ECON Test 5

Irrational means:

decisions that people make that are not consistent with the rational choice model.

New low-cost technology can substitute for workers. More technology will _________ the demand for labor

decrease

Higher prices _______ the marginal utility per dollar, so consumers buy ___ of the good.

decreases, less

What is derived demand?

demand for inputs used in production - Derived because the factors are inputs used to supply a good in another market

There are ______ which cause people to accidentally make the "wrong" decisions.

biases

If I consume more of good Z, what happens? A. The price of good Z will fall. B. The price of good Z will rise. C. My marginal utility of good Z will fall. D. My marginal utility of good Z will rise.

C. My marginal utility of good Z will fall.

Non-monetary determinants of earnings include:

compensating differentials, human capital, location, lifestyle, unions, efficiency wages, and discrimination

When maximizing utility:

consumers face a budget constraint, which depends on income and prices.

Lower prices _________ the marginal utility per dollar, so consumers buy _____ of the good.

Increase, more

Name the key "conflict" with welfare programs. A. We want the rich to pay more taxes but not too much more. B. We want to help workers without hurting firms looking for people to hire. C. We want to help people in their time of need but don't want to create work disincentives. D. We want to decrease inequality but not decrease it too much.

C. We want to help people in their time of need but don't want to create work disincentives.

Explain the age gap in wage discrimination

- As workers get older, gain more human capital so earnings rise. - But gains from more human capital subject to diminishing returns.

Explain the race gap in wage discrimination

- Can be explained in large part by differences in human capital. - Education levels by race differ.

What legislation is to prevent wage discrimination?

- Equal pay act of 1963 - 2009 Fair Pay: gives employees more time to file a complaint with the government

What are some behaviors that do not fit assumptions about fully rational behavior?

- Misperceptions of probabilities - Inconsistencies in decision making - Judgments about fairness

What is intertemporal decision making?

- Planning to do something over a period of time - If rational, you value the present and the future consistently

Why do people play the lottery or gamble when there is little chance of winning?

- Players have incomplete information or do not calculate the exact odds of winning. - Players believe they have some control over the game-"lucky numbers." - Gambling is fun.

Explain the gender gap in wage discrimination

- Some of the wage differences can be explained by compensating differentials. - Men more likely to work outdoors (construction, road work) or in more dangerous conditions - Women leave the labor force more (child or elder care)

What is the problem for many of us in intertemporal decision making?

- We tend to be impatient: overweigh today's utility above tomorrow's utility.

Who are the outsourcing losers?

- Workers who may have lost their job or experienced wage reductions

What are the results of outsourcing in the long run?

- allows specialization - increases efficiency - lowers costs (and prices) - helps firms and consumers - increases labor demand in the long run

What are the different types of funds?

- bond or fixed income - stock or equity - hybrids - specialty (socially responsible funds, biblically responsible funds , industry- focused funds)

Why does wage discrimination not make economic sense?

- demand for men is higher - Fewer works to choose from - Firm has to pay higher wages - Firm that discriminates has higher costs

What are the tax deferred retirement plans?

- employer plans (401, 403, etc.): < Does employer match? < select your monthly investment < Select the funds - Individual (IRA's): < traditional or roth

What should teachers' unions do? what are the unintended consequence?

- ensure decent wages and working conditions for people doing an important job - prevent unfair things consequence: - some believe the unions have become too powerful - has become nearly impossible to fire bad teachers - Teachers paid to not teach because its cheaper than trying to take on the union and fire them

What are the results of outsourcing globally?

- increases supply of pool of workers - decreases wages for domestic workers - domestically unemployment rises

What is the return from an investment?

- interest: savings accounts, money market accounts, CD's, government and corporate bonds - Dividends: stocks pay dividends and part of the company's earnings paid to shareholders - Market Price increases: the market value of stocks, bonds, real estate, and some other assets can go up and down in value

What is the reluctance to start investing?

- no savings to invest - lack of knowledge - fear

What are the general implications of outsourcing?

- pool of workers expand (rightward supply shift) - If wages decline, domestic workers will choose to work less - Firms may also relocate (even within a country) to a place where labor is cheaper

What determines the future size of your investment?

