econ 201 final exam
A. Which of the following best defines what economists mean by scarcity? B. Scarcity is central to the study of economics because it implies that:
A. A situation in which unlimited wants exceed the limited resources available to fulfill those wants B. every choice involves an opportunity cost
Assess the following statement by a U.S. politician in a letter to their constituents: The U.S. trade deficit with China fell as a direct result of the "trade war" of 2018, indicating that the amount of harm done to the U.S. economy through our trade deficit with China has been correspondingly reduced.
The is completely false. The U.S.-China trade deficit actually rose in 2018-19, and trade deficits are not inherently bad for the economy
In 2018, Congress debated a bipartisan bill called the Stop Bad Employers by Zeroing Out Subsides Act. Under the act, firms whose employees received assistance from various government welfare programs like Medicaid and SNAP would be required to pay a tax equal to the cost of the government assistance. The bill was explicitly designed to give firms an incentive to pay their low-wage workers more so that their workers wouldn't need to rely on welfare programs any more. Based on our discussion in class, which best explains why economists generally opposed this proposed law?
The law would have the unintended consequence of making it most costly for firms to hire workers who qualified for welfare programs (think: single parents), thus making them less likely to hire these workers in the first place
In The Wealth of Nations, Adam Smith discussed what has come to be known as the "diamond and water paradox": "Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it." LOADING... Click in the icon for a reference diagram. It is possible for the price of water to be much lower than the price of diamonds if which of the following is true?
The supply of water is greater than the supply of diamonds.
Assess the following statement: "Trade with China has wiped out the American manufacturing sector. Starting with the "China Shock" around the turn of the century, the number of American manufacturing jobs has fallen off a cliff. "
This statement is false. Although the relative share of manufacturing jobs has fallen, this trend began decades before the China shock.Moreover, this trend largely reflects the growth of non-manufacturing employment - not an absolute decline in manufacturing due to trade.
In the "Magical Iowa Car Crop" video that we watched in class, economist Bryan Caplan said "for all practical purposes, foreign trade is a type of technology." According to Dr. Caplan, in what way is opening up foreign trade like developing a new technology?
Trade allows society to produce more output at lower cost
In the early stages of the COVID vaccine rollout, policymakers faced tough decisions about how to best allocate vaccines, especially since the demand for vaccinations was far greater than the limited supply. Because of the scarcity of available vaccines, policymakers faced a what economists would call a(n) _____________ because every shot that went to one person was a shot that, by definition, could've instead gone to another person.
Trade-off
In 2018, the U.S. washing machine manufacturer Whirlpool successfully lobbied the Trump Administration to pass protective tariffs on foreign-produced washing machines. Thinking back to our discussion in class, why didn't Whirlpool experience an enormous rise in its profits as a result of these protective tariffs?
A- The Trump administration also passed protective tariffs on steel and aluminum, thereby making it more expensive Whirlpool to manufacture washing machines B- Foreign nations retalliated by imposing tariffs of their own on American-made washing machines. Both A and B are true
A. A "free market" can succinctly be defined as one with: B. Which of the following roles can governments serve to provide a sound legal environment that allows markets to flourish?
A. few government restrictions on economic activity B. protect private property and enforce contracts
A columnist writing for crainsnewyork.com observes that "the central conclusion of the vast majority of economic work on the subject is that rent regulation leads to a deterioration of housing stock." Source: Greg David, "How Rent-regulation Changes Will Hurt Housing Stock," crainsnewyork.com, April12, 2019. What does the columnist mean by "deterioration of the housing stock"? Why might rent control lead to a deterioration of the housing stock? The "deterioration of the housing stock" means that
Apartments that are subject to rent control often become rundown and in need of repairs. Rent control removes the ability of landlords to (legally) raise their rental prices, thereby reducing their incentive to properly maintain that property and undertake quality-enhancing improvements.
Adam Smith (1776) famously argued that the _____________ of the market did a better job of allocating resources than government central planners. This is because, as F.A. Hayek (1945) famously argued nearly two centuries later and as we discussed in-class, market prices serve as effective price signals that communicate the decentralized ______________ that is required to run an advanced economy.
Invisible Hand; Knowledge
Which of the following is NOT one of the three key economic ideas that we discussed in class?
People are profit-maximizers
Which of the following was a main takeaway from the Candyland trading game that we played in class?
