ECO 202- Exam 1

What is meant by randomization in the context of an economic experiment

Subjects are assigned by chance; rather by choice, to a group.

A simple economic model predicts that a fall in the price of bus tickets means that more people will take the bus. However , you observe that some people still do not take the bus even after the price of the ticket fell. Is the model incorrect? How would you test this model?

No, because it predicts the outcome of increased bus ridership on average. You should run a natural experiment by analyzing bus ridership and price changes.

There is a proverb "anything worth doing is worth doing well." Do you think an economist would agree with this proverb?

No, because the marginal cost of extra effort may be greater than the marginal benefit.

How does the sample size affect the validity of an empirical argument?

The larger the sample size the better.

As the text explains, it can sometimes be difficult to sort out the direction of causality. Causation occurs when there is

a logical cause and effect relationship

More economic growth and higher employment levels is likely to be

causation.

More police officers and lower crime rates is likely to be

causation.

The length of a women's skirts and stock market performance is likely to be

correlation.

Scarce resoruces

are things that people want, where the quantity that people want exceeds the quantity that is available.

Optimization is the process that describes

the choices that businesses make.

You and your friend Jim, have moved out of your dorm and into a new apartment. Both of you decide that you need to get a couch. Jim thinks you should get a new one from a furniture store nearby. You feel that, given your budget it is best to buy a used one. Your other options are to buy one online or get a couch custom made at the same furniture store. How would you arrive at an optimal solution here? Assume that your opportunity cost of time is 5 dollars per hour. You and Jim would need to consider____

the direct costs and the indirect opportunity cost of your time require to shop.

positive economics

describing what has happened or predicting what will happen. "actually do"

Economists study what?

they study the choices that people make, especially the costs and benefits of these choices. - study all human behavior from a person decision to lease a new car to her decision to not wear a seatbelt. - study the orignial choice and its multiple consequences f or other people in the world

Scarcity:

exists because people have unlimited wants in a world of limited resources

The ___ implies that a college student who drops out of school one month before graduation should earn almost the same as a student who graduates.

human capital argument

cost-benefit analysis:

is a calculations that adds up costs and benefits using a common unit of measurement like dollars.

Economic agent

is an individual or a group that makes choices. EX: a consumer chooses to ea ta cheeseburger or tofu burgers.

Budget constraint

is the set of things that a person can choose to do or buy without breaking her budget.

Economics

is the study of how agents choose to allocate scarce resources and how those choices affect society.

Microeconomics:

is the study of how individuals, households, firms and governments makes choices and how those choices, and how those choices affect prices, the allocation of resources, and the well being of other agents.

Optimization in level examines _____, while optimization in difference analyzes _______

total benefits of alternatives; the change in net benefits

Positive questions ask

what is or will be? ( How much is the national debt?)

Normative questions ask:

what ought to be (should welfare be repealed?)

Suppose you have to give up a job that pays you 40,000 a year to attend business school. How would this affect your calculation of whether to attend business school?

It will increase the indirect cost of your time, making you less likely to attend business school.

Normative economics

advises individuals and society of their choices. Depends on personal feelings, tastes or opinions. "ought to do"

Tradeoffs

an economic agent faces a trade off when the agent needs to give up something to get something else.

To say that economists use the scientific method mans that they are using

an ongoing process to develop models of the world and then test and evaluate those models.

Oregon expanded its Medicaid coverage in 2008. Roughly 90,000 people applied but the state has funds to cover only an additional 30,000 people. The state used a lottery to determine who would receive this free health care. How could you use the Oregon experience to estimate the impact of increased access to health care on health outcomes? The Oregon experience is a _______. One might analyze the data as follows: gather and analyzes the outcomes for the two groups to determine if ___________.

natural experiment; free health are results in better health outcomes.

Optimization

people decide what to do by consciously or unconsciously weighing al of the know pros and cons of different available options and trying to pick the beast feasible option.

Economic analysis

positive economics and normative economics

The _____ implies that a college student who drops out of school one month before graduation should earn much less than a student who graduates.

signaling argument

Opportunity cost:

the next best alternative activity

Suppose you are accepted at all of the three business schools to which you applied. Consider all the factors that matter when it comes to choosing a business school. How would you go about making an optimal decision about which school to attend?

By comparing the net benefits from attending the three schools.

Your client becomes critical of your "sloppy" technique of using a model that does not include all factors. What is the most appropriate reply to this criticism? He is still unconvinced about the reliability of using economic models to make businesses decisions. You can answer this concern by sharing that you will confirm the accuracy of the model by

Economic models are meant to be approximations that predict what happens in most circumstances. testing its predictions w/empirical data.

Suppose you have just been hired as am management consultant by a major oil company to help it optimally price gasoline at its service stations. During a meeting with your client, the CEO asks if your economic models include all factors that impact gasoline prices. What is your response to his question?

No, the model is as simplified representation of reality.

How do economists distinguish between models that work and those that don't?

They test their economic models against real world data.

Equilibrium

a situation in which no agent would benefit personally by changing his or her own behavior.

Empircism

analysis that use data or analysis that is evidence based. EX: Economist use data to test theories and to determine what is causing things to happen in the world. are interested in understanding what is causing things to happen in the world.

Macroeconomics

is the study of the economy as a whole. study economy-wide phenomena, like the growth rate of a country's total economic output, the inflation rate or the unemployment rate.