Chapter 1 Economics foundations and models

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Normative analysis

Analysis concerned with what ought to be

​Today, which of the following countries has a centrally planned​ economy?

North Korea

Productive efficiency

a situation in which a good or service is produced at the lowest possible cost

Market

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

Which of the following statements about a hypothesis is​ correct?

A hypothesis is a statement that could in principle turn out to be incorrect

Economic model

A simplified version of reality used to analyze real-world economic situations

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

Voluntary exchange

A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction

Which of the following statements is​ true?

All individuals face a scarcity of time and need to make choices how to allocate it

Positive analysis

Analysis concerned with what is

Which of the following statements about economics as a social science is​ correct?

Economics studies the actions of individuals

In a market​ system, what determines how goods and services will be​ produced?

Firms determine how goods and services will be produced.

Which of the following is a correct statement about a mixed​ economy?

In a mixed​ economy, most economic decisions are made in markets but the government plays a significant role in the allocation of resources.

Which of the following areas of economics studies issues such as whether government intervention is capable of reducing the severity of​ recessions?

Macroeconomics

Which of the following statements about microeconomics and macroeconomics is​ correct?

Macroeconomics is the study of the economy as a whole

Which of the following is not a step that economists use in developing a useful economic​ model?

Make a value judgement about the merits of the hypothesis.

Efficiency means that goods are distributed in a way that ________ while equity means that goods are distributed in a way that_____________-

Maximizes benefits to society, is fair

Economic variable

Something measurable that can have different values such as the incomes of doctors

An incentive that doctors would have to NOT accept the​ patient-provided information is that

They may doubt the accuracy of information provided directly by patients

Warren Buffet is the Chief Executive Officer of the investment firm Berkshire Hathaway and one of the wealthiest people in the world. In an editorial in the Wall Street Journal​, Buffet argued that economic policies in the United States should be designed so that people who are willing to work receive enough income to live a​ "decent lifestyle." He argued that an expansion of the Earned Income Tax Credit​ (EITC) would be superior to an increase in the minimum wage as a means to reach this goal. The EITC is a program under which the federal government makes payments to​ low-income workers.

This is a normative economic question, so the answer is a matter of the norms or values of the person answering

Which of the following best describes​ scarcity?

Unlimited wants exceed the limited resources available.

The three economic questions that every society must answer are

What goods will be​ produced, how will they be​ produced, and who will receive the​ goods?

In a market​ system, how does society decide who will receive the goods and services​ produced?

Who receives the goods and services produced depends largely on how income is distributed.

Productive efficiency means that

a good or service is produced at the lowest possible cost

If a firm is productively and allocatively​ efficient, it earns ________ if it is not it____________

a profit; suffers a loss

Which of the following statements about an economic variable is​ correct?

an economic variable is something measurable that can have different values

How are economic resources allocated in a market​ economy?

by the decisions of households and firms interacting in markets

A news story on declining attendance at college football games noted that schools in the central time zone had particular problems with attendance at games that started at 11 a.m. The athletic director at the University of Illinois was quoted as​ saying, "I'm a big fan of evening​ games." Playing games in the late afternoon or​ evening, rather than in the​ morning, would

change the opportunity cost for students whose alternative activities vary throughout the day

Any attempt to determine whether or not this is a good system must focus on its

costs and benefits

Scarcity is central to the study of economics because it implies that

every choice involves an opportunity cost.

Microeconomics is the study of

how households and firms make​ choices, how they interact in​ markets, and how the government attempts to influence their choices.

Consider an organization that exists to help the poor. The members of the organization are discussing alternative methods of aiding the​ poor, when a proponent of one particular method asserts​ that: ​"If only one poor person is helped with this​ method, then all our time and money would have been worth​ it." If you were a member of the​ organization, what reply best represents clear economic​ thinking? This attitude

ignores the fact that the cost of helping that one person has an opportunity cost of what those funds could have been used for to help other people.

A firm operating in a market economy has a strong incentive to be productively efficient and allocatively efficient because the former enables it to____________ while the latter ensures it of ________________

minimize production costs; ample revenues

The price of coffee at Starbucks is too high. This represents

normative analysis

When the federal government crafts environmental policies that make it less expensive for firms to follow green​ initiatives,

the policies are consistent with economic incentives.