Simple exchange can raise the utility (i.e. happiness, or well-being) of a society even if the production of goods doesn't increase at all
Economists generally agree that sugar quotas are bad policies that destroy jobs outside the sugar industry and make American consumers worse off. Nevertheless, trade restrictions on sugar imports remain in place. This is because the benefits that a small group of sugar farmers reap from these trade restrictions is much larger than the costs of these policies that must be borne by each individual citizen in the form of higher prices. For this reason, special interest groups in the sugar industry will be much more motivated to lobby politicians to maintain these restrictions than the average voter will be to lobby against them. Economists refer to this specific phenomena as:
The Logic of Concentrated Benefits & Dispersed Costs
Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange.
This statement is false; the U.S. economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas.
Based on our discussion of international trade from chapter 7, which of the following is NOT one of the main sources of comparative advantage for anation?
absolute advantage
We do not see complete specialization in the real world because:
all of the above are reasons why we don't see complete specialziation in the real world -production of most goods involves increasing opportunity costs -tastes for products differ between nations -not all goods and services are traded internationally
After World War II in 1945, the United States experienced a "baby boom" as birthrates rose and remained high through the early 1960s. In 2011, the first members of the baby boom generation became older than 65. What effect will this have on the market for nurses? As the first baby boomers become older than 65, the
demand curve for nurses will shift to the right.
A(n) ______________ is someone who operates a business, bringing together the factors of production - labor, capital and natural resources - to produce goods and services
entrepreneur
According to economists, an efficient tax is one that
imposes a small deadweight loss relative to the tax revenue it raises.
Suppose one of your friends says the following: "Why would anyone be stupid enough to pay $400 for a share of Game Stop or $40,000 for a bitcoin or dogecoin? Their economic value is obviously way less than that!" Although this may prove to be wise investment advice, based on our in-class discussion we would say that your friend is neglecting the fact that all economic value is __________.
subjective
An article in the New Yorker magazine states, "the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. But...the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries." Explain how it is possible that middle- and lower-income Americans are both the biggest losers and at the same time the biggest winners from free trade. Source: James Surowiecki, "The Free-Trade Paradox," New Yorker, May 26, 2008. It would be possible for middle- and lower-income Americans to be both the biggest losers and at the same time the biggest winners from free trade if they are the ones most likely to
work in industries that produce at higher opportunity cost than in other countries and purchase those goods that can be produced at lower opportunity cost in other countries.
In 2018, when the Trump administration imposed a 25 percent tariff on imports of steel to the United States, economists at the Federal Reserve Bank of New York wrote, "We can conclude that the 25 percent steel tariff is likely to cost more jobs than itsaves." Source: Mary Amiti, Sebastian Heise, and Noah Kwickli, "Will New Steel Tariffs Protect U.S. Jobs?" https://libertystreeteconomics.newyorkfed.org/2018/04/will-new-steel-tariffs-protect-us-jobs.html, April 19, 2018. A. Why might a tariff on steel imports cost more jobs than it saves? B. Which jobs are being saved, and which are being lost?
A. A tariff will raise the price of steel, increasing the costs to firms, and higher costs will result in higher prices, leading to lower sales and potentially lost jobs B. Some jobs in the U.S. steel industry are saved, but some jobs that use steel as an input are lost.
A. Before the deregulation of the airline industry in the late-1970s, flights were incredibly expensive due to price floors. Because of these price floors: B. Based on our conversation in-class of the various types of price floors, which of the following is NOT a negative unintended consequence of price floors:
A. All of these answers listed here are correct (Airlines offered fancier in-flight meals, more legroom, and free alcohol to attract more customers. Airlines hired attractive stewardists to attract more customers, particularly male business-class travelers. Airlines could not compete for customers by offering lower prices, so they engaged in economically rational but wasteful increases in quality. Airlines were too expensive for the average American to afford B. price floors in the sugar industry create shortages of sugar
A. What is the basis for trade? B.How can a country gain from specialization and trade?
A. Comparative advantage. B. A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services.
A. Think back to our discussion of the leading arguments against trade. Based on our discussion, which of the following would economists likely argue represents the *best* argument against free trade (at least in certain circumstances): B. Even if there is a valid reason to restrict trade in very specific circumstances, economists would still stress that restricting trade - no matter how valid the reasons for doing so - will still make both nations poorer.
A. Excessive reliance on trade with potentially hostile nations may threaten national security in times of crisis B. True. The best arguments for restricting trade are generally non-economic arguments (national security, morality, etc.)
