chapter one
The rationality assumption as used in economics
states that people respond to incentives.
_______________________ economics is value-free and relates to statements that can be refuted, such as "If A, then B."
positive
Two key assumptions in economics are:
1) that people are rational long dash— that people do not intentionally make decisions that would leave them worse off, and 2) people respond to changes in incentives -- if individuals never intentionally make decisions that would leave them worse off, then by definition they will respond to changes in incentives pursuing actions that make those individuals better off or avoiding actions that make them worse off.
Which of the following is not true about economic models?
A good model must be realistic.
_________________ economics emphasizes psychological constraints and complexities that potentially interfere with rational decision making. This approach utilizes the ________________________ hypothesis that people are not quite rational, because they cannot study every possible alternative but instead use simple rules of thumb to decide among choices.
Behavioral; bounded rationality
Everyone should enjoy open access to healthcare.
Normative economics
Falling gasoline prices will result in additional vacation travel.
an increase in hotel taxes at popular resorts
A reduction in income tax rates will result in more people working
an increase om the outsourcing of jobs
Positive economic statements ________, and normative economic statements ________.
are concerned with "what is"; are concerned with "what ought to be"
Economics
assumes individuals are rational and respond to different incentives.
Most models use the __________ assumption that all other things are held constant, or equal.
ceteris paribus
Which of the following is a true statement about self-interest as used in the study of economics?
Any action can be based on self-interest if the person has some reason for the action.
Which of the following statements is true?
Economics is a science since the study of economics uses models and theories that are subject to empirical testing.
Increasing the earnings of minimum wage employees is desirable, and raising the minimum wage is the best way to accomplish this.
Normative economics
Analysis involving value judgments about economic policies; relates to whether things are good or bad. A statement of what ought to be.
Normative economics
A higher minimum wage will reduce employment opportunities for minimum wage workers.
Positive economics
Heathcare subsidies will increase the consumption of health care.
Positive economics
Analysis that is strictly limited to making either purely descriptive statements or scientific predictions; for example, "If A, then B." A statement of what is.
Positive economics
Which of the following is not one of the three fundamental questions of economics?
Where will items be produced?
The three fundamental economic questions that a nation addresses in order to allocate society's scarce resources include all of the following except:
Why will the items be produced?
One of your classmates, Sally, is a hardworking student, serious about her classes, and conscientious about her grades. Sally is also involved, however, in volunteer activities and an extracurricular sport. Is Sally displaying rational behavior?
Yes, she is using her time allocated among school, studying, sports and volunteer work in a manner she deems best.
The economic system in which a government establishes ownership of resources and issues rules for how to manage the production of products is best described as
a command and control system.
A politician states "taxes should be raised to provide more spending on school lunch programs." This is:
a normative economic statement.
An increase in the price of gasoline will reduce the amount of gasoline purchased. This is:
a positive economic statement.
The hypothesis that people are nearly, but not fully, rational, so that they cannot examine every possible choice available to them but instead use simple rules of thumb to sort among the alternatives that happen to occur to them is known as
bounded rationality
Each country has a unique economic system to allocate its scarce resources. However, the economic system of most of the world's nations are a combination of the ___________________ system and the _____________________ system.
central planning price
The two opposing sets of answers are offered by alternative economy systems: (1) centralized ___________________ and (2) the ____________________ system.
command and control price
An economist can evaluate which is the better model for forecasting electoral outcomes by
comparing the predictions of the two models with actual election results.
In economics, we assume that people _________________ make decisions that will leave them _____________ off.
do not intentionally; worse
A society's institutional mechanism for determining the way in which scarce resources are used to satisfy human desires refers to its
economic system.
