CHAPTER 1: FOUNDATIONS AND MODELS

Refer to the graph. What is the value of the area of rectangle A?

$250,000

Refer to the new graph. What is the value of the shaded area?

$6,250

Refer to the graph. What is the value of the slope of this line?

-1/5

Which of the following statements about a hypothesis is correct?

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

When you think of an arrangement or institution that brings buyers and sellers of a good or service together, what are you thinking of?

A marketMarkets come in all shapes, sizes and forms. EBay, the New York Stock Exchange and the local labor market are all examples of either formal or informal markets where buyers and sellers come together to exchange goods and services. Marginal analysis and rationality are both economic assumptions we make and adhere to in the marketplace. Normative economics deals with value decisions of what we should be doing. Macroeconomics can

A hypothesis in an economic model is

A. tested before it can be accepted (or not rejected). B. usually about a causal relationship. C. a statement that may be either correct or incorrect about an economic variable. D. all of the above.(correct) A hypothesis in an economic model is a statement that may be either correct or incorrect about an economic variable. An economic variable is something measurable that can have different values. An economic hypothesis is usually about a causal relationship. Before accepting a hypothesis, we must test it.

When does allocative efficiency occur?

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

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

An economic variable is something measurable that can have different values.

Which of the following statements is correct?

An innovation is the practical application of an invention.

The diagram to the right illustrates a hypothetical demand curve representing the relationship between price (in dollars per unit) and quantity (in 1,000s of units per unit of time).

Areas that form rectangles and triangles on graphs can have important economic meaning. The formula for the area of a rectangle is: Area of a rectangle = Base×Height. For the diagram below, because the curve is a demand curve, the area of the rectangle is the firm's total revenue. Total revenue is $1,400,000. We can calculate total revenue for this price and quantity combination by multiplying price ($70) and quantity (20—in 1,000s of units) and expressing the correct number of units.

Why are models based on assumptions?

Because models have to be simplified to be useful.

__________ goods and services are those bought by businesses to be used to increase efficiency or enhance production.

Capital

Which of the following statements is correct?

Economists use the terms firm, company, and business interchangeably.

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

False

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 positive economic statement?

If minimum wage rates rise, then unemployment will rise. Positive economic statements are statements of fact that imply no value judgment. Notice that the correct response merely stated what would happen if minimum wage went up and made no statement about whether that was good or bad. The other responses all imply value by using the word 'should.' If we 'should' do something we are implying that is a good outcome and something we need to pursue.

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.

In the United States, who receives the goods and services produced depends largely on__________________

In the United States, who receives the goods and services produced depends largely on how income is distributed. Individuals with the highest income have the ability to buy the most goods and services.

What is the name given to the development of a new good?

Invention Innovation involves taking the invention and applying it. Inventions may occur years before widespread innovation follows. Entrepreneurship involves business creation and can stem from an invention or be something as commonplace as opening a new restaurant. Entrepreneurs risk their own financial capital in this process.

Which of the following covers the study of topics such as inflation or unemployment?

Macroeconomics

Macroeconomics is

Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Microeconomics is the study of

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

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

Microeconomics involves the study of how households and firms make choices. Macroeconomics is the study of the economy as a whole.

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

North Korea

Which of the following countries has an economy where most of the resource allocation is determined by a central planning authority?

North Korea

Jim declined to take part in a health study on a free basis but changed his mind after being offered $1,000 to participate in the study. Jim's behavior best illustrates which economic principle?

People respond to economic incentives.

_____is concerned with what is, and _________positive analysis neutral analysis normative analysis is concerned with what ought to be. Economics is about________, which measures the costs and benefits of different courses of action.

Positive analysis is concerned with what is, and normative analysis is concerned with what ought to be. Economics is about positive analysis, which measures the costs and benefits of different courses of action.

When does productive efficiency occur?

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

Economics is the study of choice under conditions of:

Scarcity

Which of the following is not a possible opportunity cost of attending college?

The cost of housing

Microsoft charges a price of​ $599 for a copy of Windows 7. Is this pricing decision​ rational?

When we assume the managers at Microsoft have used all available information and weighed all known benefits and costs, we are assuming rationality

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.

Let V1 equal the value of a variable in period 1 and V2 equal the value of the same variable in period 2. What is the rate of growth between periods 1 and 2?

