Microeconomics Chapter 2

(True or False) Economists always agree on which public policy is the best.

False

(True or False) In order to understand how the real world works, economists try to capture every aspect of the real world in their models that they construct

False

(True or False) Policies such as rent control and trade barriers persist because almost all economists agree that those policies are desirable.

False

(True or False) The Council of Economic Advisers was created in 1946 and consists of two members and a staff of several dozen economists.

False

(True or False) The advice of economists is the only thing a policymaker has to consider when implementing a proposed policy.

False

(True or False) The fact that there are far fewer farmers now than at the turn of the century has caused massive food shortages in the United States.

False

(True or False) The production possibilities frontier is a graph that shows the various combinations of output that an economy should produce.

False

(True or False) The scientific method is only applicable to studying the natural sciences.

False

(True or False) There is only one explanation for why economists give conflicting advice on policy issues, and it is that they have different scientific judgments about the validity of alternative theories.

False

(True or False) When economists are trying to explain the world, they are policy advisers, but when economists are trying to help improve the world they are scientists.

False

(True or False) According to the concept of the 'broken window fallacy' protests and riots that result in the destruction of property are good for the economy.

True

(True or False) Different values are a reason for disagreement among economists.

True

(True or False) Normative statements are prescriptive, whereas positive statements are descriptive.

True

(True or False) Points on the production possibilities frontier represent efficient levels of production.

True

(True or False) Refer to the Figure. Consider the production possibilities frontier for an economy that produces only sofas and cars. The opportunity cost of each car is the slope of the production possibilities frontier.

True

Refer to the Figure. Max works as a CPA for a corporation and is paid a salary in exchange for the accounting services he performs. Jim owns land and rents his land to companies in exchange for rent payments. If Max's income is represented by a flow of dollars from Box D to Box B of this circular-flow diagram, then Jim's income is represented by a flow of dollars from a. Box D to Box B b. Box C to Box D c. Box C to Box A d. Box A to Box C

a. Box D to Box B

Economists from which administrative department help enforce the nation's antitrust laws? a. Department of Justice b. Department of Labor c. Department of the Treasury d. Office of Management and Budget

a. Department of Justice

Which of the following statements about economic models is NOT correct? a. Economic models are not useful because they oversimplify the real world. b. Economic models leave out irrelevant details. c. Economists use assumptions to construct models. d. Economic models are often composed of equations and diagrams.

a. Economic models are not useful because they oversimplify the real world.

Sometimes economists disagree because their values differ. Which of the following instances best reflects this source of disagreement? a. One economist advises against a consumption tax because she thinks it's unfair for low-income people; another economist argues that what's fair isn't relevant. b. One economist believes that the labor market is strengthening because the unemployment rate is declining; another argues that the unemployment rate is not a good measure of the labor market's health. c. One economist believes that American jobs are being lost to over-seas manufacturers; another economist disputes this claim. d. One economist believes that when the tax on gasoline rises, people will reduce their consumption of gasoline; another economist argues that the demand for gasoline is inelastic and thus unresponsive to changes in the gas tax.

a. One economist advises against a consumption tax because she thinks it's unfair for low-income people; another economist argues that what's fair isn't relevant.

In the circular-flow diagram, which of the following do households NOT do? a. Produce goods and services. b. Sell their labor to firms. c. Buy goods and services that firms produce. d. Own the factors of production.

a. Produce goods and services.

Which of the following events would cause a production possibilities frontier to shift outward? a. a technological improvement b. an increase in the money supply c. a change in society's preferences for one good over another d. a shift in resources from the production of one good to the production of the other good

a. a technological improvement

Which of the following steps does an economist not take when studying the economy? a. create data in a laboratory b. analyze data c. collect data d. devise theories

a. create data in a laboratory

What are the two basic reasons why economists often appear to give conflicting advice to policymakers? a. differences in scientific judgment and values b. differences in scientific judgment and education c. differences in knowledge and opinions d. differences in education and values

a. differences in scientific judgment and values

According to the circular-flow diagram, if Molly is an employee who delivers packages for Deliver Dynomite, she participates in the markets for a. factors of production exchanging labor for income b. goods and services exchanging labor for income c. goods and services exchanging packages for wages, rent, and profit d. factors of production exchanging packages for revenue

a. factors of production exchanging labor for income

Economists make assumptions to a. focus their thinking. b. better match the complexity of the real world. c. represent their political bias. d. make models easier for students to understand.

a. focus their thinking.