Economic models relate to the way people think rather than to the way people act.
false
It is relatively easy for an author to keep all normative statements out of a textbook.
false
On a coordinate number system, the vertical number line is known as the x axis and the horizontal number line is known as the y axis.
false
The concept of self interest assumes that individuals can only further their goals at the expense of other individuals.
false
The slope is constant at all points on a nonlinear curve.
false
When constructing a graph in economics, it is conventional to put quantities on the ________ and dollar values on the ________.
horizontal axis; vertical axis
On a horizontal number line, the numbers ________, and on a vertical number line, the numbers ________.
increase from left to right; increase as we move up the line
Based on the recommendation of a friend, you buy a ticket and attend a movie with high expectations. After seeing the movie, you think that it is the worst film ever made and that it was a complete waste of money. This situation
is consistent with rational behavior because you had thought that you were going to like the movie
Until 2008, the people of the fictitious nation of Dor relied mainly on private car companies to determine how many automobiles to produce. After 2008, the people of Dor have been relying on the Dor government to determine how many automobiles to produce. This represents a shift in the economic system of Dor from
market system to central planning
A _____________________ uses assumptions and is by nature a simplification of the real world. Its usefulness can be evaluated by bringing empirical evidence to bear on its predictions.
model
For U-shaped expressions that 'open-down', as you approach the maximum point the slope is positive long dash— as x increases, y increases. Beyond that maximum point the slope is:
negative
If the tangent line is downward sloping, the slope of the curve is
negative
_____________ economics involves people's values and typically uses the word should.
normative
"We ought to do more for the education of our children." Statements using words like ought or should are
normative statements.
The ceteris paribus assumption means
other things equal.
For U-shaped expressions that 'open-up', as you approach the minimum point the slope is negative long dash— as x increases, y decreases. Beyond that minimum point the slope is:
positive
If the tangent line is upward sloping, the slope of the curve is
positive
An economic model
should capture only the essential relationships that are sufficient to analyze a particular problem or answer a particular question.
The model for forecasting electoral results that is more firmly based on the rationality assumption of economics is
the Iowa Electronic Market model using prices, as the traders on this exchange have a strong incentive to make the best possible forecast.
To evaluate the impact of an increase in the range of choices that an individual confronts when deciding among devices for accessing the internet, an economic researcher makes the assumption that the individual is unable to take into account every new internet-access option available to her. In examining the above decision-making process, the approach that the economist is following can best be described as the one that relies on:
the assumption of bounded rationality
An economist seeking to predict the effect that an increase in a state's sales tax rate will have on consumers? Purchases of goods and services presumes that people are limited in their ability to process information about how the tax-rate increase will influence the after-tax prices those consumers will pay. In examining the above decision-making process, the approach that the economist is following relies on:
the assumption of bounded rationality.
An economic model is developed from a set of assumptions about consumer behavior and predicts that people will buy less of a good the higher the price of the good. Empirical testing of this model would involve
the collection of data to evaluate the usefulness of the model.
The notion that people do not intentionally make decisions that would leave them worse off is known as
the rationality assumption
An economic study of the number of online searches that individuals conduct before selecting a particular item to purchase online presumes that people are interested only in their own satisfaction, pursue their ultimate objectives, and consider every relevant option. In examining the above decision-making process, the approach that the economist is following can best be described as the one that relies on
the rationality assumption.
People may appear to use rules of thumb, as suggested by the assumption of bounded rationality, even though they may really be behaving in a manner suggested by the rationality assumption if
they face persistently predictable range of choices for a period of time.
A model is considered "good" if it yields usable predictions that are supported by real-world observations.
true
Much of human behavior can be explained in terms of how individuals respond to changing incentives over time.
true
The bounded rationality hypothesis assumes people are not fully rational and therefore use simple rules of thumb to sort among the alternatives that happen to occur to them.
true
The economic system in which individuals and families own all of the scarce resources used in production, decide how and what to produce, and how many products to produce, is best described as a price system.
true
The rationality assumption of economics is the assumption that people do not intentionally make decisions that would leave them worse off.
true
The relationship between two variables is inverse when a decrease in one variable is associated with an increase in the other variable.
true
The slope is constant at all points on a straight line in a graph.
true
Proponents of behavioral economics suggest that traditional economic models assume that people exhibit all of the following "unrealistic" characteristics except
unbounded altruism.
The three basic economic questions are __________ will be produced, __________ will items be produced, and for __________ will items be produced?
what and how much; how; whom
If the tangent line is horizontal, the slope of the curve is
zero
Ceteris Paribus means
"other things constant."
