Chapter 1 Economics

When we say that an individual behaves according to ʺrational self-interest,ʺ we mean that this individual A) is motivated by greed. B) will always buy the most fashionable items available. C) will always buy the cheapest products available on the market. D) is making choices that they believe will leave him/her better off.

D) is making choices that they believe will leave him/her better off.

The study of economics can be divided into two areas, which are

Micro and Macroeconomics

________ are the things that are used to produce things that satisfy peopleʹs wants.

Resources

The basic economic problem is

Scarcity

According to economic theory, how do people make decisions?

They make decisions based on their own self-interest.

Consider the case of a teacher who tells students that those who miss more than three classes for any reason will automatically receive a lower grade.

This is an example of a negative incentive for students to attend class.

Deciding whether to go to the beach or to go to school is

an economic decision.

How does the science of economics deal with the fact that we all have different values?

by using positive analysis

Economics may be referred to as a(n) ________ science, meaning that data is looked at to see whether assertions are correct.

empirical

The Presidentʹs statement that ʺto encourage economic growth, taxes should be cut,ʺ

example of a normative statement.

By using the ceteris paribus assumption in conjunction with a model, economists can

hold certain factors constant.

Because resources are scarce relative to wants, the study of economics concerns

how individuals, businesses, and governments make choices.

Scarcity exists in the world because

human wants are unlimited.

Economic analysis is used

in all decision making

Positive economics

is objective

The rationality assumption states that

people do not intentionally make decisions that would leave them worse off.

When two variables have a direct relationship, the slope is

positive

The slope of a nonlinear curve is ________ when the curve is rising, and ________ when the curve is falling.

positive,negative

An incentive is a

reward for desired behavior.

Economists assume that people are motivated by

self-interests

Economic models are used to

simplify reality to predict outcomes.

Microeconomics is concerned primarily with

smaller units of the economy such as firms and households.

Economics is a

social science

Economics is a study of

the allocation of scarce resources

Economics is the study of

the allocation of scarce resources to satisfy unlimited wants.

Macroeconomics is concerned primarily with

the entire economy.

Why do economists test their hypotheses?Why do economists test their hypotheses?

to see whether their models predict the choices people will make

Resources are

used to produce goods and services to satisfy peopleʹs wants.

Suppose that on average there are five more car accidents for every extra inch of snowfall in a certain region. If snowfall is graphed on the y axis and car accidents on the x axis, then if we graph this relationship, the slope of the line will be

1/5

Which one of the following is an example of a normative statement? A) A vacation in Colorado is better than a vacation in Hawaii. B) Hotels in Colorado are more expensive than are hotels in Hawaii. C) The hotel vacancy rate in Hawaii will increase as airfares to Hawaii increase. D) The busiest tourist month in Colorado is July.

A) A vacation in Colorado is better than a vacation in Hawaii.

Which one of the following is an example of a normative statement? A) Public school teachers are not paid enough. B) The average public school teacher earns less than the average truck driver. C) The average public school teacher earns more than the average truck driver. D) Students in smaller classes perform better on standardized tests.

A) Public school teachers are not paid enough.

What would lead an economist to conclude that Theory A is superior to Theory B? A) Theory A predicts real-world events better than does Theory B. B) The assumptions underlying Theory A are more realistic than are the assumptions underlying Theory B. C) Theory A explains how people think, whereas Theory B only explains what they do. D) Theory A is based on the assumption that an individual typically cannot determine what is in his or her own best interest, whereas Theory B assumes that each person knows what is in his or her own best interest and acts accordingly.

A) Theory A predicts real-world events better than does Theory B.

Rational behavior for an economist means that individuals A) are motivated by self-interest. B) never change their minds. C) always make positive choices. D) are self-sacrificing.

A) are motivated by self-interest.

Which of the following would most likely be part of the study of microeconomics? A) how General Motors makes decisions regarding their production goals B) national income C) the total economic output of our domestic economy D) overall price stability in the United States

A) how General Motors makes decisions regarding their production goals

What type of economics would most typically deal with aggregates? A) macroeconomics B) microeconomics C) labor economics D) environmental economics

A) macroeconomics

Ceteris paribus means A) other variables are held constant. B) almost certainly. C) only if everything works just right. D) perhaps.

