ECONO 2202 CH 1
market economies respond to the question "Who receives the goods and serviced produced?" with
"Those who are most willing and able to buy them"
1.2 The Economic Problem That Every Society Must Solve
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CH 1
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A firm operating in a market economy has a strong incentive to be productively efficient and allocatively efficient because the former enables it to minimize production costs while the latter ensures it of ample revenues. If a firm is productively and allocatively efficient, it earns a profit; if it is not, it suffers a loss.
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Efficiency means that goods are distributed in a way that maximizes benefits to society , while equity means that goods are distributed in a way that is fair .
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The three important ideaas about markets
1. People are rational 2. people respond to economic incentives 3. optimal decisions are made at the margin
What fundamental questions do trade-offs force society to answer?
1. What goods and services will be produced? 2. How will the goods and services will be produced? 3. who will receive the goods and services produced?
concept check: Many universities and corporations offer a health wellness program that helps their employees improve or maintain their health and get paid (a relatively small amount) for doing so. The programs vary, but typically consist of employees completing a health assessment, receiving a healthy living program, and monitoring their monthly health activities. Corporations and universities are willing to pay employees to take care of themselves because a healthier workforce A. performs more efficiently, thereby improving overall productivity in the workplace. B. translates into lower costs, in part by reducing illness-related absenteeism and premature retirements. C. is a happier workforce and thus less likely to become confrontational with management. D. all of the above. E. A and B only. Your answer is correct. The incentive of employees to improve or maintain their health once they obtain health insurance may be negatively impacted. When an employer offers a wellness program to its employees, the health insurance premiums the employer pays on behalf of the employees are likely to decrease.
A and B only.
Many universities and corporations offer a health wellness program that helps their employees improve or maintain their health and get paid (a relatively small amount) for doing so. The programs vary, but typically consist of employees completing a health assessment, receiving a healthy living program, and monitoring their monthly health activities. Corporations and universities are willing to pay employees to take care of themselves because a healthier workforce A. performs more efficiently, thereby improving overall productivity in the workplace. B. translates into lower costs, in part by reducing illness-related absenteeism and premature retirements. C. is a happier workforce and thus less likely to become confrontational with management. D. all of the above. E. A and B only. Your answer is correct. The incentive of employees to improve or maintain their health once they obtain health insurance may be negatively impacted. When an employer offers a wellness program to its employees, the health insurance premiums the employer pays on behalf of the employees are likely to decrease.
A and B only. negatively decrease
Technology
A firm's technology is the processes it uses to produce goods and services. In the economic sense, a firm's technology depends on many factors, such as the skill of its managers, the training of its workers, and the speed and efficiency of its machinery and equipment.
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
Suppose Apple is currently selling 2,000,000 iPods per year. However, managers at Apple are considering whether to increase production by 200,000 iPods. One manager explains that after increasing production by this amount, total profit would be $100 million. Given this information, should Apple increase production by 200,000 iPods? A. Information about the additional revenue earned and the additional cost incurred from producing 200,000 additional iPods is required to answer this question. Your answer is correct. B. No, because increasing production by 200,000 iPods would decrease the price of iPods. C. Information about the additional cost incurred from producing 200,000 additional iPods is required to answer this question. D. Information about the total revenue earned and the total cost incurred from producing 2,200,000 iPods is required to answer this question. E. Yes, because Apple would earn a profit.
A. Information about the additional revenue earned and the additional cost incurred from producing 200,000 additional iPods is required to answer this question.
Economists assume that people are rational in the sense that A. they use all available information as they take actions intended to achieve their goals. Your answer is correct. B. they do not respond to economic incentives. C. they generally make the correct choices. D. they make decisions based on total, rather than marginal, variables.
A. they use all available information as they take actions intended to achieve their goals.
Services
Activities done for others, such as providing haircuts or investment advice.
mixed economy
An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
innovation
An innovation is the practical application of an invention. (Innovation may also be used more broadly to refer to any significant improvement in a good or in the means of producing a good.) Much time often passes between the appearance of a new idea and its development for widespread use. For example, the Wright brothers first achieved self-propelled flight at Kitty Hawk, North Carolina, in 1903, but the Wright brothers' plane was very crude, and it wasn't until the introduction of the DC-3 by Douglas Aircraft in 1936 that regularly scheduled intercity airline flights became common in the United States. Similarly, the first digital electronic computer—the ENIAC—was developed in 1945, but the first IBM personal computer was not introduced until 1981, and widespread use of computers did not have a significant effect on the productivity of U.S. business until the 1990s. There is a distinction between an innovation and an invention. An invention is a new good or a new process for making a good.
