HW1

Economics deals primarily with the concept of

Scarcity

In a market economy, economic activity is guided by

Self-interest and prices.

If the United States decides to trade with Yemen, we know that

Yemen and the United States can both benefit.

*The short-run tradeoff between inflation and unemployment implies that, in the short run,

a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.

Senator Brown wants to increase taxes on people with high incomes and use the money to help the poor. Senator Johnson argues that such a tax will discourage successful people from working and will therefore make society worse off. An economist would say that

a good decision requires that we recognize both viewpoints.

When society requires that firms reduce pollution, there is

a tradeoff because of reduced incomes to the firms' owners and workers.

Large or persistent inflation is almost always caused by

excessive growth in the quantity of money.

When the government redistributes income from the wealthy to the poor,

equality is improved, but efficiency is not.

The terms equality and efficiency are similar in that they both refer to benefits to society. However Equality & Efficiency are different in that

equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources.

Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is intended to reduce

externalities.

*Central planning refers to

government guiding economic activity. Today many countries that had this system have abandoned it. (communist)

If an externality is present in a market, economic efficiency may be enhanced by

government intervention.

Economics is the study of

how society manages its scarce resources.

Equality means

how to equally/fairly distribute the total output among members of the society.

The "invisible hand" works to promote general well-being in the economy primarily through

people's pursuit of self-interest.

What is the most important factor that explains differences in living standards across countries?

productivity

In most societies, resources are allocated by

the combined actions of millions of households and firms.

Opportunity Cost

the loss of potential gain from other alternatives when one alternative is chosen.

As a result of a successful attempt by government to cut the economic pie into more equal slices,

the pie gets smaller, and there will be less pie overall.

*The opportunity cost of going to college is

the value of the best opportunity a student gives up to attend college.

For most students, the largest single cost of a college education is

the wages given up to attend school.

High-school athletes who skip college to become professional athletes

understand that the opportunity cost of attending college is very high.

*Consider Mandy's decision to go to college. If she goes to college, she will spend $20,000 on tuition, $10,000 on room and board, and $2,000 on books. If she does not go to college, she will earn $18,000 working in a store and spend $8,000 on room and board. Mandy's cost of going to college is

$42,000.

Suppose that a country that has a high level of output per person agrees to trade with a country that has a low level of output per person. Which country can benefit?

Both countries can benefit

(3 points) One tradeoff society faces is between efficiency and equality. Define each term (i.e. what efficiency is and what equality is). If the U.S. government redistributes income from the rich to the poor, explain how this action affects efficiency and equality.

Efficiency is about how to maximize the total output from the existing scarce resources; equality is about how to equally/fairly distribute the total output among members of the society. If the U.S. government redistributes income from the rich to the poor, this improves equality at the expense of efficiency

The phrase "no such thing as a free lunch" means

people must face tradeoffs.

(3 points) Under what conditions might government intervention in a market economy improve the economy's performance?

Government intervention can improve market outcome when a. Externalities, such as pollution. b. Monopoly c. Income inequality.

*A worker in Vietnam can earn $6 per day making cotton cloth on a hand loom. A worker in the United States can earn $85 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages?

Labor is more productive making cotton cloth with a mechanical loom than with a hand loom.

A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate?

People respond to incentives.

The "invisible hand" refers to

The free market

Which of the following firms is most likely to have market power?

a. a grocery store in a metropolitan area b. a convenience store in a suburb c. a pub in a college town d. (the only gasoline station in a rural area)

A rationale for government involvement in a market economy is

a. markets sometimes fail to produce a fair distribution of economic well-being. b. markets sometimes fail to produce an efficient allocation of resources. c. property rights have to be enforced. d. All of the above are correct.

The willingness of citizens to pay for vaccinations does not include the benefit society receives from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as

an externality.

Inflation is defined as

an increase in the overall level of prices in the economy.

The term "productivity"

c.refers to the quantity of goods and services produced from each unit of labor input.

*Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth

is more equal but less efficient for society.

A society allocates its scarce resources to various jobs. These scarce resources include

land, People, Machines.

In the short run, an increase in the money supply is likely to lead to

lower unemployment and higher inflation.

A rational decision maker takes an action only if the

marginal benefit is greater than the marginal cost.

Billie Jean has $120 to spend and wants to buy either a new amplifier for her guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost $120, so she can only buy one. This illustrates the basic concept that

people face trade-offs.

The overriding reason why households and societies face many decisions is that

resources are scarce.

What term refers to the property that society has limited resources and therefore cannot produce all the goods and services people wish to have?

scarcity

Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should

sell the ticket because the marginal benefit exceeds the marginal cost.

Efficiency means that

society is getting the maximum benefits from its scarce resources. maximize the total output from the existing scarce resources;

Suppose the Federal Reserve announces that it will be making a change to a key interest rate to decrease the money supply. This is likely because the Federal Reserve is

worried about inflation.