A) other variables are held constant.

Macroeconomics might study which of the following? A) the causes of domestic unemployment B) decision making undertaken by firms C) decision making undertaken by households D) determinants of the prices of rare goods (e.g., diamonds)

A) the causes of domestic unemployment

If the slope of a curve is 1/5, we know that A) the relationship is linear, and the line moves from lower left to upper right. B) the relationship is non-linear, and the line moves from lower left to upper right. C) the relationship is linear, and the line moves from upper left to lower right. D) the relationship is non-linear, and the line moves from upper left to lower right.

A) the relationship is linear, and the line moves from lower left to upper right.

The value of a model is determined by A) the usefulness of its predictions in the real world. B) the extent of the profit earned by applying it. C) the realism of its assumptions. D) the modelʹs attention to real world details.

A) the usefulness of its predictions in the real world.

The idea of bounded rationality is used to address all of the following characteristics EXCEPT A) unbounded selfishness. B) unbounded knowledge. C) unbounded willpower. D) unbounded rationality.

A) unbounded selfishness.

The author of the book An Inquiry into the Nature and Causes of the Wealth of Nations is

Adam Smith.

Which of the following is a normative economic statement? A) Few auto mechanics are women. B) Men and women should earn the same salary if they perform the same job. C) Auto mechanics typically earned more than waitresses in the United States in 2004. D) Most waitstaff are women.

B) Men and women should earn the same salary if they perform the same job.

The study of how a particular firm might choose to maximize its profits would fall into what type of analysis? A) macroeconomics B) microeconomics C) labor economics D) aggregate economics

B) Microeconomics

Which of the following is a normative economic statement?A) If the government increases spending, unemployment will fall. B) The government should increase spending during times of economic recession. C) If banks create more money, unemployment will decrease. D) If the price of gasoline rises, car pooling will increase.

B) The government should increase spending during times of economic recession.

Which of the following is a positive statement? A) An unemployment rate of 5.8 percent is too high. B) The unemployment rate is 5.8 percent. C) The unemployment rate should be below 5.8 percent. D) The unemployment rate should never be above 5.8 percent.

B) The unemployment rate is 5.8 percent.

The relationship between beers consumed the night before an exam and test grade will be graphed as A) a line sloping down from upper right to lower left. B) a line sloping down from upper left to lower right. C) a circle. D) a u-shaped curve

B) a line sloping down from upper left to lower right.

The difference between positive statements and normative statements is that A) a positive statement involves a value judgment and a normative statement is a statement of fact. B) a positive statement is a statement of fact and a normative statement involves value judgments. C) value judgments are made in normative statements but assumed in positive statements. D) normative statements are provable while positive statements are not.

B) a positive statement is a statement of fact and a normative statement involves value judgments.

Economic models A) should be designed so as to capture every detail or interrelationship that exists. B) are simplified representations of the real world. C) must employ the use of laboratory methods. D) All of the above are correct.

B) are simplified representations of the real world.

Consider the statement, ʺThe number of beers consumed the night before a test affects the grade.ʺ In this statement A) beer is the dependent variable and test grade is the independent variable. B) beer is the independent variable and test grade is the dependent variable. C) both beer and grade are dependent variables. D) both beer and grade are independent variables.

B) beer is the independent variable and test grade is the dependent variable.

If the government offers to reduce your property taxes by 10 percent if you install solar heating for your home, this would be an example of A) police power. B) incentives. C) disincentives. D) ceteris paribus.

B) incentives.

ʺThe U.S. government should not use my tax dollars to subsidize people on welfareʺ A) is a positive economic statement because it simply describes one personʹs opinion. B) is a normative economic statement because it involves a value judgment about an economic policy. C) is a positive economic statement because it predicts that my tax dollars will go to welfare. D) is a normative economic statement because it is a scientific fact.

B) is a normative economic statement because it involves a value judgment about an economic policy.

Economic theory predicts that people make choices in a manner that A) makes them well liked by others. B) makes them better off. C) reflects the fact that resources are unlimited. D) shows that they do not respond to monetary incentives.