Firm, company, or business
An organization that produces a good or service. Most firms produce goods or services to earn profits, but there are also nonprofit firms, such as universities and some hospitals. Economists use the terms firm, company, and business interchangeably.
In a market system, what determines how goods and services will be produced? A. Consumers determine how goods and services will be produced. B. Firms determine how goods and services will be produced. Your answer is correct. C. The government determines how goods and services will be produced. D. Consumers, firms, and the government determine together how goods and services will be produced.
B. Firms determine how goods and services will be produced. Your answer is correct.
When the federal government crafts environmental policies that make it less expensive for firms to follow green initiatives, A. pollution is likely to increase. B. the policies are consistent with economic incentives. Your answer is correct. C. the policies are likely to be more successful than policies that cost firms more, but they do not recognize economic incentives. D. the policies are futile because where the environment is concerned, it has been repeatedly shown that firms do not respond to economic incentives.
B. the policies are consistent with economic incentives.
According to the FBI Bank Crime Statistics, there were more than 4,000 bank robberies in the United States in 2015, an increase of 3.9 percent over 2014. The FBI claims that banks have made themselves easy targets by refusing to install clear acrylic partitions, called bandit barriers, that separate bank tellers from the public. According to a special agent with the FBI, "Bandit barriers are a great deterrent. We've talked to guys who rob banks, and as soon as they see a bandit barrier, they go find another bank." Sources: U.S. Department of Justice, Federal Bureau of Investigation, "Bank Crime Statistics 2015," and "Bank Crime Statistics 2014"; and Richard Cowen, "FBI: Banks Are to Blame for Rise in Robberies," NorthJersey.com, March 10, 2009. Despite this finding, many banks have been reluctant to install these barriers. Wouldn't banks have a strong incentive to install bandit barriers to deter robberies? Why, then, do so many banks not do so? A. Banks are not interested in the safety of their customers and employees. B. Banks have no economic incentive to install the barriers. Your answer is correct. C. Banks would not receive any benefits from installing the barriers. D. Banks are not rational.
Banks have no economic incentive to install the barriers. Your answer is correct.
Alberto Chong of Georgia State University and several colleagues conducted an experiment to test the efficiency of government postal services around the world. They mailed letters to nonexistent businesses in 159 countries and kept track of how many of the letters were returned. Was this test most relevant to evaluating the productive efficiency or the allocative efficiency of these postal services? Source: Alberto Chong, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, "Letter Grading Government Efficiency," Journal of the European Economic Association, Vol. 12, No. 2, April 2014, pp. 277-299. This test that Albert Chong and his colleagues carried out was most relevant for evaluating the A. allocative efficiency of these postal services because the test was designed to measure how much it cost to send and return letters in various countries. B. productive efficiency of these postal services because the test was designed to measure how often and how quickly the letters sent were returned. C. allocative efficiency of these postal services because the test was designed to measure how often and how quickly the letters sent were returned. Your answer is correct. D. productive efficiency of these postal services because the test was designed to measure how much it cost to send and return letters in various countries.
C. allocative efficiency of these postal services because the test was designed to measure how often and how quickly the letters sent were returned.
Household
Consists of all persons occupying a home. Households are suppliers of factors of production—particularly labor—used by firms to make goods and services. Households also demand goods and services produced by firms and governments.
Relative to a market economy, a centrally-planned economy would be expected to be A. better at productive efficiency but not allocative efficiency because costs can be controlled by the government but consumer tastes cannot. B. better at allocative efficiency but not productive efficiency because consumers can be forced to buy in government shops but firm managers can be wasteful because there is no profit motive. C. better at both productive efficiency and allocative efficiency because entrepreneurial greed doesn't exist there. D. better at neither productive efficiency nor allocative efficiency because the absence of market-imposed competition negates the need of firms to satisfy consumer wants or produce using the lowest-cost methods.
D. better at neither productive efficiency nor allocative efficiency because the absence of market-imposed competition negates the need of firms to satisfy consumer wants or produce using the lowest-cost methods.