Dwight: Beets=100 Paper=400 Jim: Beets=400 Paper=400 A. Which worker, if any, has an absolute advantage in producing *both* goods? B. Dwight's opportunity costs of making one beet is _________ ream(s) of paper C. Dwight's opportunity costs of making one ream of paper is _________ beet(s). D. Jim's opportunity cost of making one beet is __________ ream(s) of paper. E. Jim's opportunity cost of making one ream of paper is __________ beet(s). F. According to the theory of comparative advantage, Dwight should specialize in producing __________ and Jim a should specialize in producing_____________. G. If Michael decides to have each worker split their time evenly between producing beets and paper, how many beets and how much paper will be produced at Dunder Mifflin Scranton? (assuming each worker has a straight-line PPF) H. If Michael instead commands each worker to completely specialize in producing whatever they have a comparative advantage in, how many beets and how much paper will be produced at Dunder Mifflin Scranton?
A. Jim B. 4 C. .25 D. 1 E. 1 F. Paper; Beets G. 250 beets; 400 reams of paper H. 400 beets; 400 reams of paper
A. In our discussion in class of the "Water-Diamond Paradox," we determined that luxury goods like diamonds are generally much more expensive than necessities water. This is because, generally speaking, the ____________ value of an additional diamond is greater than that of the next additional bottle of water. B. We also discussed how economic value varies from person-to-person. If you're shopping at Walmart in Hammond, you may only value a bottle of water at only about $1. If you're stranded for days in the Saharan desert, however, you may be willing to pay hundreds of dollars for that same bottle of water. This best illustrates that all economic value is:
A. Marginal B. Subjective
A. In our discussion for the sweatshop debate, we said that a worker's wages are determined by two things. The UPPER BOUND of a worker's wage (i.e. the MOST that an employer would be willing to pay an employee) is determined by that worker's: B. The LOWER BOUND of a worker's wage (i.e. the LEAST that an employer would be able to pay a worker) is determined by that worker's:
A. Marginal (revenue) product of their labor (i.e. their producitivity) B. Opportunity cost of working (i.e. the pay at their next best job opportunity)
Consider the following two uses of the word "demand" in news articles: i. An article in the Wall Street Journal noted that an "increase in the price of oil quickly reduces demand for oil." ii. A different article in the Wall Street Journal noted: "Electric cars are poised to reduce U.S. gasoline demand by 5% over the next two decades...." Sources: Josh Zumbrun, "Oil's Plunge Could Help Send Its Price Back Up," Wall Street Journal, February22, 2015; and Lynn Cook and Alison Sider, "U.S. Gasoline Demand Is Likely to Slide," Wall Street Journal, June 20, 2016. A. Do you agree with how the first Wall Street Journal article uses the word "demand"? B. Do you agree with how the second Wall Street Journal article uses the word "demand"?
A. No, a change in the price of oil affects the quantity of oil demanded, not the demand for oil. B. Yes, the article is correct in its use of the word "demand."
Think back to our discussion of (now four-time NBA champion) Lebron James at the start of Week 7. In our discussion, we saw that Lebron James earns a salary of $37 million from the Los Angeles Lakers. Sports economists argue, however, that he is still underpaid and is actually worth about $50 million. Use this information to answer the following questions: A. When economists estimate that Lebron James is actually worth to the Lakers, what they mean is that he is worth up to $50 million based on his: B. Since the Lakers are the demanders (i.e. buyers) of Lebron James's labor services, we can say that they earn a ____________ of ____________ per year on his current contract.
A. Productivity (i.e. the marginal revenue his labor adds for the Lakers in terms of added wins, ticket sales, etc.) B. consumer surplus; $13 million
A. Based on our discussion in class, Chic-fil-a chicken sandwiches and Popeye's chicken sandwiches are_____________ - meaning that we should expect that a rise in the price of Popeye's chicken sandwiches would cause a(n) _________ in demand for Chic-fil-a chicken sandwiches (and vice-versa). B. Red solo cups and ping pong balls (especially when sold around college campuses) are an example of______________ - meaning that we should expect that a rise in the price of ping pong balls would causea(n) _________ in demand for red solo cups (and vice-versa).