- principal (how much you invested) - how long you leave the principal invested - rate of return

What is the keys to maximize earnings?

- start early - save and invest all you can - go for higher returns when you are young

What is the value of the marginal product of labor?

- the additional sales generated by the additional worker (MPL multiplied by the price of the product it produces)

Who are outsourcing winners?

- workers in country with increased labor demand - Firm that is hiring cheaper labor

What is the status quo bias?

-Exists when decision makers want to maintain their current choices . . . - even if a change would be preferred.

What is bounded rationality?

-People are only capable of making limited strategic decisions - Incomplete information, limited brain power, not enough time

What are some ways to reduce investment risk?

1) avoid debt: dont borrow to invest, dont invest in companies with high debt loads 2) diversify your investments over many different assets (stocks and bonds use mutual funds) 3) invest for the long term (avoid the temptation to get rich quick)

What are the 5 factors for income inequality?

1. Ability 2. Training and education 3. Discrimination 4. wealth 5. corruption

What two factors will change the demand for labor?

1. Change in the demand for the product the firm produces 2. Change in the cost of producing the product

At the consumer optimum, two conditions are satisfied:

1. all income is spent 2. for the last unit purchase =

What are the free and easy trading benefits?

1. enable young investors to get started early 2. everyone can now invest

What are some specific limitations to the free and easy trading apps?

1. limited free research and educational components 2. no mutual funds available (limits diversification) 3. extremely limited account types (no IRA's) 4. selling your order flow

Why should anyone save instead of spend?

1. look after yourself 2. Look after your loved ones 3. Help others - Give 4. be debt free 5. make your dreams come true 6. provide for the next generations

What to invest in a mutual fund?

1. select a mutual fund company or discount brokerage 2. pick an index fund 3. check the morningstar rating 4. check the expenses, fees, and loads

Saving

1. setting aside money for a purchase 2. shorter term 3. rate of return is less important than risk 3. requires positive cash flow

Investing

1. setting aside money to use to earn money 2. longer term 3. rate of return becomes more important 4. requires positive cash flow

Which of the following statements is true? A. Marginal utility generally diminishes with additional consumption of a good. B. Marginal utility generally becomes negative with additional consumption of a good. C. Marginal utility equals total utility. D. Individuals avoid consuming goods in which they experience diminishing marginal utility.

A. Marginal utility generally diminishes with additional consumption of a good.

Which of the following statements is true about risks, risk taking, and risk preference? A. Risk preferences vary among different people. B. Risk-averse people will never engage in an activity with an uncertain outcome. C. All activities involve probability and risk. D. People never change their risk preferences.

A. Risk preferences vary among different people.

What is marginal utility?

Additional utility gained from consuming one more unit of a good or service

A flipped coin lands on heads five times in a row. Jaime believes the sixth flip will almost certainly land tails. Jaime is showing an example of: A. bad decision making. B. imperfect information. C. the hot hand fallacy. D. the gambler's fallacy

D. the gambler's fallacy

What is the simple rule to maximize utility ?

Allocate income by choosing goods that give you the most utility per dollar spent. - You want the biggest bang for your buck

What is an explanation for bounded rationality (also called limited reasoning)? A. People like to take risks. B. People often have incomplete information and limited decision-making time. C. People really are not concerned with utility maximization. D. People don't know their own preferences.

B. People often have incomplete information and limited decision-making time.

Loss aversion tends to cause people to: A. ignore wins completely and only focus on the negative effects of losses. B. behave too conservatively and not take enough risks. C. gamble only when they can afford to play. D. live boring lives.

B. behave too conservatively and not take enough risks.

If the price of a good rises, consumers tend to purchase less of that good and instead purchase more of another good. This illustrates: A. the real-income effect. B. the substitution effect. C. diminishing marginal utility. D. the disadvantage of using "utils" to measure consumption.

B. the substitution effect.

What is hot hand fallacy?

Belief that random sequences exhibit a positive relationship.

What is gambler's fallacy?