[Related to Solved Problem #1] McDonald's typically serves breakfast until only 10:30 a.m. on weekdays and 11:00 a.m. on weekends. In 2015, the company began to experiment with serving breakfast all day at various locations in San Diego. Several owners of McDonald's restaurants, however, point out that offering breakfast 24 hours a day presents two logistical problems: (1) Burgers and other meats need to be cooked at a higher temperature than eggs, so it would be difficult for employees to set the grill at the right temperature for both foods; and (2) scrambled eggs require employees to continually stir, while hamburgers don't require this attention. In addition, some customers might buy the cheaper breakfast than the more expensive lunch or dinner meals. Source: Associated Press, "McDonald's Gives All-Day Breakfast a Test Try," usatoday.com, March 30, 2015; and Susan Befield and Leslie Patton. "What So Hard About a 24/7 McMuffin?" Bloomberg Busines Week, May 12, 2013. From an economics perspective, to determine whether to serve breakfast all day, McDonald's should A. conduct customer surveys to better understand how its customers feel about the change. B. calculate whether the total revenue from serving breakfast all day is positive. C. compare the total revenue from serving breakfast all day with the average revenue from serving breakfast all day. D. compare the average cost of serving breakfast all day to the total cost of serving breakfast all day. E. compare the marginal revenue from serving breakfast all day with the marginal cost of serving breakfast all day. Your answer is correct. Would McDonald's decision have to be all or nothing—either serve breakfast only up to 10:30 A.M. or serve breakfast all day? A. Yes, because customers would want it to be all or nothing. B. Yes, because it would be difficult for employees to set the grill at the right temperature for both foods. C. No. McDonald's could evaluate serving items from the breakfast menu that could be cooked in better coordination with the dinner menu for a period after 10:30 A.M. Your answer is correct. D. No. The employees could learn to adjust to this situation and serve breakfast all day as well as lunch and dinner.
E. compare the marginal revenue from serving breakfast all day with the marginal cost of serving breakfast all day. Your answer is correct. No. McDonald's could evaluate serving items from the breakfast menu that could be cooked in better coordination with the dinner menu for a period after 10:30 A.M. Your answer is correct.
Consider the following statement: "The problem with economics is that it assumes that consumers and firms always make the correct decisions. But we know that everyone makes mistakes." What is the most correct response to this statement? A. Economics assumes that consumers and firms are rational, not that they always make the right decisions. Your answer is correct. B. Economics has a lot of problems such as those that caused the Great Recession. C. Economics is a proven field of study, and it has already solved this problem. D. Economics does assume that consumers and firms always make the correct decisions.
Economics assumes that consumers and firms are rational, not that they always make the right decisions.
In a paper written by Bentley College economists Patricia M. Flynn and Michael A. Quinn, the authors state: "We find evidence that EconomicsLOADING... is a good choice of major for those aspiring to become a CEO [chief executive officer]. When adjusting for size of the pool of graduates, those with undergraduate degrees in Economics are shown to have had a greater likelihood of becoming an S&P 500 CEO than any other major." A list of famous economics majors published by Marietta College includes business leaders Warren Buffet, Donald Trump, Ted Turner, and Sam Walton, as well as former presidents George H.W. Bush, Gerald Ford, and Ronald Reagan. Sources: Patricia M. Flynn and Michael A. Quinn, "Economics: A Good Choice of Major for Future CEOs," Social Science Research Network, November 28, 2006; and Famous Economics Majors, Marietta College, Marietta Ohio, May 15, 2012. Why might studying economics be particularly good preparation for being the top manager of a corporation or a leader in government? A. Economics is just as valuable to a cashier as it is for a CEO. B. Management and politics have more to do with public relations than economics. C. Economics is less of an issue as you climb the corporate ladder because you usually hire accountants to handle your money. D. Economics teaches us how to look at the tradeoffs involved in every decision.
Economics teaches us how to look at the tradeoffs involved in every decision.
What do economists mean by assuming people are rational?
Economists assume that consumers and firms use all available information as they act to achieve their goals They weigh the individual costs and benefits of said action and only choose an action if the benefits outweigh the costs. this does NOT mean that consumers/ firms know everything or always make the "best" choice
Which of the following statements is correct? A. A business has multiple locations, while a company has only a single location. B. Economists use the terms firm, company, and business interchangeably. Your answer is correct. C. A business is always larger than a firm. D. A company is owned by one person, while a firm is owned by more than one person. Which of the following statements is correct? A. An innovation is the practical application of an invention. Your answer is correct. B. The word "technology" and the word "invention" have the same meaning. C. The word "technology" and the word "innovation" have the same meaning. D. An invention is the practical application of an innovation.
Economists use the terms firm, company, and business interchangeably. \ An innovation is the practical application of an invention. Your answer is correct.
marginal cost
Extra cost of producing one additional unit of production.