In the circular-flow diagram, which of the following items does NOT flow from households to firms? a. goods and services b. revenue c. factors of production d. Labor

a. goods and services

In the simple circular-flow diagrams, the participants in the economy are a. households and firms b. firms and government c. households, firms, and government d. households and markets

a. households and firms

When a production possibilities frontier is bowed outward, the opportunity cost of producing an additional unit of a good _________ as more of the good is produced. a. increases b. remains constant c. cannot be determined d. decreases

a. increases

In the circular-flow diagram, which of the following items does NOT flow from firms to households? a. labor b. goods c. wages d. output

a. labor

"Total revenue rises when the quantity sold increases and prices remain constant" is an example of a a. positive economic statement. b. statement that contradicts one of the basic principles of economics. c. normative economic statement. d. negative economic statement.

a. positive economic statement.

In the circular-flow diagram, which of the following is NOT a factor of production? a. revenue b. capital c. labor d. land

a. revenue

The table above shows one set of production possibilities. What is the opportunity cost of increasing the production of corn from 800 bushels to 1200 bushels? a. 1300 bushels of wheat b. 500 bushels of wheat c. 400 bushels of wheat d. 200 bushels of wheat

b. 500 bushels of wheat

Refer to the Figure. Jeff receives his first paycheck for working as a waiter. To which of the arrows does this transaction directly contribute? a. B only b. C and D c. C only d. A and B

b. C and D

A survey of professional economists revealed that more than three-fourths of them agreed with a number of statements. Which of the following statement is NOT one of those propositions? a. Fiscal policy has a significant stimulative impact on a less than fully employed economy. b. Flexible and floating exchange rates are not an effective international monetary arrangement. c. Tariffs and import quotas usually reduce general economic welfare. d. A ceiling on rents reduces the quantity and quality of housing available.

b. Flexible and floating exchange rates are not an effective international monetary arrangement.

In the circular-flow diagram, which of the following do firms NOT do? a. Produce goods and services. b. Produce factors of production c. Use factors of production to produce output d. Hire workers

b. Produce factors of production

Suppose an economy produces two goods, food and clothing. This economy always operates on its production possibilities frontier. Last year, it produced 2000 units of food and 500 articles of clothing. This year it experienced a technological advance in its clothing-making industry. As a result, this year the society wants to produce 2200 units of food and 500 articles of clothing. Which of the following statements is correct? a. Because the technological advance occurred in the clothing-making industry, it is not possible to increase food production without reducing clothing production below 500. b. The technological advance reduced the amount of resources needed to produce 500 articles of clothing, so these resources could be used to produce more food. c. In order to increase food production in these circumstances without reducing machine production, the economy must experience unemployment. d. Because the technological advance occurred in the clothing-making industry, increases in output can only occur in the food industry.

b. The technological advance reduced the amount of resources needed to produce 500 articles of clothing, so these resources could be used to produce more food.

It once took 90 percent of our population to grow our food but now it takes around 3 percent of the population. Which of the following statements is true? a. This loss of agricultural jobs has caused the unemployment rate to increase by 87 percentage points. b. This is good for our economy because those who would have been farmers years ago can now invent new things and produce other goods. c. This reduction in the number of farmers has been decreased our productivity and standard of living. d. The government should provide subsidies to encourage more people to become farmers.

b. This is good for our economy because those who would have been farmers years ago can now invent new things and produce other goods.

Suppose an economy only produces two goods, pizza and tables. Last month, the economy produced 100 pizzas and 10 tables. This month, the same economy produced 125 pizzas and 15 tables. Which of the following statements could NOT explain this change? a. This month, the economy reduced the unemployment on its resources. b. This month, the economy experienced a change in the opportunity cost of producing pizza. c. This month, the economy experienced an increase in resources. d. This month, the economy experienced an improvement in technology.

b. This month, the economy experienced a change in the opportunity cost of producing pizza.

Refer to the Figure. The economy cannot currently produce at point C because a. it would be inefficient to produce there. b. it does not have the resources and technology to produce that level of output. c. it is not using the most efficient production process. d. it is not using all of its resources.

b. it does not have the resources and technology to produce that level of output.

When a government program is justified based only on the number of jobs it will create, a. the program is most certainly an efficient use of taxpayer dollars. b. it is known as the "broken window fallacy." c. it is justifiable to raise taxes to fund the program. d. it will be automatically approved if the unemployment rate is low.

b. it is known as the "broken window fallacy."