Belief that recent outcomes are unlikely to be repeated and that outcomes that have not occurred recently are due to happen soon.

Which of the following statements is related to compensating wage differentials? A. Long-term labor contracts may be undesirable for firms. B. Education is directly correlated with income. C. Workers in dangerous jobs will tend to receive higher pay. D. Middle-aged workers tend to earn higher incomes than new college graduates.

C. Workers in dangerous jobs will tend to receive

Suppose that you get more utility per dollar spent when you eat hamburgers than when you eat hot dogs. Which action makes the most sense? A. eat more hot dogs because they are cheaper than hamburgers B. get something to drink to go with the food C. eat more hamburgers D. eat at Five Guys because they have better burgers than other fast food places

C. eat more hamburgers

Which of the following would most likely illustrate an example of negative marginal utility? A. studying for another hour B. sleeping in late on a weekend C. eating too much food at an all-you-can-eat buffet D. drinking a second glass of juice with a meal

C. eating too much food at an all-you-can-eat buffet

What is a risk-neutral person?

Chooses the highest expected value regardless of the risk

Suppose the United States took the extreme step to enact wealth redistribution programs until income was equal for all people. What is the most likely result? A. High earners would be supportive of this policy. B. Firms would hire more workers. C. Most people would work harder since their wealth may get redistributed. D. Free-riding would occur.

D. Free-riding would occur.

What is economic rent?

Difference between demand price and supply price, results is artificially high profits for the seller

what is behavioral economics?

Field of economics that studies how human psychology influences decision making process

What are efficiency wages?

Firms pay a wage higher than the equilibrium wage in order to increase productivity - reducing shrinking reduce turnover

What effect matters more?

For most goods the real-income effect is very small or negligible. Either the price change would have to be substantial OR The good takes up a large part of a consumer's budget

In the stock market, what is a contrarian position?

If a stock has been doing really well, bet that it will start to go down: gambler's fallacy.

What are the factors of production?

Inputs used in the production of goods and services - land, labor, capital

In the stock market, what is herd mentality?

Investors more likely to buy (sell) when a stock is doing well (bad) even if no change in the underlying valuation: hot hand.

Changes in the demand/or supply of labor will cause the:

Market wage and quantity to change

what is substitution effect?

Occurs when consumers substitute a product that has become relatively less expensive as the result of a price change.

What is diminishing marginal utility?

Occurs when marginal utility declines as consumption increases

What is preference reversal ?

Occurs when people's risk tolerance is not consistent

What is the priming effect?

Occurs when the order of questions influences answers or choices

What is the real-income effect?

Occurs when there is a change in purchasing power as a result of a change in the price of a good.

What is a risk-averse person?

Prefers a certain payoff to a gamble with a higher expected value

What is risk-loving person or risk-taking person?

Prefers gambling with lower expected values (but potentially higher winnings) over a certain payoff

Does marginal utility ever increase?

Rarely and temporarily, for example: • At the beginning of an exercise routine, getting warmed up • In the middle of a board game after a boring or slow start

What is the labor supply curve?

Relationship between the wage rate and the quantity supplied of labor

What's the one major problem with assistance for low-income individuals?

Samaritan's dilemma

What is the principal?

The amount that is put into an investment

The demand for resources depends on:

The demand for the goods and services

What is total utility?

The overall amount of happiness from consumption

What is investing?

The use of money to earn money for the purpose of accomplishing long-term life goals

What is the Samaritan's dilemma?

When an act of charity creates disincentives for recipients to take care of themselves.

Women wages compared to men?

Women still earn less than men, although the gap has narrowed. The wage gap can be partially explained by occupational crowding.

In order to maximize utility:

a consumer will buy goods that give her the largest marginal utility per dollar—"bang for the buck"..

What are loads?

a cost associated with some mutual funds that is basically a sales charge or commission paid when the shares in the fund are purchase or sold, used to compensate a broker, financial planner, advisor, or other sales intermediary

What is a union?

a group of workers that bargains collectively for better wages and benefits - able to increase wages by threat of a strike, or work stoppage

What is a utility?

a measure of relative levels of satisfaction consumers enjoy from consumption of goods and services.