Factors of production, economic resources, or inputs
Firms use factors of production to produce goods and services. The main factors of production are labor, capital, natural resources—including land—and entrepreneurial ability. Households earn income by supplying the factors of production to firms. Economists use the terms factors of production, economic resources, and inputs interchangeably.
Which of the following is a correct statement about a mixed economy? A. In a mixed economy, most economic decisions are made by the government but markets plays a significant role in the allocation of resources. B. In a mixed economy, all economic decisions are made in markets. C. In a mixed economy, the government makes all economic decisions. D. In a mixed economy, most economic decisions are made in markets but the government plays a significant role in the allocation of resources.
In a mixed economy, most economic decisions are made in markets but the government plays a significant role in the allocation of resources.
Capital
In everyday speech, the word capital can refer to financial capital or to physical capital. Financial capital includes stocks and bonds issued by firms, bank accounts, and holdings of money. In economics, though, capital refers to physical capital, which includes manufactured goods that are used to produce other goods and services. Examples of physical capital are computers, factory buildings, machine tools, warehouses, and trucks. The total amount of physical capital available in a country is referred to as the country's capital stock.
A primary difference between macroeconomics and microeconomics is A. Microeconomics is concerned with present decisions while macroeconomics is concerned with future decisions. B. There are no true differences between microeconomics and macroeconomics. C. Microeconomics is concerned with market economies while macroeconomics is concerned with centrally-planned economies. D. Microeconomics examines individual markets while macroeconomics examines the economy as a whole.
Microeconomics examines individual markets while macroeconomics examines the economy as a whole.
Do economists ignore motives than economic incentives?
No, they recognize that human beings act from a variety of motives (envy, compassion, religious belief) but consumers and firms consistently respond more to economic incentives ex. bulletproof/ robbery prevention glass at banks
oday, which of the following countries has a centrally planned economy? A. Germany B. Canada C. North Korea Your answer is correct. D. United States How are economic resources allocated in a market economy? A. by consumers acting alone B. by the decisions of households and firms interacting in markets Your answer is correct. C. by firms acting alone D. by the government
North Korea by the decisions of households and firms interacting in markets
When does productive efficiency occur? A. Productive efficiency occurs when a good or service is produced at the lowest possible cost. Your answer is correct. B. Productive efficiency occurs when production is in accordance with consumer preferences. C. Productive efficiency occurs when an economy no longer relies on voluntary exchange. D. Productive efficiency occurs when an economy achieves equity. When does allocative efficiency occur? A. Allocative efficiency occurs when an economy no longer relies on voluntary exchange. B. Allocative efficiency occurs when a good or service is produced at the lowest possible cost. C. Allocative efficiency occurs when production is in accordance with consumer preferences. Your answer is correct. D. Allocative efficiency occurs when an economy achieves equity.
Productive efficiency occurs when a good or service is produced at the lowest possible cost. Allocative efficiency occurs when production is in accordance with consumer preferences.
Profit
Profit is the difference between a firm's revenue and its costs. Economists distinguish between accounting profit and economic profit. In calculating accounting profit, we exclude the cost of some economic resources that the firm does not pay for explicitly. In calculating economic profit, we include the opportunity cost of all resources used by the firm. When we refer to profit in this book, we mean economic profit. It is important not to confuse profit with revenue.
Entrepreneur
Someone who operates a business. In a market system, entrepreneurs decide what goods and services to produce and how to produce them. An entrepreneur starting a new business puts his or her own funds at risk. If an entrepreneur is wrong about what consumers want or about the best way to produce goods and services, his or her funds can be lost. Losing money in a failed business is not unusual: In the United States, about half of new businesses close within four years. Without entrepreneurs willing to assume the risk of starting and operating businesses, economic progress would be impossible in a market system.
Goods
Tangible merchandise, such as books, computers, or Blu-ray players.
human capital
The accumulated training and skills that workers possess. For example, college-educated workers generally have more skills and are more productive than workers who have only high school degrees; therefore, college-educated workers have more human capital.
opportunity cost
The highest-valued alternative that must be given up to engage in an activity.
Which of the following statements about the idea that people are rational is correct?
The idea assumes that consumers and firms use all available information as they act to achieve their goals.
Microeconomics
The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
Revenue
The total amount a firm receives for selling a good or service. We calculate it by multiplying the price per unit by the number of units sold.