B) makes them better off.

1) Which of the following is NOT studied in microeconomics?A) the effect of an increase in gasoline taxes on the purchase of gasoline B) the impact of an increase in the unemployment rate on economic production C) the impact of higher wages on the production of steel in the United States D) the impact of higher fuel prices on the cost of airline tickets

B) the impact of an increase in the unemployment rate on economic production

Which of the following is a macroeconomic concern? A) the unemployment rate in a specific industry B) the national output of the United States C) wage levels in specific industries D) the operation of an individual firm

B) the national output of the United States

All of the following are aspects of macroeconomics EXCEPT A) the U.S. unemployment rate. B) the production decisions of a pharmaceutical firm. C) the budget deficit of the United States. D) foreign trade.

B) the production decisions of a pharmaceutical firm

Which of the following is a microeconomic concern? A) the rate of economic growth in the United States B) the current unemployment rate in the United States C) consumer behavior D) national output of the United States

C) consumer behavior

Which one of the following is an example of a normative statement? A) A digital camera costs more than a disposable camera. B) Most digital cameras sold in the United States are imported from other countries. C) A camera makes a good wedding gift. D) More people will buy digital cameras as their prices decline.

C) A camera makes a good wedding gift.

Ceteris paribus means

other things being equal.

Which of the following statements about economic models is true? A) A good economic model is complex. B) A good model does not rely on any assumptions. C) Every model is based on a set of assumptions. D) Economic models are designed to explain what people need.

C) Every model is based on a set of assumptions.

Which of the following is a positive economic statement? A) We should strive to achieve full employment in the United States. B) The President of the United States should promote stable prices in the United States. C) If the price of eggs increases, the quantity demanded of bacon will fall. D) We should try to eliminate poverty in the United States.

C) If the price of eggs increases, the quantity demanded of bacon will fall.

Which of the following is a normative statement? A) The Gross Domestic Product is the dollar value of all goods and services produced in a country in a year. B) Fiscal policy is determined by the Congress and the president. C) Tax cuts are good for the economy. D) Monetary policy is determined by the Federal Reserve System.

C) Tax cuts are good for the economy.

How could Adam Smithʹs comment about the butcher, the brewer, and the baker be accurately rephrased in modern terms? A) The butcher, the brewer, and the baker give us our dinner because they want to be well liked in the community. B) The butcher, the brewer, and the baker give us our dinner because they will be sued if they donʹt do so. C) The butcher, the brewer, and the baker give us our dinner because they each earn a living by doing so. D) The butcher, the brewer, and the baker give us our dinner because they view doing so as a public service.

C) The butcher, the brewer, and the baker give us our dinner because they each earn a living by doing so.

Which of the following is NOT a positive statement? A) The unemployment rate is 5.8 percent. B) The inflation rate for 2002 was 2.3 percent. C) The national debt is too high. D) The federal government budget for 2004 is $2.2 trillion.

C) The national debt is too high

Which of the following is a positive statement? A) We need to carefully protect our borders. B) Hyperinflation is the most damaging thing that can occur in an economy. C) When tax revenues are less than government spending there is a budget deficit. D) Foreign aid should be reduced to help our budget deficit.

C) When tax revenues are less than government spending there is a budget deficit.

An example of a microeconomic decision is a situation in which A) the Federal Reserve considers how much to increase the money supply during the coming month in an effort to constrain the rate of inflation. B) Congress and the president seek to reach a compromise on how much to increase government spending in an effort to influence national expenditures. C) a firm evaluates how much to reduce the price of its product in an effort to influence sales and boost its profits. D) the U.S. Treasury contemplates buying foreign currencies in an effort to influence exchange rates with an aim to boosting demand for U.S. goods and services.

C) a firm evaluates how much to reduce the price of its product in an effort to influence sales and boost its profits.

Which of the following is an example of an inverse relationship? A) hours of study and test grade B) calories eliminated from diet and weight loss C) beers consumed while studying and test grade D) amount of snowfall and profits of ski resorts

C) beers consumed while studying and test grade

The slope of a line is the A) change in the values along the x-axis divided by the change in the values along the y-axis. B) values on the x-axis divided by the values on the y-axis. C) change in the values along the y-axis divided by the change in the values along the x-axis. D) values on the y-axis divided by the values on the x-axis.