What is stock index funds?

a mutual fund that makes investments so that its returns mirror the returns of the total index

What is saving?

a plan to set aside a certain amount of your net cash flow to be able to accomplish a short-term goal

What are stock or bond mutual funds?

a pool of investment money where investors have hired a manager who handles the investment of the money and returns are shared by the investors

What does saving and investing both require?

a positive cash flow

What is interest?

a return from investment - the amount a borrower pays to lender for the use of the money

A change in prices causes both:

a substitution effect and a real income effect.

What does capital in business include?

all goods used for producing other goods or services: physical assets such as production plant Financial assets, money invested in a business to purchase assets

In the short run, outsourcing could lead to:

an increase or decrease in employment

Types of equity funds

are by the size of company and by investment objective

Do people work more or less when wages increase?

at lower wages: - The substitution effect usually dominates - wage increases lead to more working at high wage levels: - the income effect may dominate

What are stocks?

documents representing ownership in a company

What is compounding?

earning returns on returns already earned: the process adds significantly to the growth of an investment

What is some solutions to the poverty rate?

education or job retraining for structurally unemployed

Risk tolerance depends on:

financial circumstances

Supply of land is _______, so supply is __________

fixed, perfectly inelastic

What are two conflicting motivation for poverty policy?

give generously and help poor to become self- sufficient

Why is income mobility important?

gives people an incentive to improve human capital and work harder if they know they can move up - poverty may be only temporary

What is the consumer goal and constraint?

goal: get on the highest indifference curve constraint: can't get above the budget line

What does the budget constraint show?

how much we can afford- not how much we want

When maximizing utility, consumers face a budget constraint and must consider:

income, prices, and marginal utility.

In the long run, outsourcing:

increases the overall productivity of workers everywhere

Economic mobility reduces:

inequality over long periods of time

What are the factors of production in the labor market?

labor: workers, shirts, wages capital: equipment, land, building other resources: supplies, food

What are the levels to start investing in the investment hierarchy?

level 1 - build an emergency fund and short term savings Level 2 - more emergency fund and short term savings Level 3 - save for major purchases: cars, houses, etc Level 4 - grow for long term events retirement and college Level 5 - take more risk to go for higher returns

What are bonds?

loans to corporations or government agencies

The goal of the consumer is to:

maximize her utility

A rational individual strives to:

maximize the benefits received from each course of action while minimizing the costs.

What is the budget constraint?

maximum amount the consumer can afford

If Wages rise, what happens? will people be willing to work more hours, what would be their trade off? what about for work less hours?

more: - opportunity cost of leisure - substitution effect less: - Earn same amount by working less - income effect

What is long-term poor?

no skills to advance to higher income levels

What is the prospect theory?

people weigh the utilities and risks of gains and losses differently - Individuals place more emphasis on losses than gains. - Implies that people evaluate the risks that lead to gains separately from the risks that lead to losses

What is a poverty rate?

percent of population whose income is below the poverty threshold

What is marginal poor?

poor now, but have skills to move up

What are investing terms?

principal, rate of return, compounding

What is increase in value?

return from investment - growth in the market price of an investment

What is dividends?

return from investment - payments made by a company to its stockholders from excess earnings

the behavior gap increases

risk

What is the trade off in investing?

security vs returns Return - the profit you get from letting someone else use your money risk - the uncertainty that you might not get your money back

for investing what must you be able to do?

sell an investment

In the labor market Individuals are _______ of labor Firms are ______ of labor the ________ is the wage rate

sellers, buyers, price

If wage rate is too low there will be a

shortage of workers

What is human capital?

skills acquired through education and training

The amount of wage discrimination is relatively ____

small, accounting for 3 to 5 % of wage differences

Due to diminishing marginal utility, the amount of happiness gained from additional consumption will get _________

smaller

The best way to provide for the long term is to

spend less in the short term and make saving of a little bit over a long time your priority - give up some of today's desires for a future benefit -

________ are usually the best for the average passive investor who has a family, job, and other interests in life

stocks and bonds

Why do skilled workers earn more?

strong demand, small supply

If the wage rate is too high there will be a

surplus of workers

Rationality assumes that:

that people never intentionally make themselves worse off.