Which of the following best describes scarcity? A. Prices of goods are very high. B. Wants cannot be fulfilled and thus all goods must be rationed. C. Unlimited wants exceed the limited resources available. Your answer is correct. D. Markets cannot properly allocate resources. Scarcity is central to the study of economics because it implies that A. society must make decisions at the margin. B. every choice involves an opportunity cost. Your answer is correct. C. wants are unlimited. D. economic agents are rational.
Unlimited wants exceed the limited resources available. every choice involves an opportunity cost.
Which of the following best describes scarcity? A. Wants cannot be fulfilled and thus all goods must be rationed. B. Unlimited wants exceed the limited resources available. Your answer is correct. C. Prices of goods are very high. D. Markets cannot properly allocate resources. Scarcity is central to the study of economics because it implies that A. every choice involves an opportunity cost. Your answer is correct. B. society must make decisions at the margin. C. economic agents are rational. D. wants are unlimited.
Unlimited wants exceed the limited resources available. every choice involves an opportunity cost.
The three economic questions that every society must answer are A. What economic system will be used, how will it be implemented, and who will make market decisions? B. What are the prices of goods, how are they determined, and who will pay for them? C. What kind of government will the society have, how will it be run, and who will run it? D. What goods will be produced, how will they be produced, and who will receive the goods? Your answer is correct. Centrally planned economies allocate resources based on decisions by government, while market economies answer these questions through decisions made by households and firms.
What goods will be produced, how will they be produced, and who will receive the goods?
In a market system, how does society decide who will receive the goods and services produced? A. Firms determine who receives the goods and services produced. B. The government determines the goods and services produced. C. Who receives the goods and services produced depends largely on how income is distributed. Your answer is correct. D. Consumers determine who receives the goods and services produced.
Who receives the goods and services produced depends largely on how income is distributed.
Late in the semester, a friend tells you, "I was going to drop my psychology course so I could concentrate on my other courses, but I had already put so much time into the course I decided not to drop it." Is your friend's reasoning correct or incorrect? Your friend's reasoning is incorrect.
Your friend's reasoning is incorrect.
Productive efficiency means that A. a good or service is produced at the lowest possible cost. Your answer is correct. B. every good or service is produced up to the point where marginal benefit is equal to marginal cost. C. a good or service is produced as quickly as possible. D. every good or service is distributed fairly. Allocative efficiency means that A. every good or service is produced up to the point where marginal benefit is equal to marginal cost. Your answer is correct. B. a good or service is produced as quickly as possible. C. every good or service is distributed fairly. D. a good or service is produced at the lowest possible cost.
a good or service is produced at the lowest possible cost. Your answer is correct. every good or service is produced up to the point where marginal benefit is equal to marginal cost.
Market
a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
voluntary exchange
a situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction
Suppose that your local police department recovers 100 tickets to a big NASCAR race in a drug raid. It decides to distribute these to residents and announces that tickets will be given away at 10 A.M. Monday morning at City Hall. Suppose that your college decides to give away 1,000 tickets to the football game against your school's biggest rival. The athletic department elects to distribute the tickets by giving them away to the first 1,000 students who show up at the department's office at 10 a.m. the following Monday. 1. The groups of people that are most likely to get the tickets will be those for whom the expected marginal benefits of going to the department's office on Monday morning are greater than the expected marginal costs. 2. What is the actual cost and also the opportunity cost of distributing the tickets this way? A. The cost of travel to the department's office. B. The activities that cannot be done (such as earning money at work) when one is standing in line. C. The cost of people blocking traffic in and around the department's office building. D. All of the above. Your answer is correct. E. A and B only. 3. Productive efficiency occurs when a good or service (such as the distribution of tickets) is produced at the lowest possible cost. Is this an efficient way to distribute the tickets? No. 4. This is A. an equitable way to distribute the tickets because the students who really want them will be able to go and get them. B. not an equitable way to distribute the tickets because some students who really want them may be unable to go and get them. Your answer is correct. C. an equitable way to distribute the tickets because everyone has an equal chance of getting a ticket. D. not an equitable way to distribute the tickets because there may be enough tickets for faculty and staff.
all of the above not an equitable way to distribute the tickets because some students who really want them may be unable to go and get them.