In the markets for factors of production in the circular-flow diagram, households are _________ and firms are __________. a. buyers, sellers b. sellers, buyers c. sellers, sellers d. buyers, buyers

b. sellers, buyers

Which of the following would likely be studied by a microeconomist rather than a macroeconomist? a. the effect of national debt on the interest rate b. the effect of gas prices on the profitability of snowplow companies in New England c. barriers to effective international trade d. the effect of changes in health care standards on gross domestic product

b. the effect of gas prices on the profitability of snowplow companies in New England

Refer to the Figure. Which arrow represents the flow of factors of production? A, B, C, or D

c

Which of the following is an example of a normative, as opposed to positive, statement? a. As the price of cars rises, more people choose to take the bus. b. An increase in the cigarette tax would cause a decrease in the number of smokers. c. Gasoline prices ought to be lower than they are now. d. The discount rate is the interest rate the Federal Reserve charges banks to borrow funds.

c. Gasoline prices ought to be lower than they are now.

Which of the following is an example of a positive, as opposed to normative, statement? a. Taxes are bad for the economy. b. The world would be a better place without monopolies. c. Inflation occurs when the government prints too much money. d. Everyone should receive free health care.

c. Inflation occurs when the government prints too much money.

Which of the following statements about the Council of Economic Advisers is NOT true? a. It advises the president of the United States on economic policy matters. b. It was created in1946 c. It implements the president's tax policies. d. It writes the annual Economic Report of the President.

c. It implements the president's tax policies.

Which of the following statements about the circular-flow diagram is NOT correct? a. It is an economic model. b. It represents the flows of inputs, outputs, and dollars. c. It incorporates all aspects of the real economy. d. It helps explain how participants in the economy interact with one another.

c. It incorporates all aspects of the real economy.

Economists who are primarily responsible for advising Congress on economic matters work in which agency? a. the Department of Justice b. the Department of Labor c. The Congressional Budget Office d. the Federal Reserve

c. The Congressional Budget Office

Refer to the Figure. If this society moves from point R to point U, a. it gives up 60 bushels of apples to get 80 sweaters. b. it gives up 20 bushels of apples to get 60 sweaters. c. it gives up 80 sweaters to get 60 bushels of apples. d. it gives up 160 sweaters to get 140 bushels of apples.

c. it gives up 80 sweaters to get 60 bushels of apples.

Some, but not all, government economists are employed within the administrative branch of government. Which of the following government agencies employs economists outside of the administrative branch? a. the Department of Justice b. the Council of Economic Advisers c. the Federal Reserve d. the Department of the Treasury

c. the Federal Reserve

Which of the following would likely be studied by a macroeconomist rather than a microeconomist? a. the effect of an increase in the gas tax on fuel consumption b. how tariffs affect the cotton industry c. the effects of borrowing by the federal government d. the effect of rent control on housing in New York City

c. the effects of borrowing by the federal government

Almost all economists agree that a legitimate role for the government is a. creating large federal budget deficits. b. managing agricultural subsidies. c. the redistribution of income. d. subsidizing professional sports franchises.

c. the redistribution of income.

Refer to the Figure. If this economy devotes all of its resources to the production of washers, then it will produce a. 80 dryers and 50 washers b. 80 dryers and 0 washers c. 60 dryers and 50 washers d. 0 dryers and 100 washers

d. 0 dryers and 100 washers

Refer to the Figure. Consider the production possibilities frontier for an economy that produces only sofas and cars. The opportunity cost of each sofa is a. not constant. b. 600 cars. c. 3/2 cars. d. 2/3 of a car.

d. 2/3 of a car.

Suppose an economist develops a theory that higher gas prices lead people to take more local vacations. According to the scientific method, which of the following is the economist's next step? a. Gather up support from other economists who agree with the theory. b. Publish the theory as is. c. Devise another theory that contradicts the initial one. d. Collect and analyze data.

d. Collect and analyze data.

Economists from which administrative department help design tax policy? a. Office of Management and Budget b. Department of Justice c. Department of Labor d. Department of the Treasury

d. Department of the Treasury

Refer to the Figure. Efficient production is represented by which point(s)? a. L, M, Q b. Q c. L, M, N, O, and P d. L, M

d. L, M

Which of the following statements about economic models is correct? a. The more details a model includes, the better the model. b. Models are not helpful in solving public policy debates. c. It is not appropriate for models to incorporate equations or diagrams. d. Models assume away irrelevant details, allowing us to see what is truly important.

d. Models assume away irrelevant details, allowing us to see what is truly important.