What is income mobility?

the ability to move up and down the economic ladder over time

Due to diminishing marginal utility:

the amount of happiness gained from additional consumption will get smaller and smaller.

What is the marginal product of labor?

the change in output from hiring one more worker

What is occupational crowding?

the crowding of a group of workers into a small number of jobs - rigidity in changing careers, social customs, and personal preferences

What is compensating differentials?

the difference in wages offered to offset the desirability or undesirability of a job examples: Extra salary that must be paid to get workers for certain jobs

What is a risk premium?

the extra compensation that lenders earn when they are taking greater risk in loaning money to a borrower

What are expense ratios?

the feeds paid by investors to the manager of a mutual fund, typically ranging from 0.1 percent to 2 percent of the amount invested

What is the rate of return?

the gain from an investment as a percent of the principal invested

what is the behavior gap?

the gap between individual profits and the overall market - emotions - greedy or fearful - Amnesia - forgot mistakes

The higher the risk

the greater the potential reward

what is the poverty threshold?

the income level below which a person (or family) is considered impoverished

in the discrete choice model we buy

the one "best" choice out of many alternatives

Price changes will affect the:

the optimal consumption bundle chosen by individuals

What does the budget constraint depend on ?

the prices of goods and consumer income

What is outsourcing?

the shifting of jobs within the firm to an outside company for cheaper labor in the US or globally

Labor - leisure trade off

the tradeoff faced by wage-earning human beings between the amount of time spent engaged in wage-paying work (assumed to be unpleasant) and satisfaction-generating unpaid time, which allows participation in "leisure" activities and the use of time to do necessary self-maintenanc - But money is sometimes needed to enjoy leisure

The demand for each factor of production is derived from:

the value of the factor's marginal product

Why is income inequality in and of itself is neither good nor bad?

too equal incomes = work disincentives too unequal incomes = political unrest

True or False: If designed correctly, welfare policies can help decrease problem of income inequality

true

True or False: Some amount of income inequality is to be expected in a market economy.

true

True or False: The poverty rate in the United States has been constant for the last 40 years, despite many efforts (welfare, in-kind transfers, and the EITC) designed to reduce it.

true

Your satisfaction is quantified with

utils

What would be a indifference curve?

various combinations of two goods that yield the same level of satisfaction

The supply of labor depends on the:

wage rate that is offered, and also on each person's goals and other opportunities

If there is a surplus of available workers at the current wage:

wages will fall

If there is a shortage of available workers at the current wage:

wages will raise

What are poverty policies?

welfare, in-kind transfers, earned income tax credit, minimum wage

When does winner take exists?

when relatively small differences in ability lead to large differences in earnings

When does income inequality exists? what is caused by?

when some workers earn more than others - compensating differentials - discrimination - corruption - differences in marginal product of labor

What is wage discrimination?

when workers of the same ability are not paid the same as others because of their race, ethnicity, sex, age, religion, or some other group characteristic.

What is the role of corruption?

working hard, innovation not sufficient to succeed - assets may also not be safe from criminals or government seizure - investors less likely to develop a business

When is all wages equal?

• All workers • same skills, ability, productivity • All jobs • equally attractive • All workers • perfectly mobile

What are in-kind transfers?

• Direct assistance in the form of goods and services.

What is minimum wage?

• May provide low-skill workers with higher paycheck. • But firms respond by reducing the number of workers.

Are the shortcomings a serious measurement issue? Further problems?

• Not so much from year to year, but across generations. • Income distribution is not the only measure of a society's well-being.

how do you start building your savings account in college?

• Put yourself on a budget. • Get a part-time job. • Pay yourself first. • Cut out nonessentials.

What is welfare?

• Series of initiatives designed to help the poor by supplementing their income. • Eligibility limited to a set amount of time. • Valid as long as the recipient's income is below the eligibility cutoff.

What is earned income tax credit?

• Tax credit designed to encourage low-income workers to work more. • Credit falls as income increases, so less of a disincentive to work.