Econ. Chapter 1.
A model of demand predicts that a rise in price will cause a decrease in the quantity of good consumers want to buy and a decrease in price will cause an increase in quantity of a good consumers want to buy. In this model, the assumptions are that consumers:
behave rationally, respond to incentives, and are aware of other alternatives to consuming the good whose price has changed.
Suppose that the current allocation of resources is such that the economy is not producing the goods and services that have the greatest value to society. An economist would say that this economy is not:
efficient.
The U.S government places subsidy on growing corn. This policy provides: This policy is designed to:
an incentive for farmers to switch their farms over to growing corn. get more corn produced so that it can be used for ethanol production.
Each statement below is part of an economic model. Indicate whether the statement is a prediction of cause and effect or an assumption. a} People behave rationally. b} If the price of a good falls, people will consume more of that good. c} Mass starvation will occur as population outgrows the food supply. d} Firms want to maximize profits.
a} Assumption b} Prediction of cause and effect c} Prediction of cause and effect d} Assumption
If the owner of a pizza resturant is tempted to try charging more for her pizzas, she can expect fewer diners will decide to order them. This illustrates the importance of how:
charges in trade-offs influence decision making.
When the economy is working efficiently:
resources are allocated efficiently.
Individuals are required to make choices because of:
scarcity
A model is a:
simplified representation of the important parts of a complex situation.
A good economic model is more likely to address a:
positive statement because a good model can be tested with evidence.
For a long time, when a team from the American Football Conference won the Super Bowl, the stock market had a bad year; when a team from the National Football Conference won the Super Bowl, the stock market had a great year. This is an illustration of:
correlation without causation
Susan has a chance to take two weeks of unpaid leave from her job to go on a trip to Antarctica that will cost $5,000. She earns $2,000 per week. She estimates that the trip will be worth twice what she has to pay for the pleasure it will give her. Susan should:
take the trip because the cost of the trip is less than her benefit.
Sweaters sell for $15 at the crafts fair. Allie knits sweaters and her marginal costs are given in the table below. Allie's marginal costs increase with each additional sweater. If Allie is behaving rationally, how many sweaters will she sell? 1st- 5$ 2nd- 8$ 3rd- 12$ 4th- 18$ 5th- 25$ 6th- 32$
Allie will sell 3 sweaters.
Your best friend has an idea for a drive-through bar. Indicate the best explanation for why others have not taken advantage of her idea:
Government Intervention
A statement that makes a factual claim about how the real world actually works is called a ___ statement. A statement that makes a claim about how the world should be is called a ___ statement.
Positive Normative
You are trying to decide whether to take one more course this semester. Which of the following would an economist suggest that you consider?
The additional cost of the course versus its individual benefits
Which of the following is a normative statement?
The distribution of income in the U.S. should be equal.
An innovation in technology, business, or culture that had a major economic impact in your lifetime is
the Internet.
Suppose the price of a sweater is $15. Julia's marginal benefit for purchasing each additional sweater is given in the table below. Julia gets the most benefit from the first sweater and less benefit from each additional sweater. If Julia is behaving rationally, how many sweaters will she purchase? 1st- 50$ 2nd- 35$ 3rd- 30$ 4th-23$ 5th- 12$ 6th- 8$
Julia will purchase 4 sweaters.
Which of the following best describes scarcity?
Wanting more than we can obtain with limited resources.
The circular flow model illustrates:
how inputs, goods and services, and money flow through the economy.
You supervise a team of salespeople. Your employees already receive a company discount. A _____ incentive would include a reward such as a bonus, a gift certificate, or an extra discount on company merchandise to the most productive employee of the month. A _____ incentive would include an announcement that employees who fail to meet targets will lose their company discount.
positive negative
Economists often argue that the existence of unemployment benefits (payment to those that are unemployed) may cause laborers to be unemployed for longer. Which of the following best explains why?
The payments reduce the cost of being unemployed and thus create a disincentive to look for a job.
Two things that are positively correlated are: Two things that are negatively correlated are:
age and weight in babies. number of failing grades and likelihood of graduation.