A. Substitutes; increase B. Complements; decrease
A. Suppose that you come across a news article entitled: "Winter Storm boost Texas and Louisiana economy as reconstruction spending soars." Based on our discussion in class, what fallacy is the author committing in making the case that damaging storms and other natural disasters might boost real economic growth? B. In particular, the author neglects the ________________ associated with spending that goes towards replacing wrecked cars and rebuilding homes and factories, because every dollar spent on replacing or rebuilding damanged goods is a dollar that can't be spent on new goods and services.
A. The Broken Window Fallacy B. Opportunity Cost
China: Auto=200 Corn=1,000 USA: Auto=1,000 Corn 2,000 A. Which nation, if any, has an absolute advantage in producing both goods? B. The opportunity cost for China of making one automobile is __________ crates of corn. C. The opportunity cost for China of making one crate of corn is __________ automobiles. D. The opportunity cost for the USA of making one automobile is __________ crates of corn. E. The opportunity cost for the USA of making one crate of corn is __________ automobiles. F. The USA should specialize in __________ and China should specialize in _____________. G. Assume the price of an automobile is $10,000. At what price per crate of corn would the USA and China be willing to trade with one another? They'd be willing to trade at any price between _______ and _______ per crate of corn: H. Assume that labor costs are the only cost of producing these goods. To ensure that each nation has a cost advantage in producing whatever good it holds a compararative advantage in, wages in the USA must be somewhere between __________ and _________ than wages in China, given the difference in relative productivity between their workers.
A. USA B. 5 C. 0.2 D. 2 E. 0.5 F. Auto, Corn G. 2,000, 5,000 H. 2 times higher, 5 times higher
According to an article in the Wall Street Journal in early 2019, the price of oil produced in the United States had increased by 25 percent since the beginning of the year. At the same time, U.S. oil production was at a record high. Source: Dan Molinsky, "Oil Prices Decline as U.S. Crude Production Hits Record," Wall Street Journal, February 21, 2019. A. Are these two facts alone, holding everything else constant, consistent with a movement along the supply curve for oil? B. Is it possible that the supply curve for oil also shifted? Suppose you were told that managers at oil firms were convinced that oil prices in the future were going to be significantly lower than they are today. Would this fact help you answer the question? Given that managers at oil firms were convinced that oil prices in the future were going to be significantly lower than they are today,
A. Yes. A higher price of oil causes an increase in the quantity of oil supplied, which we show by a movement upwards along the supply curve for oil. B. it is likely that the supply curve for oil shifted to the right because firms will be more likely to increase the supply of oil today when prices are higher.
Recall our conversation from class of the economic crisis in Venezuela. After its interventionist economic policies generated enormous shortages of agricultural products and other goods, Venezuelean president Hugo Chavez introduced price controls that made these shortages even worse. This resulted in a rise of black markets in Venezuela. A. A black market is: B. Black markets may arise
A. a market in which buying and selling occur at prices that violate government price regulations. B. in reaction to binding price ceilings.
A. Dave is an aspiring rapper. Once his single "Save that Money" goes viral and he becomes rich, his demand for steak rises and his demand for ramen noodles fall. In this example that we discussed inclass, steak (a good for which demand increases as income rises) is ________, and ramen noodles (a good for which demand increases as income falls) is ________. B. Suppose the price of steak falls from $40 to $25. Dave responds by buying more steak. The ________ is used to describe how changes in price affect Dave's purchasing power (i.e. now that steak is cheaper, Dave has more money leftover to spend on more steak and other goods), and the ________ is used to describe how a change in price affects the quantity demanded of a good by making it more or less expensive than substitute goods (i.e. now that steak is cheaper relative to say, lamb, Dave will eat more steak and less lamb).
A. a normal good; an inferior good B. Income Effect; Substitution Effect
A. Think back to our discussion of marginal analysis in class. Which of the following is an example of "marginal anaylsis": B. When conducting marginal analysis, an optimal decision occurs when:
A. all of the above (Your decision to eat that extra piece of pizza at the buffet in the campus cafeteria, Your decision of what speed to set the cruise control on driving down I-12, Your decision whether to spend an extra hour studying economics before bed or binge watch a TV show) B. marginal benefit equals marginal cost.
A. Based on our discussion in-class of the three main types of economic systems, China today would best be described as a _____________ economy. The United States today would best be described as a ______________. B. In our discussion of the various types of economic systems, we concluded that more market-oriented economies outperformed more centrally-planned economies. This was in large part because they are "more efficient," meaning that they tend to promote both allocative and productive efficiency When does productive efficiency occur? C. When does allocative efficiency occur?
