Ch. 1 Essay Practice questions

Explain the economic assumption that "people are rational."

"People are rational" means that economists assume consumers and firms will use all available information as they act to achieve their goals. Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs.

Explain the difference between a firm's revenue and its profit.

A firm's revenue is the total amount received for selling a good or service. It is calculated by multiplying the price per unit by the number of units sold. A firm's profit is the difference between its revenue and its costs.

What is equity, and how does it differ from efficiency?

Equity refers to the fair distribution of economic benefits. In economics, efficiency refers to least cost production (productive efficiency) and producing according to human preferences (allocative efficiency).

Positive analysis is concerned with "what ought to be", while normative analysis is concerned with "what is.

FALSE

Scarcity is a problem that will eventually disappear as technology advances.

FALSE

What is meant by the statement that "optimal decisions are made at the margin"?

In economics, the word "marginal" means "extra" or "additional". Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost, so optimal decisions are made at the point where the extra benefit received from an activity is equal to the extra cost associated with that activity.

Does productive efficiency imply allocative efficiency?

No

What is the difference between positive economic analysis and normative economic analysis? Give one example each of a positive and normative economic issue or question or statement.

Positive economic analysis is concerned with what is. Positive economic analysis reaches conclusions based on verifiable statements. Normative economic analysis, on the other hand, is concerned with what ought to be. Normative analysis reaches conclusions based on opinions. (Students will give many different examples.)

Define productive efficiency. Does productive efficiency imply allocative efficiency? Explain.

Productive efficiency is an efficiency criterion that describes a situation in which goods and services are produced at the lowest possible cost. It does not imply allocative efficiency which is a criterion associated with producing goods and services that consumers value most.

If it costs Sinclair $300 to produce 3 suede jackets and $420 to produce 4 suede jackets, then the difference of $120 is the marginal cost of producing the 4th suede jacket.

TRUE

Suppose the extra cost for a doctor to keep his office open for one extra hour is $200. Then, the doctor should stay open for the extra hour even if he can generate additional revenue of $200 for that hour.

TRUE

List the five main factors of production.

The five main factors of production are labor, capital, human capital, natural resources, and entrepreneurial ability.

Normative analysis reaches conclusions based on

opinions

Market equillibrium

quantity demanded = quantity supplied