output per person. Which country can benefit?

Only the one with a low level of output per person. b/c the low level of output would be gaining while the other will either not gain as much or lose some, in this case lose some.. I guess?

A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate?

People respond to incentives

Which of the following is not part of the opportunity cost of going on vacation?

The money you spent on food.

T/F An unintended consequence of public support for higher education is that low tuition provides an incentive for many people to attend state universities even if they have no desire to learn anything

True

T/F Sue is better at cleaning, and Bob is better at cooking. It will take fewer hours to eat and clean if Bob specializes in cooking and Sue specializes in cleaning than if they share the household duties evenly

True

T/F The cost of an action is measured in terms of foregone opportunities

True

T/F To a student, the opportunity cost of going to a basketball game would include the price of the ticket and the value of the time that could have been spent studying.

True

T/F When a jet flies overhead, the noise it generates is an externality

True

T/F One way that governments can improve market outcomes is to ensure property rights (ability of individuals are to own and exercise control over their scarce resources) Can be rephrased to: One way governments can improve market outcomes is by ensuring property rights

True also: government can sometimes intervene in the market to improve efficiency or equality

Possible causes of market failure

externality: the impact of one person's actions on the well-being of a bystander and market power: the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

High and persistent inflation is caused by

governments increasing the quantity of money too much

Benefits from trade would not include

less competition

Trade-offs are required because wants are unlimited and resources are

scarce

Economics is the study of how

society manages its scarce resources.

Because people respond to incentives, we would expect that if the average salary of accountants increases by 50 percent while the average salary of teachers increases by 20 percent,

students will shift majors from education to accounting.