When it comes to assessing how this system affects the financial interests of doctors and the well being of​ consumers, it may be that the former gain more simply because

there are far fewer of them, hence each stands to gain much from supply restrictions

Economists use models

to answer questions and analyze issues

Economic data is used

to test models

Leonard​ Fleck, a philosophy professor at Michigan State​ University, has​ written, ​"When it comes to health care in​ America, we have limited resources for unlimited health care needs. We want everything contemporary medical technology can offer that will improve the length or quality of our lives as we age. But as presently healthy​ taxpayers, we want costs​ controlled." Is it necessary for all economic systems to limit services such as health​ care?

yes

Economists assume that the only reason people take the actions they do is in response to economic incentives.

False

Dr.​ Strangelove's theory is that the price of mushrooms is determined by the activity of subatomic particles that exist in another universe parallel to ours. When the subatomic particles are emitted in​ profusion, the price of mushrooms is high. When subatomic particle emissions are​ low, the price of mushrooms also is low. Is it possible to test this theory?

No

What type of economic analysis is concerned with the way things ought to​ be?

Normative Analysis

The federal government should spend more on AIDS research. This represents

Normative analysis

When does productive efficiency​ occur?

Productive efficiency occurs when a good or service is produced at the lowest possible cost.

A news story discussing​ Sanadu's prospects for success selling its home medical devices​ observes, "Another challenge will be getting doctors on board with the idea of patients bringing them information from​ home." An economic incentive for doctors to accept information supplied by their patients is that it would

Reduce the amount of time spent testing and evaluating the patients' condition in the office or hospital where they were treated

Equity

The fair distribution of economic benefits

Opportunity cost

The highest valued alternative that must be given up to engage in an activity

Trade off

The idea that, because of scarcity, producing more of one good or service means producing less of another good or service

Suppose economists develop an economic model and find that​ "it works great in​ theory, but it fails in​ practice." Which of the following should the economists do​ next?

They should revise the model in light of its failure to explain or predict real world events.

Allocative efficiency

a state of the economy in which production is in accordance with consumer preferences in particular every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

Which of the following statements is​ correct?

an innovation is the practical application of an invention

Marginal analysis

analysis that involves comparing marginal benefits and marginal costs

Allocative efficiency means that

every good or service is produced up to the point where marginal benefit is equal to marginal cost.

What do economists mean by the word​ "marginal"?

extra or additional

Which of the following statements about normative analysis is​ correct?

normative analysis is concerned with what ought to be

Rising paper prices will increase textbook prices. This represents

positive analysis

Macroeconomics is the study of

the economy as a​ whole, including topics such as​ inflation, unemployment, and economic growth.

Economists believe that an activity should be continued up to the point where

the marginal benefit from the activity is equal to the marginal cost.

According to Forbes​ magazine, in 2015 Bill Gates was the​ world's richest person with wealth of​ $79.2 billion. Does Bill Gates face​ scarcity?

​Yes, because even though​ billionaires' financial resources enable them to afford a much greater array of goods and services than those less​ wealthy, their financial resources are not infinite.

Indicate whether each of the following is primarily a microeconomic issue or a macroeconomic issue. -the effect of higher cigarette taxes on the quantity of cigarettes sold. this is a _________ issue -The effect of higher income taxes on the total amount of consumer spending. this is a ________ issue -The reasons for the economies of east asian countries growing faster than the economies of​ sub-Saharan African countries. This is a _______ issue -The reasons for low rates of profit in the airline industry. This is a _____ issue

-microeconomic -macroeconomic -macroeconomic -microeconomic

Three Key economic ideas

1. People are rational 2.People respond to economic incentives 3.Optimal decisions are made at the margin

When does allocative efficiency​ occur?

Allocative efficiency occurs when production is in accordance with consumer preferences.

Mixed economy

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant roll in the allocation of resources

Market Economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources

Centrally planned economy

An economy in which the government decides how economic resources will be allocated

Why are models based on​ assumptions?

Because models have to be simplified to be useful

In a market​ system, how does society decide what goods and services will be​ produced?

Consumers, firms, and the government determine what goods and services will be produced by the choices they make

The Making the Connection explains that there are both positive and normative elements to the debate over whether medical schools should charge tuition and whether hospitals should continue to pay residents who pursue primary care but not residents who specialize. Which of the following economic statistics would be the most useful in evaluating the positive elements in this​ debate?

E. All of the above

Consider the following​ statement: ​ "The problem with economics is that it assumes that consumers and firms always make the correct decisions. But we know that everyone makes​ mistakes." What is the most correct response to this​ statement?

Economics assumes that consumers and firms are​ rational, not that they always make the right decisions.

Which of the following statements is​ correct?