C) change in the values along the y-axis divided by the change in the values along the x-axis.

The term ceteris paribus is an economic assumption that means

other things being equal.

Which of the following is a microeconomic topic? A) the unemployment rate of the United States economy as a whole B) the rate at which prices increase in Brazil C) the advertising strategy of a particular company D) the increase in the national income of the United States over the past three months

C) the advertising strategy of a particular company

Assumptions in models tend to make A) the model predict what the scientist wants the results to be. B) the model more complex. C) the model more applicable to specific circumstances. D) the model always predict the future accurately.

C) the model more applicable to specific circumstances.

Which of the following would likely be considered as falling into the domain of microeconomics? A) the U.S. unemployment rate B) the Gross Domestic Product C) the price of apples D) the effects of fiscal policy on the U.S. economy

C) the price of apples

A direct relationship occurs when A) the two variables being compared change in opposite directions, or when one goes up the other goes down. B) a change in one of the variables causes a change in the other variable in any direction. C) the two variables being compared change in the same direction, or when one goes up the other also goes up. D) the two variables have no identifiable relationship with each other.

C) the two variables being compared change in the same direction, or when one goes up the other also goes up.

Which of the following article topics is a macroeconomic subject? A) a proposed merger between two companies B) the level of Christmas sales at a particular department store C) the unemployment rate of the United States economy as a whole D) the advertising strategy of a particular automobile firm

C) the unemployment rate of the United States economy as a whole

Which of the expressions below best describes the aim of economic theory? A) to predict how people think about money B) to understand why money motivates some people more than others C) to predict the choices people will make D) to learn what we can do to prevent people from having unrealistic wants

C) to predict the choices people will make

In the definition of economics

resources are limited and wants are unlimited.

Economics A) is a social science. B) is concerned with limited resources. C) is concerned with unlimited wants. D) All of the above are correct.

D) All of the above are correct.

five-cent deposit on beer bottles A) provides a positive incentive because it rewards people for recycling. B) provides a negative incentive because it punishes people who do not recycle. C) has no impact on recycling. D) Both A and B are correct.

D) Both A and B are correct.

What is meant by saying that economics is an empirical science? A) Economic theories do not need to be tested because they are based on true assumptions. B) Economic theories cannot be tested because there is no means of measuring economic variables with adequate precision. C) Economic theories cannot be tested because economic variables change too quickly. D) Economic theories will be tested by seeing how well they correspond to real-world phenomena.

D) Economic theories will be tested by seeing how well they correspond to real-world phenomena.

Which one of the following is an example of a positive statement? A) Farmers need some type of government aid. B) State governments should provide economic assistance to farmers. C) The federal government should provide economic assistance to farmers. D) The amount of financial assistance given to farmers is higher this year than it was 10 years ago.

D) The amount of financial assistance given to farmers is higher this year than it was 10 years ago.

Based on your understanding of your roommateʹs preferences, you predict that he will select the spaghetti for his lunch at the cafeteria, but instead he chooses the gyros. How do you describe this event in terms of economic theory? A) Your roommate is irrational. B) Your roommate does not know what is in his own best interests. C) You roommate does not know his own preferences as well as you do. D) You constructed a model that made a prediction, and the prediction was refuted.

D) You constructed a model that made a prediction, and the prediction was refuted.

All of the following are positive statements EXCEPT A) the President of the United States in 2003 was George W. Bush. B) California is in the United States. C) migratory birds fly south for the winter. D) a dog is manʹs best friend.

D) a dog is manʹs best friend.

Which of the following terms identifies something that macroeconomists would study but that Microeconomists would NOT? A) incentives B) resources C) rationality D) aggregates

D) aggregates

2) All of the following are examples of macroeconomic problems EXCEPT A) inflationary pressures caused by an increase in the cost of petroleum. B) unemployment caused by a fall off in the level of residential construction. C) a decline in the rate of overall economic growth. D) consumers deciding to buy more fish and less beef because of concerns about a healthier diet.