Think about how and why goods and resources are scarce. Goods and resources can be inherently scarce at all times, can be scarce on occasion due to temporary or seasonal issues, or can be artificially scarce when access to the resource is restricted. For each of the following goods and resources, indicate whether the good is artificially scarce, inherently scarce, or not scarce. a} Air regardless of quality: b} Land: c} Patented goods: d} Original Picasso paintings:
a} Not scarce b} Inherently scarce c} Artificially scarce d} Inherently scarce
You just received your midterm exam results and your professor wrote the following note: "You received a 70 on this exam, the average score. If you want to improve your grade, you should study more." Evaluate your professor's note. a} the first sentence is ____ b} the second sentence is ____
a} positive b} normative
Your best friend has an idea for a long-distance car service to drive people across the country. Indicate the best explanation for why others have not taken advantage of her idea:
Unprofitable
An incentive:
modifies behavior by changing tradeoffs.
Suppose you are shopping for new clothes to wear to job interviews, but you're on a tight budget. In this situation, your wants are: In the face of this scarcity, behaving rationally means:
new clothes and your constraints are limited funds. buying the nicest clothing that you can afford.
A model of demand predicts that a rise in price will cause a decrease in the quantity of good consumers want to buy and a decrease in price will cause an increase in quantity of a good consumers want to buy. In this model:
the cause is the change in the price and the effect is a change in the quantity of the good consumers want to purchase.
Cultures around the world use food to convey social values. This is a _____ statement. Food is the best way to understand the social values of a culture. This is a _____ statement.
positive normative
When shopping for your interview clothes, some trade-offs you face include: The opportunity cost of buying new clothes is: The benefit of buying new clothes is: You balance the two by:
time and money that could be used on other things. money that could be spend elsewhere. feeling better and having more confidence. accepting costs that are less than, or no greater than, the benefits they provide.
It is important for a good economic model to predict the cause and effect so that it can:
explain events that have occurred and help anticipate future events.
You may have seen TV advertisements for products or programs that claim to teach a surefire way to make millions on the stock market. Applying the "Why isn't someone already doing it?" test to this situation:
if there was a way to do this, everyone would be rich.
It is important for a good economic model to make clear assumptions so that:
the limitations of the model are clear.
Your former neighbor gave you his lawnmower when he moved. You are thinking of using this gift to mow lawns in your neighborhood this summer for extra cash. As you think about what to charge your neighbors and whether this idea is worth your effort, the opportunity costs you need to consider include:
the sales value of the mower, the cost of gas and oil to run the mower, and what you could earn doing something else.
People confuse correlation with causation because correlation means that:
two events occur together. Since the two often occur together, people often believe that one causes the other.
In the circular flow model, households: In the circular flow model, firms:
buy goods and services and supply factors of production. sell goods and services and buy factors of production.
Which of the following is a positive statement?
Unemployment benefits usually expire after 26 weeks.
Your boss decides to pair workers in teams and offer bonuses to the most productive team. Your boss might offer team bonuses instead of individual bonuses because:
the pressure of the team will make people work harder.
Sweaters sell for $16 at the crafts fair. Allie knits sweaters and her marginal costs are given in the table below. Allie's marginal costs increase with each additional sweater. If Allie is behaving rationally, how many sweaters will she sell? 1st- 5$ 2nd- 8$ 3rd- 12$ 4th- 18$ 5th- 25$ 6th- 32$
Allie will sell 3 sweaters.
A good that is valued by society may not be on the market for all of the following reasons except:
Markets are too competitive, and thus regulation is necessary.
Last year, you estimated you would earn $5 million in sales revenues from developing a new product. So far, you have spent $3 million developing the product, but it is not yet complete. Meanwhile, this year you have new sales projections that show expected revenues from the new product will actually be only $4 million. How much should you be willing to spend to complete the product development?
Up to $4 million
Suppose you have two job offers and are considering the trade-offs between them. Job A pays $45,000 per year and includes health insurance with two weeks of paid vacation. Job B pays $30,000 per year and includes four weeks of paid vacation but no health insurance. a}Which statement is true? b}Which statement is true?
a} The benefit of Job A are the extra pay and health insurance, and the benefit of Job B is the two extra weeks of vacation. b} The opportunity cost of Job A is losing out on the extra two weeks of vacation. The opportunity cost of Job B is $15,000 in lower salary, and health insurance.
When we say rational people make decisions at the margin, we are saying that people:
compare the additional costs and additional benefits of only the current choice.
