Study Questions - Chap 1 Intro to Microeconomics

68. Write down a normative statement and a positive statement with reference to the minimum wage and then explain each.

Answer: 'Higher minimum wages lead to limited employment losses.' This is a positive statement, which has been the subject of much debate in economics. Some researchers have concluded that marginal increases in the minimum wage lead to significant employment losses, while others argue that the effects are statistically insignificant. 'The minimum wage should be higher to help fight poverty.' This is a normative statement since it expresses an opinion, a value judgment of the author.

72. Compare the behavior of a person who has a hobby of stamp collection with that of an athlete who undergoes regular training. Who do you think is more rational and why?

Answer: The stamp collector will go to any extent to collect the stamps, irrespective of what costs he has to bear. He will not weigh the materialistic cost and benefit associated with the transaction but will mainly consider personal satisfaction. Therefore his behavior cannot be classified as rational. However, the athlete is well aware of the expected benefits he would receive from this routine exercise and possibly weighs it with the costs that he has to incur. Since this is a more careful and deliberative process it is considered to be rational.

74. Explain why ticket prices sold by scalpers near the venue where an event will take place increase the closer you get to the venue.

Answer: There is a cost involved in turning back to purchase a ticket from someone standing further from the venue.

70. The annual income of a worker in the construction sector increased by 30 percent between 2010 and 2011. Does this necessarily imply that the worker's purchasing power had increased? Explain your answer.

Answer: An increase in annual income will improve a worker's purchasing power if the average price level in the economy remains more or less stable or increases at a lesser pace compared to the growth in the annual income. In the above case, if the average price level in the country increases by more than 30%, there will be no change in the worker's purchasing power.

12. Which of the following is true of positive analysis? a. It draws on accepted bodies of theory and evidence to ascertain the likely consequences of a policy or action. b. It is always used to evaluate proposed policy changes in the most positive way. c. It is sufficient to determine whether a policy is desirable or undesirable. d. It claims that the impact of policies cannot be quantified.

a. It draws on accepted bodies of theory and evidence to ascertain the likely consequences of a policy or action.

47. Consider the production possibility frontier of an economy in Figure 1-1. If the economy is governed by rational actors, it is likely to choose between how many of the production points labeled in the figure? a. 5 b. 4 c. 3 d. 2

d. 2

32. Which of the following is an assumption usually made about markets and market participants by economists? a. Market participants are interested in maximizing social welfare. b. Market participants are generally altruistic. c. Market participants engage in irrational behavior. d. Market participants confront scarce resources.

d. Market participants confront scarce resources.

64. Jane can either bake 10 mango tarts or clean 2 cars in one hour. If Jane decides to do both these jobs within the same hour, what would be her opportunity cost of cleaning one additional car? (Assume that Jane faces constant opportunity cost.) a. 5 mango tarts b. 2 mango tarts c. 4 mango tarts d. 10 mango tarts

a. 5 mango tarts

30. Which of the following is not an assumption usually made about markets and market participants? a. Collective welfare maximization b. Self-interested behavior c. Scarce resources d. Rational behavior

a. Collective welfare maximization

54. The production possibility frontier in Figure 1-1 exhibits _____ opportunity cost of apples. a. increasing b. decreasing c. constant d. zero

a. increasing

51. In the production possibility frontier in Figure 1-1, which point(s) is (are) infeasible? a. D, A, and E b. A and E c. B and C d. D

b. A and E

57. If a production possibility frontier (PPF) is drawn concave to the origin with the quantity of shoes on the X-axis and the quantity of T-shirts on the Y-axis, a movement downward along the PPF reflects: a. an increasing opportunity cost of producing T-shirts. b. an increasing opportunity cost of producing shoes. c. constant opportunity cost of producing T-shirts. d. constant opportunity cost of producing shoes.

b. an increasing opportunity cost of producing shoes.

13. Value judgments: a. always produce predictable results. b. are subjective opinions that cannot be proven correct on the basis of objective facts or evidence. c. should be the basis for all serious policy discussions. d. can always be tested and verified using accepted standards of logic and evidence.

b. are subjective opinions that cannot be proven correct on the basis of objective facts or evidence.

31. "Goal-oriented behavior" can best be described as: a. market participants using complete information to achieve objective ends. b. market participants using available information to achieve their personal aims. c. market participants trying to maximize social welfare. d. all market participants maximizing their efficiency to improve aggregate income.

b. market participants using available information to achieve their personal aims.

2. Microeconomics is also known as price theory because: a. everything has a price. b. prices have important effects on individual and firm decisions. c. prices are the only determinant of economic outcomes. d. prices change constantly.

b. prices have important effects on individual and firm decisions.