A. mixed; mixed B. When a good or service is produced at the lowest possible cost. C. When production is in accordance with consumer preferences.
Think back to our in-class discussion from the minimum wage debate to answer the following questions: A. Which of the following is *NOT* an unintended consequence that we discussed of minimum wage laws: B. According to research by economist Walter E. Williams, in the Jim Crow south and Aparteid South Africa, some of the biggest proponents of minimum wage laws were racially segregated labor unions and racist organizations like the Klu Klux Klan. Why did these groups support minimum wage laws? C. According to Williams' research, the implementation of minimum wage laws resulted in a sharp and sustained _________ in unemployment amongst racial minority groups, particularly amongst______________. D. Most supporters of the minimum wage today only support it because they believe it will hurt minority groups.
A. reduced inequality and greater job benefits for low-skill workers, which reduces poverty and increases workers' incentive to find jobs B. they prevented minorities from being able to offer lower prices for their labor to undercut the higher prices charged by racially-exclusive labor unions C. increase; low-skill workers (e.g. teenagers) D. False. Many people support raising the minimum wage because they genuinely believe it will help lift many poorer workers, particularly minority groups, out of poverty.
A. A production possibilities frontier (PPF): B. Think back to our in-class discussion of the PPF for picking apples and cherries. We discussed how the PPF for these goods depicted that there are"increasing opportunity costs" associated with spending more time picking one fruit as opposed to the other, and that this is true for the production of most goods. Generally speaking, "increasing opportunity costs" means that: C. What are the implications of this idea for the shape of the production possibilities frontier?
A. shows the maximum attainable combinations of two goods that may be produced with available resources B. Increasing the production of a good requires larger and larger decreases in the production of another good. Your answer is correct. C. The production possibilities frontier will be bowed outward.
Think back to our in-class discussion of the supply and the oil market. A. The marginal cost of producing oil is B. Why is the supply curve often referred to by economists as a "marginal cost curve?" (Think within the context of the oil market, as we did in class)
A. the additional cost of producing one more gallon of oil B. It shows the willingness of oil producers to supply oil at different prices based on its marginal cost of production.
A. The law of demand is the assertion that B. An increase in the price of a product causes a decrease in quantity demanded because of two effects. The _____________ is the decrease in quantity demanded because the product is more expensive relative to other goods and the ___________ is the decrease in quantity demanded owing to the decline in consumers' purchasing power.
A. the quantity demanded of a product is inversely (i.e. negatively) related to its price. B. substitution effect; income effect
Cities like San Francisco and New York that require a driver to buy a city-issued taxi medallion before the driver can legally operate a taxi are shifting the supply curve for taxis to the left relative to where it would be without the requirement for a medallion. A. Briefly explain why the supply curve for taxi rides shifts to the left. What is the effect on the market price of taxi rides from the medallion requirement? The supply curve for taxi rides shifts to the left because B. According to a news report, in 2008, medallions in San Francisco were selling for $250,000. In late2018, "the market for taxi medallions in San Francisco is now totally frozen. No one has bought or sold one in over two years." Source: Sam Harnett, "Cities Made Millions Selling Taxi Medallions, Now Drivers Are Paying the Price," npr.org, October 15, 2018. Why would taxi medallions have been worth $250,000 in 2008? Why was it apparently impossible to sell them at any price in 2018? In 2008,
A. the quantity of taxis available is lower because the city issues only a limited number of medallions. The equilibrium price for taxi rides will increase. B. the taxi business was very profitable in San Francisco, and given the small supply of themedallions, the equilibrium price skyrocketed. By 2018, the increased popularity of rideshare companies like Uber and Lyft made it possible for individuals to provide taxi service without purchasing a medallion.
A. Opportunity cost is defined as: B. Based on our discussion in-class, what is the *best* example of the opportunity cost of attending college?