You have an 8:30 class this morning but you are feeling extremely tired. You decide whether to get some extra sleep or go to class by:
comparing the benefit of feeling rested to the cost of missing your class.
Individuals or firms usually provide the goods and services people want because:
if they didn't produce goods that people want, no one would buy their goods.
A ___ incentive makes a person less likely to do something, whereas a ___ incentive makes a person more likely to do something.
negative positive
A nuclear weapon with the explosive power of 10 kilotons of TNT will have a fallout radius of up to 6 miles. This is an example of a ____ statement.
positive
The first question economists use to break down problems -- "What are the wants and constraints of those involved?" -- is based on the existence of:
scarcity
Your friend offers to buy you a cup of coffee, a cup of tea, or a soda. You don't like coffee, and after some thought, you choose the tea. The opportunity cost of the teas is:
the soda.
Consider two events: Every morning, you get up. (Event A) Every morning, the sun rises. (Event B) Thus these two events occur together every day. Given that information, the best description of this relationship is which of the following?
The two events are correlated.
Suppose the price of a sweater is $40. Julia's marginal benefit for purchasing each additional sweater is given in the table below. Julia gets the most benefit from the first sweater and less benefit from each additional sweater. If Julia is behaving rationally, how many sweaters will she purchase? 1st- 80$ 2nd- 65$ 3rd- 60% 4th- 53$ 5th- 42$ 6th- 38$
Julia will purchase 5 sweaters.
Consider the events that change prices as shown in the table below. For each one, say whether the opportunity cost of consuming the affected good increases or decreases. a} A local movie theater offers a student discount. b} A tax on soft drinks passes in your state. c} Subsidies on corn are cut in half. d} Your students health center begins offering flu shots for free.
a} Decreases b} Increases c} Increases d} Decreases
Determine whether each of the following statements is positive or normative. (Remember that a positive statement isn't necessarily correct, it just makes a factual claim rather than a moral judgement). a} People who pay their bills on time are less likely than others to get into debt: b} Hard work is virtue: c} Everyone should pay his or her bills on time: d} China has a bigger population than an other country in the world. e} China's One-Child Policy (which limits families to one child each) helped to spur the country's rapid economic growth: f} Lower taxes are good for the country:
a} Positive b} Normative c} Normative d} Positive e} Positive f} Normative
For each of the pairs below, determine whether they are positively correlated, negatively correlated, or uncorrelated. a} Time spent studying and test scores. b} Vaccination and illness. c} Soft drink preference and music preference. d} Income and education.
a} Positively b} Negatively c} Un d} Positively
Determine whether each of the following statements is best explained by coincidence, an omitted variable, or reverse causation. a} In cities that have more police, crime rates are higher: b} Many retired people live in the states where everyone uses air conditioning during the summer. c} More people come down with the flu during the Winter Olympics than during the Summer Olympics. d} For the last five years, Punxsutawney Phil has seen his shadow on Groundhog Day, and spring has come late.
a} Reverse causation b} An omitted variable c}An omitted variable d} Coincidence
It's Friday night. You already have a ticket to a concert, which cost you $30. A friend invites you to go out for a game of paintball instead. Admission would cost you $25, and you think you'd get $25 worth of enjoyment out of it. Your concert ticket is nonrefundable. Your opportunity cost (in dollars) of playing paintball is:
the enjoyment of the concert (since the $30 cannot be recovered).
Correlation means that: Causation means that:
there is a consistently observed relationship between two events. one event brings about another event.
Consider the following examples. For each one, say whether the incentive is positive or negative. a} Bosses who offer time-and-a-half for working on national holidays. b} Mandatory minimum sentencing for drug offenses. c} Fines for littering. d} Parents who offer their children extra allowance money for good grades.
a} Positive b} Negative c} Negative d} Positive
You would like to spend winter break traveling in South America. You have three weeks off for break and you have $2,000 that you saved last summer when you had a job. The amount of break time is ____ The desire to travel is a ____ The money that you have is a ___
constraint want constraint
What is the difference between disagreeing about a positive statement and disagreeing about a normative statement? Disagreeing about a positive statement means: Disagreeing about a normative statement means:
disputing a fact. not agreeing with someone's opinion.