22. When analyzing events across time, economists measure consumer behavior based on: a. nominal prices. b. real prices. c. complete information about buyer preferences. d. current income.

b. real prices.

65. Differences in the _____ of resources in the production of various commodities explain the per-unit opportunity cost associated with a concave production possibility frontier. a. cost b. relative productivity c. availability d. supply elasticity

b. relative productivity

62. Along a concave production possibility frontier, the per-unit opportunity cost of increasing output typically: a. increasing because specializing in the production of just one good is irrational. b. decreasing because resources are difficult to move from one sector to another. c. increasing because some resources are better-suited to producing one good than to the other. d. decreasing because resource productivity increases naturally over time.

c. increasing because some resources are better-suited to producing one good than to the other.

11. Economic theory: a. can determine which public policy is the most desirable. b. tries to account for all possible influences. c. is a tool for understanding economic relationships. d. uses no assumptions in deriving results.

c. is a tool for understanding economic relationships.

25. The relative price of a good: a. is always measured in current dollars. b. is a measure of the relative share of the consumer's income devoted to its purchase. c. reflects its price compared to prices of other goods. d. is equal to the average price of the good over the last five years.

c. reflects its price compared to prices of other goods.

63. A farmer can produce 10,000 pears if he uses the whole of his one acre farmland. If he uses the same land for apple cultivation, a total of 5,000 apples can be produced. However, he decides to produce both and the opportunity cost of producing either fruit is constant. If his production possibility frontier (PPF) is graphed with apples on the Y-axis and pears on the X-axis, what will be the slope of this PPF? a. -2 b. -1 c. -1.5 d. -0.5

d. -0.5

48. Consider the production possibility frontier of an economy in Figure 1-1. Which of the following point(s) will be considered inefficient? a. A. A and E b. A, B, and C c. B and C d. D

d. D

4. Which of the following economic decisions is not a part of the study of microeconomics? a. A consumer's decision regarding how much of a good to purchase b. A worker's decision concerning which job to take c. A business firm's decision regarding how many machines to purchased. d. The government's decision regarding the use of monetary or fiscal policy to control increasing prices

d. The government's decision regarding the use of monetary or fiscal policy to control increasing prices

27. What would be the impact on the real price of automobiles if the nominal price increases by 60 percent over a ten year period? a. The real price will increase by 60 percent. b. The real price will increase, but by less than 60 percent. c. The real price will decrease. d. The real price cannot be determined without more information.

d. The real price cannot be determined without more information.

34. Petroleum oil is an example of: a. a renewable resource. b. a composite good. c. a biodegradable resource. d. a scarce resource.

d. a scarce resource

56. Relative to a linear production possibilities curve, one that is more concave to the origin indicates a(n): a. greater resource availability. b. reduced resource availability. c. decreasing opportunity cost of specializing in production. d. increasing opportunity cost of specializing in production.

d. increasing opportunity cost of specializing in production.

37. The explicit cost of production equals: a. opportunity cost minus sunk cost. b. implicit cost minus sunk cost. c. economic cost minus opportunity cost. d. opportunity cost minus implicit cost.

d. opportunity cost minus implicit cost.

29. The _____ is the absolute price of a good or service that has been adjusted for the changing value of money. a. market price b. choke price c. nominal price d. real price

d. real price

67. Using a real life example explain why price is an important element affecting consumer choice.

Answer: Consumers have limited income to satisfy their desire to consume a variety of goods and services and therefore they are forced to choose among them. For example, when the price of cars increases, a rational consumer who was planning to purchase a car will defer the purchase to a future period or choose a different brand that is within his budget. The consumer can also curtail the present consumption of some other goods and reallocate that portion of the income for making the purchase. Thus, price is an extremely important consideration for a consumer while choosing the optimum consumption bundle.

73. What is the opportunity cost of going to college? What is the opportunity cost of attending class?

Answer: The answer should include the direct, explicit costs of going to college (tuition, books, etc.) and the implicit costs of foregone wages, for example. One might also include the costs of studying hard to earn high grades. The opportunity cost of attending class does not include tuition since that is a sunk cost from the perspective of a student already enrolled in classes. Thus, the explicit cost of attending class is zero and the implicit cost is the value of the next best alternative use of your time, perhaps the value of sleeping that hour, or the wage that you could earn by working that hour.

71. Do you think that the behavior of a student, who is focused on achieving superior grades and aims to top the class, will be described as goal-oriented behavior by economists?

