Chapter #1 - Foundations of Economics

Brian recently attended a concert by the rapper 2 Chainz at the Mississippi Coast Coliseum in Biloxi, MS. His Total Benefits from seeing this show were $125, while his Total Costs were $75. From this information, it follows that his Economic Surplus from attending the show was A. $75 - $125 = -$50. B. $125 - $75 = $50. C. $125 + $75 = $200. D. (2)($125 + $75) = $400

$125 - $75 = $50.

What is the Incentive Principle?

The Incentive Principle states that if the marginal benefit of an activity increases, then a rational person will engage in more of the activity, whereas if the marginal cost of an activity increases, then a rational person will engage in less of the activity.

In 2015, Walmart made cash donations of _________ to private charities. A. $0 (since Walmart is a for-profit company, and such companies never take any actions that do not maximize profit) B. $895,256 C. $17.5 million D. $301 million

$301 million

What is a marginal benefit?

A marginal benefit is defined as the change in the value of TOTAL BENEFITS as more of an activity is undertaken.

What is a normative statement?

A normative statement is one that aims to assess the desirability of how the world is or functions, perhaps with suggestions of things that could be done to improve matters. These observations are opinion based statements that can never be proven true or false.

What is a positive statement?

A positive statement is one that aims to describe how the world actually is or actually functions. These observations are scientific in nature, in that given enough research, evidence, and data that can potentially be shown to be either true or false.

What is a rational decision maker?

A rational decision maker is someone with a well-defined goal, who takes actions to achieve the goal as best as possible.

What is a self-interested individual?

A self-interested individual places more weight on his own priorities than he places on the priorities of others. (someone who makes his own personal assessment of the benefits and costs associated with different outcomes. and who subsequently uses these measure as the basis for decision making)

What is a total economic surplus?

A total economic surplus refers to the difference between total benefits and total costs.

What is a Tradeoff?

A tradeoff is acquiring more of but at the expense of getting by with less of something else.

Which of the following statements is a "Positive Statements"? A. Kennesaw State University was established on October 9, 1963. B. The production, possession, and consumption of all types of alcohol should be illegal. C. Our country would be a better place to live if we decreased spending on national defense and increased spending on education. D. More than one (perhaps all) of the above answers is correct.

A. Kennesaw State University was established on October 9, 1963.

Andrea has $75 to spend and wants to purchase either a new amplifier for her guitar or a new MP3 player. Each good costs $75, so she can only purchase one of the two items. This scenario illustrates the basic concept that A. people face tradeoffs. B. most consumers are irrational. C. rational people never respond to incentives. D. economic insights are never useful for analyzing consumption decisions.

A. people face tradeoffs.

The quote by Milton Freidman on page 17 suggests that he believed Mother Theresa was A. rational and self-interested. B. rational and not self-interested. C. irrational and not self-interested. D. irrational but self-interested.

A. rational and self-interested.

Mike Ditka's suggestion that football related injuries could likely be reduced by have participants play without helmets (or at least without facemasks on their helmets) A. relies heavily upon the Incentive Principle. B. does not make any sense whatsoever when analyzed using the tools of economics. C. implicitly assumes that football players are irrational. D. implicitly assumes that football players are not self-interested.

A. relies heavily upon the Incentive Principle.

Trent enjoys going to the movies. In June he saw 6 movies in the theater. His Marginal Benefit of the 6th movie was $30, while his Marginal Cost of the 6th movie was $14. Based upon this information alone, his Economic Surplus A. would have been smaller if he had instead gone to the movies 5 times. B. would have been larger if he had instead gone to the movies 5 times. C. was clearly maximized by going to the movies exactly 6 times. D. would have been larger if he had instead gone to the movies 7 times.

A. would have been smaller if he had instead gone to the movies 5 times.

________________is the branch of economics which studies how individual decision-makers behave and interact with each other, often with a focus on how households and firms behave and interact with each other in markets. A. Macroeconomics B. Microeconomics C. Comparative Economic Systems D. Public Choice

B. Microeconomics

Consider the following two statements. Statement 1: "Tariffs and import quotas always increase the general welfare of society." Statement 2: "A ceiling on rents reduces the quantity and quality of available housing." Most economists would A. disagree with both Statement 1 and Statement 2. B. agree with Statement 2, but disagree with Statement 1. C. agree with Statement 1, but disagree with Statement 2. D. agree with both Statement 1 and Statement 2.

B. agree with Statement 2, but disagree with Statement 1.

A "Self-Interested" person A. cares only about his own well-being (and does not care at all about the well-being of others). B. cares about his own well-being more than the well-being of others. C. cares about the well-being of others more than his own well-being. D. does not are about the well-being of anyone (including himself).

B. cares about his own well-being more than the well-being of others.

In 2017 High School graduates earned $9,984 per year more than non-High School graduates. If this difference had instead been $15,000 per year, then we would expect A. more people to drop out of school before graduating High School. B. fewer people to drop out of school before graduating High School. C. more children to start eating breakfast before school. D. that nobody would change their behavior.

