Chapter 1

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

In the short run,

a decrease in inflation temporarily increases unemployment.

Trade

allows specialization, which reduces costs.

Taxes

alter decisions of producers and consumers

Externalities and Market Power

can lead to market failure

In a market economy an increase in the price of a good or service reflects

either an increase in its value to society or an increase in its cost to produce.

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

food

Inflation is created by

high money supply growth. An increase in inflation temporarily reduces unemployment.

Productivity can be increased by

improving the education of workers.

Variations in the standard of living across countries

is due almost entirely to differences in each nation's total output of goods and services.

Trade makes costs

lower and raises the variety of goods and services available.

People respond to incentives

means people may alter their decisions when the costs and benefits of an action change.

Efficiency

refers to how much a society can produce with its resources. Equity refers to how fairly the benefits from using resources are distributed between members of society.

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

scarce

Resources are

scarce for households and scarce for economies.

Resources are scarce

so a society cannot give all individuals the standard of living to which each aspires.

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.

You go to the movieplex where movies ordinarily cost $8. You are intending to see a movie for which you have a $2 off coupon good for only that movie at that time. However, when you get there you see a friend who asks if you would rather see a new release. Both movies start and end at the same time. If you decide to see the new release with your friend, what is your opportunity cost?

the amount you value the first movie + $2

You have eaten two bowls of ice cream at Greg's Ice Cream store. You consider eating a third. As a rational consumer you should make your choice by comparing

the benefits from eating one more bowl of ice cream to how much one more bowl of ice cream costs.

Lucy was accepted to Harvard and another college. She is trying to decide where to go. Which of the following should she include in making her decision?

the difference between living expenses at Harvard and her second choice, but not how much she spent applying to Harvard.

Kevin is planning to take a motorcycle trip. He calculates the trip to be worth about $500 to him. After he has makes his plans, a bill for $1,200 for repairs he had done to his motorcycle last week arrives in the mail. This bill was higher than the $600 he had been expecting. Also, he sees the price of gas has gone up. Which of these two events should Kevin consider in deciding if it is still worthwhile to go on the trip?

the increase in the price of gas, but not the unexpected repairs

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

workers in the United States are highly productive.

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