Answer: The assumption of goal-oriented behavior is described as the behavior of market participants interested in fulfilling their own personal goals. It is often taken to indicate that individuals are self-interested. This assumption, however, does not imply that market participants care solely about their own pocketbooks. A student focused on achieving superior grades exhibits goal oriented behavior as the superior grades would leave him/her satisfied but would not affect the goals of the other students in the class.

69. Rubber, a major cash crop in Country X, reported a significant decline in production during a certain year. The government set up two committees, one of which was assigned the task of investigating the cause of the drop in production while the other was asked to prescribe a recovery policy. Suggest a positive and a normative statement made by each of these two groups within this context.

Answer: The first committee that has been assigned the task of investigating the reasons for the decline in production could say - "Pest attack, coupled with very low rainfall lowered rubber extraction, thereby affecting overall production." This is a positive statement as the proposition can be tested with respect to both the underlying logic and the empirical evidence. It simply states what is, or what might be, without deciding whether something is right or wrong. On the other hand, the second committee assigned the task of suggesting a remedial policy could say - "A subsidy on fertilizers and pesticides offered to rubber cultivators will boost production." This is a normative statement because the statement alone does not determine whether the policy is desirable. It cannot be proved right or wrong by facts, evidence, or logic. It stems from the value system of the committee making the judgment.

41. Which one of the following represents an economic, but not an accounting, cost of owning a restaurant? a. The interest foregone by the owner on the personal savings invested in the restaurant b. The labor hired used to operate the restaurant c. The linens used to cover tables d. The ingredients used to prepare the meals

a. The interest foregone by the owner on the personal savings invested in the restaurant

60. If a production possibility frontier is drawn concave to the origin with the quantity of shoes on the X-axis and the quantity of T-shirts on the Y-axis, a movement downward along the PPF reflects: a. a decreasing opportunity cost of both shoes and T-shirts. b. an increasing opportunity cost of both shoes and T-shirts. c. an increasing opportunity cost of shoes. d. a decreasing opportunity cost of shoes.

a. a decreasing opportunity cost of both shoes and T-shirts.

45. The opportunity cost of a good is always constant if the production possibility frontier is: a. a downward-sloping straight line. b. concave to the origin. c. convex to the origin. d. negatively sloped.

a. a downward-sloping straight line.

5. Macroeconomics deals primarily with: a. aggregate economic factors. b. the behavior of rational consumers. c. the role of politics in economics. d. a society's economic and cultural environment.

a. aggregate economic factors.

59. If a production possibility frontier is drawn concave to the origin with the quantity of shoes on the X-axis and the quantity of T-shirts on the Y-axis, a movement upward along the PPF reflects: a. an increasing opportunity cost of T-shirts. b. an increasing opportunity cost of both shoes and T-shirts. c. a decreasing opportunity cost of T-shirts. d. a decreasing opportunity cost of both shoes and T-shirts.

a. an increasing opportunity cost of T-shirts.

58. If a production possibility frontier (PPF) is drawn concave to the origin, with the quantity of shoes on the X-axis and the quantity of T-shirts on the Y-axis, a movement upward along the PPF reflects: a. an increasing opportunity cost of producing T-shirts. b. an increasing opportunity cost of producing shoes. c. constant opportunity cost of producing T-shirts. d. constant opportunity cost of producing shoes.

a. an increasing opportunity cost of producing T-shirts.

24. Suppose the consumer price index was 100 in the year 2000 and 200 in the year 2010. If the nominal price of apples has increased from 100 to 150 over this period, the real price of apples has: a. fallen by 25 percent. b. fallen by 50 percent. c. risen by 50 percent. d. risen by 25 percent.

a. fallen by 25 percent.

20. If the nominal price of apples has increased by 20 percent over a year in which the average price level has risen by 10 percent, then the real price of apples: a. has increased. b. has stayed the same. c. has decreased. d. cannot be determined without further information.

a. has increased.

28. In microeconomics, the term price generally refers to the: a. relative price of an item. b. dollar price of an item. c. absolute price of an item. d. choke price of an item.

a. relative price of an item.

61. The downward slope of the production possibility frontier indicates that: a. resources are scarce. b. individual decisions are based on self-interested behavior. c. individual decisions are rational. d. resources increase over time.

a. resources are scarce.

18. Which of the following is a positive statement? a. The minimum wage should be raised to $7.50. b. If the military draft were re-instituted, military salaries would probably fall. c. Customers should not be required to show ID to buy alcohol. d. Immigration laws are bad for the economy.

b. If the military draft were re-instituted, military salaries would probably fall.

19. Which of the following is an example of a normative statement? a. Students who miss more classes tend to earn lower grades. b. Students should make better use of their time by attending every class. c. The increasing price of textbooks has caused students to purchase fewer texts. d. Increasing government grants and loans to college students have caused tuition fees to rise faster than the rate of inflation.

b. Students should make better use of their time by attending every class.