The grading system plays an important role in student learning. In their book Effective Grading: A Tool for Learning and Assessment in College, Barbara Walvoord and Virginia Anderson state that "grading infuses everything that happens in the classroom." They also argue that grading "needs to be acknowledged and managed from the first moment that an instructor begins planning a class." Source: Barbara E. Walvoord and Virginia Johnson Anderson, Effective Grading: A Tool for Learning and Assessment in College, 2nd edition, San Francisco: Jossey-Bass, 2010, p. 1. The grading system used by a teacher can affect the incentives of students to learn the course material by A. doubling the points assigned to each component of the course. B. uniformly weighting all course components. C. altering the payoffs to achieving success on the various components of the course. Your answer is correct. D. none of the above since student performance is based on innate intelligence. If teachers put too much weight in the grading scale on a certain part of the course, like readings outside the textbook, students might respond by de-emphasizing other parts of the course. Teachers often wish that students came to class prepared having read the upcoming material. A teacher could design the grading system to motivate students to come to class prepared by increasing the grade weight assigned to being prepared.
altering the payoffs to achieving success on the various components of the course.
centrally planned economy
an economy in which the government decides how economic resources will be allocated
Economists use the word marginal to mean...
an extra or additional benefit or cost of a decision. An optimal decision occurs when
positive analysis
analysis concerned with what is
normative analysis
analysis concerned with what ought to be
marginal analysis
analysis that involves comparing marginal benefits and marginal costs
Economics assumes people and firms: A. are rational, respond to incentives, and make decisions by comparing marginal benefits with marginal costs. Your answer is correct. B. know everything, respond to incentives, and make decisions by comparing marginal benefits with marginal costs. C. use all available information to achieve their goals, respond to incentives, and make decisions by comparing total benefits with total costs. D. are rational, respond to incentives, and make all-or-nothing decisions. E. use all available information to achieve their goals, respond to incentives, and make decisions by continuing any activity up to the point where the marginal benefit equals zero.
are rational,respond to incentives, and make decisions by comparing marginal benefits with marginal costs.
why is it hard to define equity?
because there is not an agreed-upon definition of fairness
What is the economic problem that any society faces?
because we live in a world of scarcity, every society faces the economic problem that it only has a limited amount of economic resources (workers, machines, raw materials) so it can only produce a limited amount of good or services. So, they face trade-offs which involve an opportunity cost
A market is a group of _____ of a good or service and the institution or arrangement by which they come together to trade.
buyers and sellers
[Related to the Making the Connection] A news story on declining attendance at college football games noted that schools in the central time zone had particular problems with attendance at games that started at 11 a.m. The athletic director at the University of Illinois was quoted as saying, "I'm a big fan of evening games." Source: Adam Rittenberg, "Attendance Challenges Big Deal for B1G," espn.com, February 17, 2014. Playing games in the late afternoon or evening, rather than in the morning, would A. change the opportunity cost for students whose alternative activities vary throughout the day. Your answer is correct. B. take the same amount of time, so the opportunity cost would not change. C. not change attendance because the real fans would attend no matter what the time. D. only change the opportunity cost if the ticket prices changed.
change the opportunity cost for students whose alternative activities vary throughout the day.
[Related to Solved Problem #1] McDonald's typically serves breakfast until only 10:30 a.m. on weekdays and 11:00 a.m. on weekends. In 2015, the company began to experiment with serving breakfast all day at various locations in San Diego. Several owners of McDonald's restaurants, however, point out that offering breakfast 24 hours a day presents two logistical problems: (1) Burgers and other meats need to be cooked at a higher temperature than eggs, so it would be difficult for employees to set the grill at the right temperature for both foods; and (2) scrambled eggs require employees to continually stir, while hamburgers don't require this attention. In addition, some customers might buy the cheaper breakfast than the more expensive lunch or dinner meals. Source: Associated Press, "McDonald's Gives All-Day Breakfast a Test Try," usatoday.com, March 30, 2015; and Susan Befield and Leslie Patton. "What So Hard About a 24/7 McMuffin?" Bloomberg Busines Week, May 12, 2013. From an economics perspective, to determine whether to serve breakfast all day, McDonald's should A. compare the average cost of serving breakfast all day to the total cost of serving breakfast all day. B. compare the total revenue from serving breakfast all day with the average revenue from serving breakfast all day. C. compare the marginal revenue from serving breakfast all day with the marginal cost of serving breakfast all day. Your answer is correct. D. calculate whether the total revenue from serving breakfast all day is positive. E. conduct customer surveys to better understand how its customers feel about the change. Would McDonald's decision have to be all or nothing—either serve breakfast only up to 10:30 A.M. or serve breakfast all day? A. Yes, because it would be difficult for employees to set the grill at the right temperature for both foods. B. No. McDonald's could evaluate serving items from the breakfast menu that could be cooked in better coordination with the dinner menu for a period after 10:30 A.M. Your answer is correct. C. No. The employees could learn to adjust to this situation and serve breakfast all day as well as lunch and dinner. D. Yes, because customers would want it to be all or nothing.