D) consumers deciding to buy more fish and less beef because of concerns about a healthier diet.

Ceteris paribus means A) all men are created equal. B) wage parity between men and women is a worthy goal. C) there are an infinite number of factors affecting each human decision and they change all the time. D) economists isolate one or two factors that change when analyzing human decisions.

D) economists isolate one or two factors that change when analyzing human decisions.

All of the following are aspects of microeconomics EXCEPT A) monopolies. B) a firm maximizing profit. C) a worker choosing one job over another. D) the average level of prices of all goods and services produced in a country in a year .

D) the average level of prices of all goods and services produced in a country in a year .

Which of the following is an aggregate? A) the number of shoes in one manʹs closet B) the bushels of apples one farmer sells C) the cost of a particular textbook D) the total production of all goods and services

D) the total production of all goods and services

High gasoline prices give people all of the following incentives EXCEPT A) to drive less. B) to carpool. C) to buy a hybrid car. D) to buy a new SUV

D) to buy a new SUV

Positive analysis can be described as

a value-free approach to inquiry.

An inverse relationship will be graphed as

a line that is downward sloping

The impact of an increase in the gasoline tax on SUV sales is

a microeconomics topic because it deals with one industry.

The headline in the local paper today is ʺCollege tuition next fall will be raised by 3 percent.ʺ This statement is an example of

a positive statement

Economic analysis is

a tool that can aid all decision making.

Aggregate measures are

a total measure of a variable across the economy

If an increase in one variable causes a decrease in another variable there is

an inverse relationship

Normative economic statements

are statements of ʺwhat ought to be.ʺ

The combination of psychology and economics to determine individual decision making is known as

behavioral economics.

Charitable donations to the Red Cross

can be explained by the rational self-interest theory.

A positive economic statement is one that

can be refuted.

In building a model the assumption that allows economists to study only the factors being analyzed is the

ceteris paribus assumption.

In building a model to analyze economic situations, one of the important assumptions is

ceteris paribus.

slope of a nonlinear curve

changes along the various points of the curve

Economics is the study of how people make A) judgments.

choices

Underlying economic theory is the idea that

choices are affected by both positive and negative incentives.

Microeconomics studies

decisions made by individual consumers and firms.

Assumptions are necessary to

define a set of circumstances where a model is most likely to apply.

A relationship between two variables in which one variable increases at the same time that the other increases is called

direct

According to economists, when two people make exactly the opposite decision,

each person evaluates the situation according to his/her individual self-interest.

Microeconomics is the study of

individual decision making

A relationship between two variables in which one variable increases at the same time as the other decreases is called

inverse

Normative economics

involves value judgments.

A theory or a model

is a simplified, abstract view of reality.

When the Board of Governors of the Federal Reserve Bank, chaired by Ben Bernanke, determines the discount rate, it is using

macroeconomic theories

In constructing models, economists

make simplifying assumptions

Individual decision making by consumers and producers is the focus of

microeconomics

If a straight line crosses the Y-axis at 5 and crosses the X-axis at 10, we can conclude that the slope of the line is

negative

When two variables have an inverse relationship, the slope is

negative

An inverse relationship

one variable rises while the other falls

The intersection of the x axis and the y axis is called the

origin.

The ceteris paribus assumption means

other things are equal.

Economics seeks to use only positive analysis to

provide a value-free analysis.

Rational self-interest means

pursuing what makes you better off.

It is assumed in economics that people make decisions based upon

rational self-interest.

The idea that people will not consciously make decisions that make them worse off is known as

rationality assumption.

A negative slope

represents an inverse relationship

Scarcity

requires individuals to make choices

The assumption that individuals do NOT intentionally make decisions that would leave them worse off is referred to as

the rationality assumption.

If a teacher tells a student that those who attend the study session typically score higher on the final exam,

the student has a positive incentive to attend the study session because she may get a higher grade.

Economics is most precisely defined as

the study of how people make choices.

Economics does NOT concern itself with

what people think.

The ʺpaired observationʺ of (-14, -6) means

x = -14, y = -6

The ʺpaired observationʺ of (14, 6) means

x = 14, y = 6