microeconomics Test #1 Chapter 1

What is "ceteris paribus?"

"All else equal". When used in economic models, this concept helps us to simplify reality in order to focus on the relationships we are most interested in.

what does post hoc fallacy mean?

A common error in thinking about causation. An example would be "if Event A happens before Event B, Event A must have caused Event B to occur"

What is normative economics?

Analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action.

What are sunk costs?

Costs that cannot be avoided, regardless of what is done in the future, because they have already been exposed and cannot be refunded.

What are the two areas of positive economics?

Descriptive economics and economic theory

Why would a company be more enthusiastic in providing more training to its workers during an economic downturn than during an economic boom (assuming that they do not layoff their workers and can keep them when the economy recovers)?

During an economic downturn the opportunity cost of training workers is likely to be much smaller in terms of lost production. However, during an economic boom the costs are much larger because while employees are being trained they are not producing and selling as much output as they otherwise could if they were performing their normal duties.

What is descriptive economics?

Involves the compilation of data that describe economic phenomena and facts.

Explain how a model can be useful even if it is not realistic.

Models are used to simplify reality to expose only those aspects of behavior that are important to the question being asked. Thus, while not realistic, the model gets at the heart of the matter and allows us to ignore irrelevant details.

If a good is scarce, does that imply that there is a shortage of it?

No. If a good is scarce, that means that it is limited in supply. All resources in the economy are scarce.

What is this an example of: some value judgment or "what should be".

Normative statement

If crime rates in the United States fall, can incumbent lawmakers rightfully claim credit? Why or why not?

Probably not. Lower crime rates can occur for many reasons including a change in the age distribution of the population and lower unemployment rates. One cannot simply conclude that the lawmakers in office were responsible for the lower crime rates, until other plausible reasons have been ruled out.

What is macroeconomics?

The branch of economics that examines the economic behavior of the entire economy, including aggregate income, aggregate employment, and the average level of prices.

What is microeconomics?

The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units (such as households and firms).

Referring to Situation #1 suppose that you decide that you have to fire the first and the third executive without hiring any replacements. What would be the opportunity cost of the second executive's work? Explain why your answer is not the same as in the question above.

The opportunity cost of second executive's work is $800,000. The reason is that since each executive can perform any work that they other can then it makes sense to change the second executive's job so that he is now doing the most highly valued work - that with the $1,000,000 value. That leaves the $800,000 job undone which means that becomes the opportunity cost of the second executive's work.

Assume that you have hired three executives to run your company each with a different job. All are equally productive and each can do the other person's job if necessary. Assume that the first executive's contribution to the company is worth $1,000,000 and is assigned to this task; the second one is worth $800,000 and the third one is worth $500,000. Referring to Situation #1 suppose that for the time being you can only afford to hire the first executive. What is the opportunity cost of the first executive's work from the viewpoint of the company? Explain.

The opportunity cost of the first executive is $800,000. That is the value of the next best available alternative which is currently forgone.

Referring to Situation #1 suppose that you can now hire two workers. What is the opportunity cost of the second executive's work from the viewpoint of the company? Explain.

The second executive's work is simply the value of the next best opportunity which is the work that could have been done by the third executive which is $500,000

What does this mean: "Water is plentiful; therefore it can't be a scarce resource like oil which is not as plentiful"?

The truth is that both water and oil are scarce because they are both limited in supply. The fact that water happens to be more plentiful than oil doesn't make it any less scarce of a resource.

What is opportunity cost?

There is a trade off. For one product to be made more you would have to make a sacrifice of the other product.

Evaluate the following statement - "Economists are fond of saying that there are positive statements and normative ones but the truth is that all questions are really normative".

This statement could be interpreted as a normative statement but ironically it may actually be a positive statement. That is it may be a statement that can be verified with the use of logic. Whether it can be proved or not or whether it is true or not is not the issue. It is a statement of fact.

What is positive economics?

To understand behavior and the operation of systems without making judgments. It describes what exists and how it works.

Explain how and why an all-volunteer army may actually be cheaper than an army staffed with drafted soldiers.

When men and women decide on their own to choose to join the military they are no doubt looking at their opportunity cost. If they elect to join they are signaling that their opportunity costs are lower compared to other choices they could have made. When people are drafted into the military their opportunity costs are not taken into account. As a result doctors, lawyers, engineers and other high-paid professional can be drafted just as easily as those in lower-paying occupations. This raises the cost to society as a whole by employing people who could be contributing economically to the country.