A. the highest-valued alternative that must be given up in order to engage in some activity B. The foregone wages you could've earned by working a full-time job
After the winter storms that swept through Texas and Louisiana this past Winter, there was an enormous increase in demand for bottled water, generators, gasoline and other necessities in these regions. As we did in class, consider the market for bottled water. Since many people's pipe's froze, bottled water became a highly sought-after product. Describe the supply curve (S) for bottled water in Texas andLouisiana, the demand curve (D1) for bottled water before the winter storm, and the demand curve (D2) right after the winter storm hits. A. The supply curve for bottled water is: B. The _____________ curve for bottled water *after* the winter storm strikes shifts to the ____________: C. Now suppose that Governors Abbot (TX) and Edwards (LA) set a price ceiling for bottled water at whatever the equilibirum price was *before* the winter storm hit, in effect making it illegal to sell bottled water at a price above its pre-storm price. In this case, the market for bottled water immediately after the price ceiling is imposed will: D. Over time, the price ceiling may actually cause the quantity of bottled water supplied to Texas and Louisiana to ______ since ___________, thereby hurting the very people who the law is proclaiming to help. E. Why might allowing price gouging actually be better for the victims of hurricanes than banning it? F. Assess the following statement: "Economists don't beleive in charity. They believe that people should only provide bottled water and other necessities to those in need if they can earn a monetary profit from doing so."
A. upward sloping B. demand; right C. experience a shortage of bottled water D. decrease; it would be uneconomical for suppliers to sell goods in these damaged areas unless they could recoup their higher costs by charging higher prices E. All of the answers listed here are correct (Buyers with the greatest need for bottled water will be more likely to get them because they will be able to offer higher prices. If sellers are allowed to charge higher prices, there will be a higher quantity of bottled water supplied to southwest LA. Over time, more firms might be willing to supply bottled water to Texas and Louisiana since making bottled water will be more profitable at higher prices. Consumers of bottled water will be more likely to conserve water and not waste it on low-valued uses. Some might even sell bottled water they don't need at higher prices to those who most desperately need it.) F. This statement is false. Economists believe that it is best to rely on *both* charity andself-interest to help ameliorate the problems created by natural disasters
In an example from class, we discussed how Babe Ruth was both the best pitcher and the best hitter on the Boston Redsox early in his professional baseball career. In economic terms, however, we found that although he had a(n) _______________ advantage in both pitching and hitting/playing outfield over his teammates he held a(n) _________________advantage inhitting/playing outfield.
Absolute; Comparative
People often describe international trade as generating "winners" and "losers." If trade generates winners and losers in a seemingly zero-sum fashion, why do the vast majority of economists argue in favor of freer trade?
All of the above are reasons why economists generally support freer trade - Although trade does at least temporarily displace or adversely affect some workers, economists generally believe the evidence shows that the benefits of trade outweigh the alleged costs. Trade therefore is not a zero-sum game for society at large. -Talking in terms of "winners" and "losers" can be misleading because the winners and losers of trade aren't always distinct groups. Even firms that might lose business for foreign competition benefit from being able to buy lower price inputs from abroad, and even workers who might lose their jobs due to foreign competition benefit from being able to buy cheaper imports from abroad -Trade doesn't just "eliminate jobs." By allowing nations to specialize in what they can produce most efficiently, it also helps redirect workers towards new, higher paying jobs in more sustainable sectors. In the long run, this tends to raise worker wages and increase a nation's standard of living
During the OPEC crisis of the 1970s, President Richard Nixon enacted price controls on oil and gasoline. Which of the following was a negative unintended consequences of these binding price ceilings?
All of these are examples of negative unintended consequences of Nixon's price controls -A black market developed for gasoline, where people had to pay bribes for gasoline that actually made it more expensive than it would've been in the absence of price controls -Millions of Americans had to endure wasteful search cost by waiting in line for gas since they were unable to legally offer higher prices -Resources were misallocated. Regions of the country that desperately needed gasoline (say, after a hurricane) were unable to bid for it by offering higher prices -There were massive shortages of oil and gasoline
Patrick J. Buchanan, a former presidential candidate, argues in his book on the global economyLOADING... that there is a flaw in David Ricardo's theory of comparative advantageLOADING...: "Classical free tradeLOADING... theory fails the test of common sense. According to Ricardo's law of comparative advantage. . . if America makes better computers and textiles than China does, but our advantage in computers is greater than our advantage in textiles, we should (1) focus oncomputers, (2) let China make textiles, and (3) trade U.S. computers for Chinese textiles . . . The doctrine begs a question. If Americans are more efficient than Chinese in making clothes . . . why surrender the more efficient Americanindustry? Why shift to a reliance on a Chinese textile industry that will take years to catch up to where American factories are today?" Source: Patrick J. Buchanan, The Great Betrayal: How American Sovereignty and Social Justice Are Being Sacrificed to the Gods of the Global Economy, Boston: Little, Brown, 1998, p. 66. According to comparative advantage, why is Buchanan's argument incorrect?