[(v2-v1)/v1]x100

In what type of economy does the government decide how economic resources will be allocated?

a centrally planned economy

How are economic resources allocated in a market economy?

by the decisions of households and firms interacting in markets

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d

One of the first steps in deciding whether to complete your education is to:

evaluate the marginal cost and marginal benefit of that decision.

Macroeconomics can be used to understand all of the topics listed below, except:

how a consumer decides between the purchase of two different cars Macroeconomics is concerned with the broader perspective related to the overall economy. Things like economic booms and recessions, unemployment levels and monetary policy are all big picture macroeconomic topics. The decision a consumer makes about whether to buy a Ford or a Chevy is a topic of microeconomics.

Economics:

is concerned with how people respond to incentives is the study of the choices people make to attain their goals, given their scarce resources. Economics is a social science that studies choices made in the face of scarcity. Economics also attempts to model how people would respond to a given set of incentives in order to encourage some type of desired outcome or discourage some type of unwanted behavior. Both of these require some type of value assessment on the part of the policymaker, employer, etc. And, while modeling economic behavior does require simplifying assumptions, most simple models do a reasonably good job of explaining economic behavior.

Economists believe that an individual or firm should continue any activity until:

marginal benefit is equal to marginal cost. Economists believe that an individual or firm should continue any activity until marginal benefit is equal to marginal cost. Continuing to engage in the activity when marginal benefit exceeds marginal cost will increase the total benefit of the activity. Conversely, continuing to engage in the activity when marginal benefit is less than marginal cost will reduce the total benefit of the activity. For this reason, the point where you should cease the activity is where marginal benefit is equal to marginal cost.

The United States economy is best classified as a:

mixed economy. The United States economy is best classified as a mixed economy. In a mixed economy, most economic decisions occur in markets where buyers and sellers determine the price but the government is also heavily involved in resource allocation. The United States, Japan, and most Western European countries have mixed economies.In a market economy, the private sector, instead of the government, determines the goods and services produced. Markets where buyers and sellers interact with no government intervention determine the price and the types of goods and services produced.In centrally planned economies like North Korea and Cuba, the government determines the type of goods produced, the production method, and allocates those goods among the citizens.

The resources provided by nature and used to produce goods and services are also known as:

natural resources Some examples of natural resources include fertile land, mineral deposits, oil, natural gas and water. These natural resources are often collectively referred to by economists as land. The factors of production include land, labor and capital and are all used in some combination to produce goods and services.

In the diagram to the right, the curve labeled "S" is apparently _____, while the curve labeled "D" is apparently _____.

nonlinear; linear

The relationship between two variables is positive when ________, and the relationship between two variables is negative when ________.

one variable increases and the other increases; one variable increases and the other decreases

Macroeconomics is concerned with all of the following except:

political party affiliation While various political parties can have widely different economic beliefs and approaches, the study of political party affiliation is not a macro topic. An individual's choice of political affiliation is a topic of microeconomics. The other broad topics of inflation, overall standard of living and unemployment rates are all macroeconomic topics.

The principle of opportunity cost evolves from the concept of:

scarcity Because resources are scarce there is a trade-off for every choice we make. In other words, you have to forego something (i.e., incur an opportunity cost) in order to consume one thing. While our level of wealth or poverty will certainly provide constraints to our consumer spending, we still all ultimately make consumption choices and incur opportunity costs as a result of scarce resources.

Equity is

the fair distribution of economic benefits.

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.

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.

Which of the following steps should you follow when using a formula?

A. Make sure you understand the economic concept the formula represents. B. Make sure you are using the correct formula for the problem you are solving. C. Make sure the number you calculate using the formula is economically reasonable. D.(correct) All of the above are steps you should follow when using a formula.

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.

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

The economic policies are consistent with economic incentives

Which of the following statements about the idea that people are rational is correct?

The idea assumes that consumers and firms use all available information as they act to achieve their goals.

Which of the following statements is correct?

The relationship between two variables is linear when it is represented by a straight line and nonlinear when it is represented by a curved line.

The prevalence of Alzheimer's dementia is very high among residents living in nursing homes. A student concludes that it is likely that living in a nursing home causes Alzheimer's dementia. What is the flaw in the student's reasoning?

The student is drawing a false conclusion; he is making the error of reverse causality.