Should economics be considered a science? Why or why not?

Yes. Economics uses models and theories to make predictions and then tests those predictions using empirical analysis.

economic assumptions?

full employment fixed supply of resources fixed technology two different types of production

equation for budget line

income= Quantity d* product d+ quantity b* product b

What is economic theory?

involves a statement or a set of related statements about cause and effect (action and reaction).

What is this an example of: "if you buy a hamburger then you can't buy a chicken sandwich"?

opportunity cost. "he who has choice has pain"

What does this mean: "He who has choice has pain"?

refers to the sad but unavoidable fact that whatever we decide to do is going to have a cost. All choices have opportunity costs.

Economics

the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

What is the law if increasing opportunity cost?

to increase in one unit of a product then a different product must give up a unit.

if you have $120 and you want to get books and dvd's (B=$10 and D=$20) what can you do?

$120=10(10)+20(1) $120=10(6)+ 20(3) $120= 10(2)+20(5) $120= 10(4)+ 20(4)

For each of the following, list whether the topic is microeconomic or macroeconomic in nature: A. The price of gasoline. B. The national unemployment rate. C. The quantity of new cars sold each year. D. The wage rate paid to steel workers. E. The amount of national output in an economy.

(a.) Microeconomic (b.) Macroeconomic. (c.) Microeconomic. (d.) Microeconomic. (e.) Macroeconomic.

For each of the following, note whether the statement is an example of positive economic analysis or an example of normative economic analysis: An increase in the minimum wage will lead to a higher rate of teenage unemployment. If the government reduces the tax on tobacco, more individuals will start smoking. The government should lower taxes because tax rates are too high for the average U.S. family. Wealthy senior citizens can afford to buy their own health insurance and therefore should not be given Medicare coverage. If the price of apples increases, people will buy more bananas.

(a.) Positive. (b.) Positive. (c.) Normative. (d.) Normative. (e.) Positive.

Four reasons to study economics

1) Learn a way of thinking 2) Understand society 3) Understand global affairs 4) Be an informed voter

Explain why it is more likely that the opportunity cost of attending a 7:00 a.m. class is forgone sleep but that this is not reasonably likely to be the case for a class that meets at 12:00 noon.

At 7:00 a.m. there might not be too many other opportunity costs for your time. Forgone sleep might reasonably be an opportunity cost of your time. However, at 12:00 noon while it is possible that forgone sleep is your opportunity cost it is not likely since there are probably other things of higher value that you have given up by then unless you are a very late sleeper.

What is this an example of: is objective and attempts to explain "what is"?

Positive statement

It is widely known among baseball enthusiasts that Babe Ruth actually performed quite well as a pitcher before leaving the Boston Red Sox for the New York Yankees. He was also of course a famously successful hitter. Why do you believe the Yankees chose not to use him as a pitcher? Explain using economic reasoning. Hint: pitchers typically only play every third or fourth game whereas other players in other positions play in nearly every game. Baseball has a season of 162 games.

The economic reasoning probably had something to do with opportunity cost. Even though the Yankees may have won most of the games when Babe Ruth was pitching he would no doubt be able to contribute to more wins as a hitter since he would be playing in more games as an outfielder or any other non-pitching position. The opportunity cost of having him as a pitcher was simply too high in terms of the number of games that would be lost when he wasn't playing.

Suppose an economics forecaster discovers that on days when the sunspot count is high stock market on the following day is bullish, that is stock market prices edge upwards. In addition, he also observes that on days with a low sunspot count the following day the stock market tends to be bearish, that is stock market prices tend to fall. The forecaster then concludes that there is a positive relationship between the sunspot count and stock market prices and proceeds to base his investment decisions on this premise. What kind of an error has this forecaster made?

The forecaster has fallen into the post hoc fallacy. Simply because one set of events precedes another is not enough to say that one is the cause of the other.

What is the fallacy of composition?

The incorrect belief that what is true for a part is necessarily true for the whole. Intensive fishing in an area by a boat may increase profits earned by the boat owner. However, if many boats excessively fish in the same area, the stock of fish will become depleted and all will be worse off.

Why would an economist argue that tuition is not the largest cost of attending a state university?

The largest cost of attending a university is the opportunity cost of the student's time. This could be measured by the foregone income that could have been earned if the student worked instead of attending classes.

What is a budget line?

The maximum we can spend on a product. Based on the level of income. We have two different types of products.