Economists from which administrative department help the president formulate spending plans and regulatory policies? a. Department of Justice b. Department of Labor c. Department of the Treasury d. Office of Management and Budget

d. Office of Management and Budget

Some economists disagree because their scientific judgment differs. Which of the following instances best reflects this source of disagreement? a. One economist believes in taxing cigarette manufacturers in order to try to decrease second-hand smoke; another economist believes the government should not intervene in free markets. b. One economist believes that everyone should be given free health care; another economist believes that free markets should determine the distribution of health care benefits in a society. c. One economist believes that we should have a proportional rather than a progressive tax system; another economist believes that those in the top 5% of income earners should pay a higher percentage of their income in taxes. d. One economist believes that the level of household saving would not be affected by a change in the tax laws; another economist believes that taxing a household's consumption would change a household's saving behavior.

d. One economist believes that the level of household saving would not be affected by a change in the tax laws; another economist believes that taxing a household's consumption would change a household's saving behavior.

A survey of professional economists revealed that more than three-fourths of them agreed with a number of statements. Which of the following statement is NOT one of those propositions? a. Local and state governments should eliminate subsidies to professional sports franchises. b. The United States should eliminate agricultural subsidies. c. Economic growth in developed countries like the United States leads to greater levels of well-being. d. The United States should restrict employers from outsourcing work to foreign countries.

d. The United States should restrict employers from outsourcing work to foreign countries.

Suppose an economist advises a state's governor to raise the tax on cigarettes. The governor does not implement the policy because it would not be popular with voters. Which of the following statements best describes the scenario? a. This would never happen because policymakers always follow economists' advice. b. This is an uncommon occurrence. More often than not, policymakers follow the advice of economists. c. This is a common occurrence. Policymakers typically disregard economists' advice since they don't believe it's useful. d. This is a common occurrence. The policymaker knows the best policy but chooses not to institute it for other reasons.

d. This is a common occurrence. The policymaker knows the best policy but chooses not to institute it for other reasons.

In the markets for goods and services in the circular-flow diagram, households are _________ and firms are __________. a. sellers, buyers b. sellers, sellers c. buyers, buyers d. buyers, sellers

d. buyers, sellers

Any point outside a country's production possibilities frontier represents a combination of two goods that an economy a. will never be able to produce even with an increase in resources or superior technology. b. can produce using some portion, but not all, of its resources and technology. c. can produce using all available resources and technology. d. cannot currently produce.

d. cannot currently produce.

Almost all economists agree that a large federal budget deficit a. signals that we should increase subsidies to farmers. b. implies we should restructure the welfare system. c. is highly desirable to keep an economy healthy. d. has an adverse effect on the economy.

d. has an adverse effect on the economy.

Carol and Sharon are economists. Carol thinks that the wealthiest 5% of the US population should pay higher health insurance premiums so that those who are unemployed can still receive basic health care. Sharon thinks that the wealthiest should not be punished for their success and that the unemployed simply shouldn't receive health care if they cannot afford to pay for it themselves. In this example, Carol and Sharon a. disagree about the validity of a positive theory. b. will never come to an agreement because health care is a complicated market. c. have differences in scientific judgments. d. have differences in values.

d. have differences in values.

Almost all economists agree that a minimum wage a. creates a shortage of workers. b. is necessary to meet a minimum standard of living. c. does not affect unemployment. d. increases unemployment among young and unskilled workers.

d. increases unemployment among young and unskilled workers.

When an economy is operating _______ its production possibilities frontier, we know that there are unused resources of inefficiencies in the economy. a. on b. on or inside c. outside d. inside

d. inside

Positive statements are NOT a. made by economists speaking as scientists. b. claims about how the world is. c. descriptive d. prescriptive

d. prescriptive

Almost all economists agree that government subsidies on ethanol in the United States should be a. unchanged b. doubled c. increased d. reduced

d. reduced

Differences in scientific judgment between economists are similar to all of the following except a. physicists debating how much friction is caused by salt on the roads b. meteorologists debating how much snow fall we will get in the upcoming blizzard c. doctors debating which antibiotic is appropriate for a particular infection d. two biologists arguing about the fairness of health insurance premiums

d. two biologists arguing about the fairness of health insurance premiums