compare the marginal revenue from serving breakfast all day with the marginal cost of serving breakfast all day. No. McDonald's could evaluate serving items from the breakfast menu that could be cooked in better coordination with the dinner menu for a period after 10:30 A.M.
market economy
decisions of households and firms interacting in markets allocate economic resources market economies rely primarily on privately owned firms to produce goods and services and to decide how to produce them firms must produce the goods and services that meets the wants of consumers or the firms will go out of business, so ultimately, the CONSUMERS decide WHAT goods and services are produced the income of an individual is determined by the payments they receive for what they sell
what do economists mean by optimal decisions are made at the margin?
economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost the point where MB = MC
What do economists mean by the word "marginal"? A. unimportant B. first C. small D. extra or additional Your answer is correct. Economists believe that an activity should be continued up to the point where A. the marginal benefit from the activity is equal to the marginal cost. Your answer is correct. B. the marginal benefit from the activity is less than the marginal cost. C. the marginal benefit from the activity is greater than the marginal cost. D. the marginal benefit from the activity plus the marginal cost equals zero.
extra or additional the marginal benefit from the activity is equal to the marginal cost.
Economists assume that the only reason people take the actions they do is in response to economic incentives. A. True B. False
false
who decides how the goods and services are produced?
firms choose how to produce the goods and services they sell
Scarcity implies that every society and every individual face trade-offs because scarcity means that A. people refuse to limit their wants. B. human wants are greater than what available resources can produce. Your answer is correct. C. government is unwilling to redistribute wealth. D. people are greedy and won't share with others.
human wants are greater than what available resources can produce.
economists accept and use an economic model if
if it leads to hypotheses that are confirmed by statistical analysis in most cases, the acceptance is tentative pending the gathering of new data or further statistical analysis
Consider an organization that exists to help the poor. The members of the organization are discussing alternative methods of aiding the poor, when a proponent of one particular method asserts that: "If only one poor person is helped with this method, then all our time and money would have been worth it." If you were a member of the organization, what reply best represents clear economic thinking? This attitude A. ignores the fact that the cost of helping that one person has an opportunity cost of what those funds could have been used for to help other people. Your answer is correct. B. recognizes the fact that since the organization is a charity, there is an opportunity cost based on the square root of other peoples' needs. C. is the most logical because it is focussed on helping even one person. D. acknowledges the importance of considering all the alternatives.
ignores the fact that the cost of helping that one person has an opportunity cost of what those funds could have been used for to help other people.
as a social science, economics considers human behavior...
in every context of decision making, not just in business
revenue
income from selling a good/ service
An economic variable
is something measurable that can have different values i.e. wages
economics is a social science because
it applies the scientific method to the study of the interactions among individuals, it considers human behavior-particulary decision-making behavior, and it is based on studying the actions of individuals.
Who will receive the goods and services produced?
largely depends on how income is distributed
The Food and Drug Administration (FDA) is part of federal government's Department of Health and Human Services. Among its other functions, the FDA evaluates the safety and effectiveness of drugs and medical devices. FDA approval had to be granted before OraSure was allowed to market its home HIV test. In a centrally planned economy, the government decides how resources will be allocated. In a market economy, the decisions of households and firms interacting in markets allocate resources. The regulation of the production and sale of drugs and medical devices in the United States is an example of how resources are allocated in a A. centrally planned economy because the government controls whether the drug can be used. B. centrally planned economy because the FDA is part of the government and this involves central planning. C. market economy because the FDA is made up of elected officials. D. market economy because the drug development, and the resources allocated to the development, occurs in the market.
market economy because the drug development, and the resources allocated to the development, occurs in the market.
Which of the following areas of economics studies issues such as ways to reduce teenage smoking? A. Microeconomics Your answer is correct. B. Macroeconomics C. Both microeconomics and macroeconomics give equal emphasis to these problems. D. This cannot be determined by the information given. Which of the following areas of economics studies issues such as whether government intervention is capable of reducing the severity of recessions? A. Microeconomics B. Macroeconomics Your answer is correct. C. Both microeconomics and macroeconomics give equal emphasis to these problems. D. This cannot be determined by the information given.
microeconomics macroeconomics
productive efficiency
occurs when a firm produces at the lowest possible cost per unit
allocative efficiency
occurs when production is in accordance with consumer preferences
When economists develop models designed to explain the choices people make, they generally assume that A. people make the best decisions. B. everyone knows everything. C. consumers do not act to achieve their goals. D. consumers do not use all available information. E. people are rational.
people are rational.