What do economists mean by the word "marginal"?

extra or additional

The slope of a straight line equals the change in value on the ____________ axis ____________ by the change in the value on the other axis between any two points on the line.

vertical; divided

Government policymakers use economic principles to make decisions, such as

A. whether to allocate additional funds to research on cancer or to research on heart disease. Your answer is not correct. B. whether to raise taxes on cigarettes to discourage teenage smoking. C. whether to raise interest rates to reduce the threat of inflation. D. All of the above.(Dcorrect)

Any model is based on making assumptions because

Economic models make behavioral assumptions about the motives of consumers and firms. Economists assume that consumers will buy the goods and services that will maximize their well-being or their satisfaction. Similarly, economists assume that firms act to maximize their profits. These assumptions are simplifications because they do not describe the motives of every consumer and every firm.

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

Economics studies the actions of individuals.

Economic decisions are made at every level in society. When we try to decide which production method to use among several alternatives, which of the following key economic questions are we trying to answer?

How do we produce the products?

________ is a problem that occurs when someone concludes that a change in variable X caused a change in variable Y when, in fact, it is a change in variable Y that caused a change in variable X.

Reverse causality

When we graph the relationship between two​ variables, we often want to draw conclusions about whether changes in one variable are causing changes in the other variable. Doing​ so, however, can lead to incorrect conclusions. Reasons for drawing incorrect conclusions about cause and effect include

Reverse causality and an omitted variable

Refer to the graph. How would you describe the value of the slope of this curve?

The value of the slope is greater between points g and h than between points i and j.

Trade-offs force society to make choices, particularly when answering the following three fundamental questions:

Trade-offs force society to make choices, particularly when answering the following three fundamental questions: 1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services produced?

The stock of computers, factory buildings, and machine tools used to produce goods is known as:

physical capital

Suppose that there are three variables involved in the graph to the right: (1) quantity, (2) price, and (3) a third variable. Which of those variables causes the quantity to change from point C to point D in the graph?

the third variable

Economics is a social science because

A. it is based on studying the actions of individuals. B. it applies the scientific method to the study of the interactions among individuals. C. it considers human behavior—particularly decision-making behavior. D. all of the above.(correct) Economics is a social science because it applies the scientific method to the study of the interactions among individuals. Because economics is based on studying the actions of individuals, it is a social science. As a social science, economics considers human behavior—particularly decision-making behavior—in every context, not just in the context of business.

______________________ face the problem of scarcity by trading off one good or service for another. Each choice made comes with an opportunity cost measured by the value of the best alternative given up.

Consumers, firms, and the government face the problem of scarcity by trading off one good or service for another. Each choice made comes with an opportunity cost measured by the value of the best alternative given up.

According to the rationality assumption, people:

Do not intentionally make decisions that would leave them worse off. One of the basic assumptions of economics is that people are rational. In other words, they tend to make decisions that will make them better off. This does not mean they ignore other persons and their input. It simply means they make the best decision possible given the knowledge and resources they have available to them at that time.

Tangible products like cars and televisions are referred to as __________

goods

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

Positive analysis is concerned with what is.------Normative analysis is concerned with what ought to be.

When we graph the relationship between two variables, we often want to draw conclusions about whether changes in one variable are causing changes in the other variable. Doing so, however, can lead to incorrect conclusions. Reasons for drawing incorrect conclusions about cause and effect include

reverse causality and an omitted variable. When we graph the relationship between two variables, we often want to draw conclusions about whether changes in one variable are causing changes in the other variable. Doing so, however, can lead to incorrect conclusions. One reason for drawing an incorrect conclusion is an omitted variable. An omitted variable is one that affects other variables, and its omission can lead to false conclusions about cause and effect. A related problem in determining cause and effect is known as reverse causality. The error of reverse causality occurs when we conclude that changes in variable X cause changes in variable Y when, in fact, it is actually changes in variable Y that cause changes in variable X. Next Question

The diagram to the right illustrates a hypothetical demand curve representing the relationship between price (in dollars per unit) and quantity (in 1,000s of units per unit of time). The area of the triangle shown on the diagram is $_____

Areas that form triangles on graphs can have important economic meaning. The formula for the area of a triangle is: Area of a triangle = ½ Base × Height. For the diagram below, because the curve is a demand curve, the area of the triangle is a specific dollar amount. The area of the triangle represents $242,000. We can calculate the area of the triangle by multiplying the base (60 − 38 — in 1,000s of units) and height ($52−$30) and then divide by 2.