B. fewer people to drop out of school before graduating High School.

Armen Alchain and Gordon Tullockk A. were the first to recognize that increasing the minimum wage would decrease the unemployment rate of young and unskilled workers. B. argued that automobile accident rates could be decreased by installing "five point harness" seat belts and improved airbags in every car. C. argued that automobile accident rates could be decreased by installing a sharp, irremovable, foot long, iron spike to the steering wheel of every car. D. wrote a letter to FDR in 1939, advising him to have the U.S. government assist physicists in the U.S. working on research related to the creation of a uranium bomb.

C. argued that automobile accident rates could be decreased by installing a sharp, irremovable, foot long, iron spike to the steering wheel of every car.

When considering potential government policies, it is important to recognize that A. most businesses are not run by "rational decision makers." B. voluntary trade generally makes sellers better off but buyers worse off. C. if a policy alters the costs and/or benefits for a decision maker, then the decision maker might change his behavior as a result of the policy. D. voters are self-interested but politicians are not.

C. if a policy alters the costs and/or benefits for a decision maker, then the decision maker might change his behavior as a result of the policy.

The Incentive Principle states that: A. scarcity is a universal phenomenon that arises because resources are limited. B. an action should be taken if and only if the additional benefits from taking the action are at least as great as the additional costs of doing so. C. if the marginal benefit of an activity increases, then a rational person will engage in more of the activity. D. having more of one thing usually means getting by with less of something else.

C. if the marginal benefit of an activity increases, then a rational person will engage in more of the activity.

A "Rational Decision Maker" should A. always take every action for which there is a positive Marginal Benefit. B. never take any action for which there is a positive Marginal Cost. C. take an action if and only if the Marginal Benefit of the action is at least as great as the Marginal Cost of the action. D. More than one (perhaps all) of the above answers is correct.

C. take an action if and only if the Marginal Benefit of the action is at least as great as the Marginal Cost of the action.

Economics is A. the art of communicating financial information about a business entity to stakeholders, such as employees, managers, shareholders, and customers. B. the social science that studies human mental functions and behavior, with a focus on phenomena such as perception, cognition, personality, and interpersonal relationships. C. the social science that studies decision making in the face of scarcity and the resulting impact of such decisions on both society as a whole and on the individual members therein. D. the social science that studies the allocation and transfer of power in decision-making, systems of governance, and the effects of public policy.

C. the social science that studies decision making in the face of scarcity and the resulting impact of such decisions on both society as a whole and on the individual members therein.

In March 2010, when the "Patient Protection and Affordable Care Act" (aka, Obamacare) was being finalized by and debated in Congress, A. over 40 economists (including Daniel Kahneman, one of the co-recipients of the 2012 Nobel Prize in economics) wrote a letter to President Obama supporting the legislation. B. over 130 economists (including Vernon Smith, one of the co-recipients of the 2002 Nobel Prize in economics) wrote a letter to House Minority Leader Rep. John Boehner opposing the legislation. C. no economist publicly expressed any opinion on the legislation (upholding a longstanding tradition within the profession of never getting involved in public policy debates). D. More than one (perhaps all) of the above answers is correct.

D. More than one (perhaps all) of the above answers is correct.

In April 2018 professional golfer Rickie Fowler finished in second place at The Masters (one of the four most prestigious tournaments of the year), one stroke behind winner Patrick Reed. Around the same time a plane crash in Algeria killed 257 people. If Rickie was more upset about the outcome of the Masters than about the loss of life from the accident in Algeria, then it would seemingly suggest that he A. is not as good of a person as Patrick Reed. B. does not care about anyone other than himself. C. is an irrational individual. D. is a self-interested individual.

D. is a self-interested individual.

What is diminishing marginal benefit/utility?

Diminishing marginal benefit states that the marginal benefit/utility of a good or service declines as its available supply increases.

What is Economics?

Economics is the social science that studies how people make decisions in the face of scarcity, and the resulting impact of such decisions on both society as a whole and on the individual members therein.

What is Macroeconomics?

Macroeconomics is the study of the functioning and performance of a society's economy as a whole, often with a focus on levels of and changes in aggregate measure such as the inflation rate, unemployment rate, and gross domestic product growth rate.

What is marginal cost?

Marginal cost is defined as the change in the value of TOTAL COSTS as more of an activity is undertaken.

What is Microeconomics?

Microeconomics is the study of how individual decision makers behave and interact with each other, often with a focus on how households and firms behave and interact with each other in markets.

What is the goal of a rational decision maker?

The goal of a rational decision maker is to choose the possible course of action which makes economic surplus as large as possible.

What are the total benefits of an action?

The total benefits of an action refer to gains that a person realizes from taking the action.

What are the total costs of an action?

The total costs of an action refer to the burdens that a person incurs from taking the action.

How do you achieve the objective of maximizing total economic surplus?

To maximize total economic surplus you must carefully balance marginal benefits against marginal costs.

Positive Statements A. attempt to describe how the world actually is or actually functions. B. are scientific in nature, in that given enough research, evidence, and data, they can potentially be shown to be either true or false. C. are supported (either implicitly or explicitly) by the priorities, goals, and value judgements of the person making the statement. D. More than one (perhaps all) of the above answers is correct.

D. More than one (perhaps all) of the above answers is correct.

What is the Cost-Benefit principle?

The Cost-Benefit principle states that an individual should undertake an activity if and only if the additional benefit of doing so is greater than or equal to the additional cost of doing so.