ten principles of economics practice

Guaranteeing everyone in society the best healthcare possible will likely increase equality and decrease efficiency. Paying laid-off workers unemployment benefits until they find a new job will likely increase equality and decrease efficiency.

Guaranteeing everyone in society the best healthcare possible will increase equality if poor people are less likely to have adequate healthcare. However, the economy would be less efficient because it would give people more healthcare than they would choose to pay for. Similarly, unemployment benefits will likely increase equality by providing laid-off workers with some income until they can find new jobs, but decrease efficiency as these benefits encourage unemployment. Thus, there is a trade-off between equality and efficiency.

Which of the following describe some of the trade-offs faced by a professor deciding how much time to spend preparing for class?

wrong answer-He likes his students a lot. wrong answer-He has taught the same subject for 4 years. The better the lecture, the better his chances of tenure, but time spent preparing the lecture decreases the time he has available to work on research.

Which of the following describe some of the trade-offs faced by a recent college graduate deciding whether to go to graduate school?

wrong answer-Many of her friends decide to go to graduate school. If she goes to graduate school, she won't be able to start a new job and repay her existing student loans. Graduate school means fewer years of on-the-job experience.

Which of the following describe some of the trade-offs faced by a member of Congress deciding how much to spend on national parks?

Money spent on national parks benefits park visitors, but alternatively the money could be spent on highways to benefit drivers. wrong answer-National parks are essential to protecting wildlife from extinction. wrong answer-Dog ownership will surge as a result of better national parks.

You win $200 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 3% interest. Which of the following is in the opportunity cost of putting the $200 in a bank account for one year?

Nothing, because you won the money CORRECT-The value you could obtain by spending the money now. The $206 you would have a year from now.

You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in dollars, but the benefits of the vacation are psychological. If you do not take the vacation, you would spend the same amount of money on a new computer. Which of the following is true if you decide to take the vacation?

The benefits of buying a new computer exceed the cost of buying the computer. RIGHT ANSWER-The benefits of going on the vacation exceed the benefits you would obtain from the new computer. The cost of going on the vacation is less than the cost of the computer.

Which of the following describe some of the trade-offs faced by a company president deciding whether to open a new factory?

The firm can either open a new factory or upgrade existing equipment. wrong answer-The firm currently employs 100 workers. The firm can either pay out more of its profit to shareholders or earn additional profit next year by increasing production.

Consider the outdoor activity of horseback riding. Assume that the rental cost of riding equipment is $50 and horse rental costs $95. If you go horseback riding, you would also wear the riding boots you purchased last year for $150. If you do not go horseback riding, you could either work at your part-time job, which would earn you $100, or study at the library, which you value at $40. Suppose that you were planning to spend Saturday working at your part-time job, but a friend asks you to go horseback riding.

The opportunity cost of going horseback riding is 245.

Now suppose you had been planning to spend the day studying at the library. What is included in the opportunity cost of going horseback riding in this case?

The rental of any riding equipment you need The value of your time spent studying WRONG-The wages you forgo by going horseback riding WRONG-The cost of the riding boots you purchased last year The cost of horse rental

Which of the following is the reason behind the slow growth in U.S. incomes during the 1970s and 1980s? RIGHT ANSWER-There was a slowdown in productivity growth. Minimum-wage laws were not in place to protect the livelihoods of workers. Labor unions were relatively weak. The United States experienced an increase in competition from abroad.

What can the government do to boost living standards? Encourage research and development to ensure workers have access to the best available technology. WRONG-Impose trade restrictions to reduce competition from abroad. Improve education and expand literacy among its citizens to ensure workers are well educated.

Which of the following describe some of the trade-offs faced by a family deciding whether to buy a new car?

A larger vehicle means saving time by not having to make multiple trips somewhere, but a smaller vehicle is cheaper. An increase in the family's car payment means the family will be unable to afford a vacation. Fuel-efficient cars are more expensive, but regular cars require spending more on gas.

The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $2 million. If it would cost $4 million to finish development and make the product, you should not go ahead and do so. The most you should pay to complete development is $2.0 million.

Because the $5 million your company invested in a new product has already been spent, it should not be considered in the decision of whether to finish development, according to the principle of thinking at the margin. In this case, the additional cost to finish development is $4 million, whereas the expected additional benefit of the new product is $2 million in profit (assuming that the company receives zero profit if the product remains unfinished). Therefore, your company should not go ahead and finish the product. In fact, your company should be willing to pay up to $2 million to finish development, since that is the marginal benefit from doing so.

Which of the following government activities is motivated by a concern about efficiency? WRONG-Imposing higher personal income tax rates on people with higher incomes WRONG-Providing some poor people with vouchers that can be used to buy food Breaking up Standard Oil (which once owned 90% of all oil refineries) into several smaller companies Instituting laws against driving while intoxicated Regulating cable TV prices Prohibiting smoking in public places The market failure causes by the concentration of oil refineries by Standard Oil is known as market power

Efficiency means that society is getting the maximum benefits from its scarce resources. In this case, regulating cable TV prices and breaking up Standard Oil into several smaller companies are measures designed to address inefficiency associated with market power. Prohibiting smoking in public places and instituting laws against driving while intoxicated are measures designed to address inefficiencies associated with negative externalities. The market failure associated with Standard Oil is the firm's substantial market power that resulted from its control of over 90% of all oil refineries that enabled it to significantly influence prices in the industry.

A 1996 bill reforming the federal government's antipoverty programs limited many welfare recipients to only two years of benefits. This change gives people the incentives to find a job more quickly than if welfare benefits lasted forever. The loss of benefits after two years will result in the distribution of income becoming less equal.

If welfare benefits lasted forever, there would be little incentive to find work once one became unemployed. However, if benefits last only two years, there is a greater incentive for people to find work before the two years are up and they stop receiving financial support from the government. This change in the government's antipoverty program reduces equality in the distribution of income, since those who cannot find a job will get no income at all; however, the economy is more efficient, given the increased incentive for the unemployed to find work and contribute to the nation's output.

Suppose Americans decide to save less of their incomes, reducing the ability of banks to lend to businesses. With less funds available to businesses, workers will have less capital equipment with which to work. This leads to slower growth in productivity. Factory owners will lose from the change in productivity growth because they will receive a lower return on their investments. True or False: Society can receive a "free lunch" when it builds new factories. RIGHT-False True

When Americans save less, banks have less funds to lend to businesses. This limits the ability of firms to improve or increase the amount of equipment workers can work with, thereby slowing productivity growth. Both the workers, who will get paid less because they are producing less, and the factory owners, who will get a lower return on their investments, will lose from lower productivity. Society does not receive a "free lunch" when it builds new factories, since people must reduce their spending in order to save more. Hence, they gain higher incomes in the future at the cost of consuming fewer goods in the present.

During the Revolutionary War, the American colonies could not raise enough tax revenue to fund the war effort fully; to make up the difference, the colonies decided to print more money. Printing money to cover expenditures is sometimes referred to as an inflation tax. Who is being taxed when more money is printed? Banks only RIGHT-Anyone who is holding money Families of soldiers in active duty

When the government prints money, it imposes a tax on anyone who is holding money. This is because printing money decreases the value of money by causing inflation, or an increase in the overall level of prices in the economy.