His argument is incorrect because the United States should free up resources to produce the goods in which it has the comparative advantage.
n late 2018, malnutrition was widespread in Venezuela. Writing in an opinion column in the New York Times, Javier Corrales argued, "The government is making the crisis worse by...imposing more pricecontrols." Source: Javier Corrales, "The Venezuelan Crisis Is Part of Maduro's Plan," New York Times, September 25, 2018. Shouldn't price controls help reduce malnutrition by lowering the price of food so more people can affordit?
No. Imposing a price control below the equilibrium price in a market causes the quantity of the good available to consumers to fall because sellers will supply a smaller quantity, thereby causing some consumers to go without food that they would have been able to buy in the absence of the price control.
Think back to our discussion in-class of the minimum wage. Ekaterina Jardim, Jacob Vigdor, and colleagues at the University of Washington concluded that when Seattle raised its minimum wage, the effect was to lower "the amount paid to workers in low-wage jobs by an average of $74 per month per job in 2016." Source: Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor, and HilaryWething, "Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle," National Bureau of Economic Research Working Paper 23532, revised May 2018. Shouldn't an increase in the minimum wage raise, rather than lower, the amount paid to low-wage workers?
No. The decrease in the quantity of hours worked as a result of the wage increase had to have been relatively large to reduce the total amount workers in low-wage jobs received.
When studying society, economists generally assume that people are rational. Which of the following best describes what economists mean when they say that people are "rational"?
People are purposive; they use all available information to choose (what they believe are) the best means to achieve their goals
Consider the following examples from our in-class discussion: In the early-17th century, many of the settlers who founded the Jamestown colony starved thanks in large part to the communal principles that governed the colony whereby no one owned their own land or the fruits of their labor. Since their output was split evenly, each individual had very little reason to work hard and innovate. Their fate was only improved when new leaders established new rules that allowed settlers to own private property and keep more of the fruits of their labor. In 2006, the city of Zachary, Louisiana, began offering to pay citizens $10 for every dead possum they brought in an effort to reduce the possum population . In response to this possum bounty, many citizens began breeding possums in order to collect as money as possible. The possum population consequently skyrocketed. Based on our discussion in class, this example best illustrates the key economic idea that:
People respond to incentives
An opinion column in the New York Times by Donald J. Boudreaux of George Mason University is titled "Trade Is Not a Job Killer." In the column, Boudreaux notes that work by MIT economist David Autor and colleagues estimates "that trade with China from 1999 to 2011 destroyed 2.4 million jobs in the United States." Source: Donald J. Boudreaux, "Trade Is Not a Job Killer," New York Times, March 28, 2018. If trade with China during that period, often called the "China shock," destroyed 2.4 million jobs, how can Boudreaux claim that "trade is not a jobkiller"?
While trade with China eliminated jobs in U.S. companies that were less efficient than foreign companies, it also created new jobs in U.S.companies, particularly those that export products to foreign markets
Economic efficiency is
a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
Consider the following passage from Adam Smith's Wealth of Nations (1776): "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." What important insight is Smith trying to convey in this passage?
in market economies, individuals pursuing their own self-interest have an incentive to engage in production and exchanges that make their trading partners and society, at large, better off
A number of politicians have expressed concern about the nation's decline as a major steel producer, in large part due to competition from foreign steel producers who can produce steel at lower cost than US producers. Many politicians have advocated policies to restrict imports in order to "save domestic jobs" and promote production that is "made in America". Which best describes why protectionist policies designed to protect American steel jobs might actually make America poorer?
protecting domestic steel jobs from more efficient foreign competitors absorbs resources that could otherwise go towards producing goods of greater value that we actually do have a comparative advantage in
In 2018, when the Trump administration imposed a 25 percent tariff on imports from China, executives at Walmart sent a letter to U.S. Trade Ambassador Robert Lighthizer in which they stated, "For lower-income families, a 25% tax on these items would be a serious burden on householdfinances." Source: Tony Garcia, "Walmart, Target Warn That Tariffs Will Raise Prices and Hurt Families," marketwatch.com, September 24, 2018. Were the Walmart executives correct to consider a 25 percent tariff on imports to be the equivalent of a 25 percent tax on their customers? Don't foreign firms exporting a good to the United States and not U.S. consumers buying the good have to pay the tariff? Briefly explain.
Yes, a tariff acts like a tax, and just as with a tax, a tariff raises the price of the good the tariff is levied on.