Under the Affordable Care Act, low-income people receive subsidies to help them pay for health insurance. These subsidies decline as income increases, which may result in some low-income workers supplying fewer hours to keep their income from increasing and their subsidies from declining. This outcome is an example of which key economic idea? A. people respond to economic incentives Your answer is correct. B. optimal decisions are made at the margin C. scarcity D. voluntary exchange
people respond to economic incentives
economics is always concerned with...
positive rather than normative analysis
what are the two types of efficiency?
productive efficiency and allocative efficiency
economic models
simplified versions of reality used to analyze real-world economic situations
economic growth
the ability of the economy to produce increasing quantities of goods and services
marginal benefit
the additional benefit to a consumer from consuming one more unit of a good or service
Macroeconomics is the study of A. the economy as a whole, including topics such as inflation, unemployment, and economic growth. Your answer is correct. B. why the U.S. has spent so much money on wars and government surveillance of its own citizens. C. how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. D. the economy on a state-by-state basis, covering areas affected by the Commerce Clause. Microeconomics is the study of A. how individuals make good decisions for themselves but hurt society. B. the economy as a whole, including topics such as inflation, unemployment, and economic growth. C. how individuals and firms act altruistically to better society. D. how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Your answer is correct. The level of total investment by firms in new machinery and equipment helps to determine how rapidly the economy grows. This is a macroeconomic issue. However, to understand how much new machinery and equipment firms decide to purchase, one must analyze the incentives individual firms face, which is a microeconomic issue.
the economy as a whole, including topics such as inflation, unemployment, and economic growth. how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
equity is
the fair distribution of economic benefits government policymakers often face a trade off between equity and efficiency
trade-offs
the idea that, because of scarcity, producing more of one good or service means producing less of another good or service
Who determines what goods and services will be produced
the question of what will be produced is determined by the choices of consumers, firms, and the government
economics is...
the study of the choices consumers, business managers, and government officials make to attain their goals, given their scarce resources
Macroeconomics
the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
Economists assume that people are rational in the sense that A. they generally make the correct choices. B. they use all available information as they take actions intended to achieve their goals. Your answer is correct. C. they do not respond to economic incentives. D. they make decisions based on total, rather than marginal, variables.
they use all available information as they take actions intended to achieve their goals.
Leonard Fleck, a philosophy professor at Michigan State University, has written, "When it comes to health care in America, we have limited resources for unlimited health care needs. We want everything contemporary medical technology can offer that will improve the length or quality of our lives as we age. But as presently healthy taxpayers, we want costs controlled." Source: Leonard Fleck, Just Caring: Health Care Rationing and Democratic Deliberation. New York: Oxford University Press, 2009. Is it necessary for all economic systems to limit services such as health care? Yes A market system prevents people from getting as many goods and services as they want due to which of the following? A. The government because it allocates the goods and services. B. Their income. Your answer is correct. C. Both A and B. D. Neither A nor B.
yes Their income.
In a market system, how does society decide what goods and services will be produced? A. What goods and services will be produced is determined by a vote of consumers. B. Consumers, firms, and the government determine what goods and services will be produced by the choices they make. Your answer is correct. C. The government decides what goods and services will be produced. D. Firms alone determine what goods and services will be produced.
Consumers, firms, and the government determine what goods and services will be produced by the choices they make.
According to Forbes magazine, in 2017 Bill Gates was the world's richest person with wealth of $86 billion. Source: "The World's Billionaires," forbes.com, March 20, 2017. Does Bill Gates face scarcity? A. No, because billionaires can have anything that money can buy. B. Yes, because there is a limit to the income even billionaires can earn. C. Yes, because even though billionaires' financial resources enable them to afford a much greater array of goods and services than those less wealthy, their financial resources are not infinite. Your answer is correct. D. No, because if a billionaire cannot get the goods and services they want, someone else can get it for them. Which of the following statements is true? A. Some individuals experience scarcity because they have not learned to live within their means. B. All individuals face a scarcity of time and need to make choices how to allocate it. Your answer is correct. C. While resources are scarce, most people don't own resources and therefore do not face a scarcity of them. D. Most individuals face a scarcity of time, but few experience a scarcity of other resources.
Yes, because even though billionaires' financial resources enable them to afford a much greater array of goods and services than those less wealthy, their financial resources are not infinite. All individuals face a scarcity of time and need to make choices how to allocate it.