Economists use the terms firm, company, and business interchangeably

Which of the following statements about microeconomics and macroeconomics is​ correct?

Microeconomics involves the study of how households and firms make choices

Which of the following areas of economics studies issues such as ways to reduce teenage​ smoking?

Microeconomics

A primary difference between macroeconomics and microeconomics is

Microeconomics examines individual markets while macroeconomics examines the economy as a whole

Assuming that these statistics are available or could be​ gathered, are they likely to resolve the normative issues in this​ debate?

No, because normative issues involve value judgments that incorporate an​ individual's full range of​ experiences, beliefs, and emotions.

A​ 50-cent-per-pack tax on cigarettes will reduce smoking by teenagers by 12 percent. This represents

Positive analysis

Which of the following statements about positive analysis is​ correct?

Positive analysis is concerned with what is

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices

Economics

The study of the choices people make to attain their goals, given the scarce resources

Suppose you were building an economic model forecasting the number of physicians and physicians assistants likely to be needed in 2020. Should your model take into account the growth of the home medical device​ industry?

Yes because the greater the growth in the use of home medical devices, the less patients will require the services of physicians and physician assistants

Alberto Chong of the University of Ottawa and several colleagues conducted an experiment to test the efficiency of government postal services around the world. They mailed letters to nonexistent businesses in 159 countries and kept track of how many of the letters were returned. Was this test most relevant to evaluating the productive efficiency or the allocative efficiency of these postal​ services? This test that Albert Chong and his colleagues carried out was most relevant for evaluating the

allocative efficiency of these postal services because the test was designed to measure how often and how quickly the letters sent were returned.

Relative to a market​ economy, a​ centrally-planned economy would be expected to be

better at neither productive efficiency nor allocative efficiency because the absence of​ market-imposed competition negates the need of firms to satisfy consumer wants or produce using the​ lowest-cost methods.

In the United​ States, to receive a medical​ license, a doctor must complete a residency program at a hospital. Hospitals are not free to expand their residency programs in a particular medical specialty without approval from a Residency Review Committee​ (RRC), which is made up of physicians in that specialty. A hospital that does not abide by the rulings of the RRC runs the risk of losing its accreditation from the Accreditation Council for Graduate Medical Education​ (ACGME). The ACGME and the RRCs argue that this system makes it possible to ensure that residency programs do not expand to the point where they are not providing residents with​ high-quality training. This system may help protect consumers by ensuring that

future doctors receive high-quality training

Centrally planned economies allocate resources based on decisions by ________while market economies answer these questions through decisions made by .

government, households and firms

Scarcity implies that every society and every individual face​ trade-offs because scarcity means that

human wants are greater than what available resources can produce.

What goods and services will be​ produced, how the goods and services will be​ produced, and who will receive the goods and services are​ determined:

in market economies partly by the decisions of buyers and sellers interacting in markets and partly by the government.

The level of total investment by firms in new machinery and equipment helps to determine how rapidly the economy grows. This is a________ issue. However, to understand how much new machinery and equipment firms decide to​ purchase, one must analyze the incentives individual firms​ face, which is a __________ issue

macroeconomic, microeconomic

The Food and Drug Administration​ (FDA) is part of federal​ government's Department of Health and Human Services. Among its other​ functions, the FDA evaluates the safety and effectiveness of drugs and medical devices. FDA approval had to be granted before OraSure was allowed to market its home HIV test. In a centrally planned​ economy, the government decides how resources will be allocated. In a market​ economy, the decisions of households and firms interacting in markets allocate resources.

market economy because the drug​ development, and the resources allocated to the​ development, occurs in the market

Productive efficiency occurs when a good or service​ (such as the distribution of​ tickets) is produced at the lowest possible cost. Is this an efficient way to distribute the​ tickets?

no

Suppose that your local police department recovers 100 tickets to a big NASCAR race in a drug raid. It decides to distribute these to residents and announces that tickets will be given away at 10 A.M. Monday morning at City Hall. Suppose that your college decides to give away​ 1,000 tickets to the football game against your​ school's biggest rival. The athletic department elects to distribute the tickets by giving them away to the first​ 1,000 students who show up at the​ department's office at 10 a.m. the following Monday.

the groups of people that are most likely to get the tickets will be those for whom the expected marginal benefits of going to the department's office on Monday morning are greater than the expected marginal costs What is the actual cost and also the opportunity cost of distributing the tickets this way? D. all of the above

A market system prevents people from getting as many goods and services as they want due to which of the​ following?

their income


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