15. Which of the following is an example of a positive economic statement? a. The distribution of income in the United States should be more equal. b. The after-tax distribution of income is more equal than the pre-tax distribution of income. c. The tax system should be more progressive so that the after-tax distribution of income can be more equal. d. The government should not be involved in the income redistribution schemes.

b. The after-tax distribution of income is more equal than the pre-tax distribution of income.

21. What does the consumer price index measure? a. The average price of a good over five years b. The change in nominal prices of goods and services c. The change in the value of a currency d. The change in the average price level in the economy

b. The change in nominal prices of goods and services

44. Which of the following can be categorized as a sunk cost of a firm? a. The retirement benefit provided to the workers b. The investment on a research project that failed to take-off c. The higher wages paid to workers for working extra hours d. The value of the closing stock of inventory

b. The investment on a research project that failed to take-off

33. The assumption of rationality implies that market participants: a. always choose the option with the highest gross benefit. b. assess expected benefits and expected costs. c. do not make decisions under uncertainty. d. do not care about benefits or costs accruing in the future.

b. assess expected benefits and expected costs.

14. Positive economic analysis utilizes: a. value judgments of highly trained professional economists. b. economic theories and empirical tests of the theories. c. normative economic theories in arriving at judgments on the suitability of a change in government economic policy. d. the same criteria as normative economics, but does not take into consideration the value judgments of the policy makers.

b. economic theories and empirical tests of the theories.

10. In judging the value of a theory, the most important criteria is: a. how realistic or valid the assumptions of the theory are as compared to real world circumstances. b. how well the theory predicts that which it is designed to predict. c. how well the theory builds upon the theorists' experiences. d. how simple the theory is for the average people to understand.

b. how well the theory predicts that which it is designed to predict

8. Consider the following theory: the more one practices for the SAT test, the higher the person will score. This theory: a. is complete and very useful for high school students. b. is incomplete because it leaves out many other factors that will influence SAT scores. c. is not useful since it is hard to measure practice time. d. is useful because more practice will guarantee higher SAT scores.

b. is incomplete because it leaves out many other factors that will influence SAT scores.

9. The test of a theory is whether: a. its assumptions are realistic. b. it predicts the outcomes well. c. it explains the observed data perfectly. d. it incorporates every relevant factor bearing on the analysis.

b. it predicts the outcomes well.

26. The real price of a good reflects: a. the purchasing power of consumers. b. its nominal price adjusted for the changing value of money. c. the absolute average price of goods and services. d. the total amount of money in circulation in the economy.

b. its nominal price adjusted for the changing value of money.

38. The opportunity cost of traffic congestion includes: a. lower use of gasoline. b. longer commuting time to work. c. more fuel efficient cars. d. more freeways being built.

b. longer commuting time to work.

16. Positive economics differs from normative economics in that: a. positive economics involves subjective outcomes. b. positive economics deals with propositions that can be tested. c. normative economics involves economic theory. d. normative economics can be proved correct or incorrect.

b. positive economics deals with propositions that can be tested.

43. After spending $5 million developing a new MP3 player, you discover that a competitor is about to introduce a new model similar to yours at a lower per unit price. The $5 million development cost: a. should be factored into your decision on whether or not to introduce your new MP3 player. b. should be ignored in your decision on whether or not to introduce your new MP3 player. c. should not be included while determining the opportunity cost of this investment. d. should be considered as fixed cost for the firm.

b. should be ignored in your decision on whether or not to introduce your new MP3 player.

66. A farmer can produce 10,000 pears on his one acre farmland. When he uses the same land for apple cultivation, a total of 5,000 apples can be produced. He realizes that with the introduction of a new fertilizer, he can increase the maximum production of apples to 7,000. The maximum production of pears, however, remains unchanged. Given that his production possibility frontier (PPF) is linear and apples are graphed on the Y-axis and pears on the X-axis, calculate the slope of his PPF. a. -1.4 b. -0.2 c. -0.7 d. -0.4

c. -0.7

49. Consider the production possibility frontier of an economy in Figure 1-1. What is the opportunity cost of moving from point B to point C to produce 5 more apples? a. 25 computers. b. 15 computers. c. 5 computers. d. 10 computers.

c. 5 computers.

17. Which of the following steps in evaluating a public policy is not in the realm of positive analysis? a. Determination of the effects of the policy b. Determination of the magnitudes of the effects c. A judgment that the effects of the policy are desirable or undesirable d. Stating a hypothesis based on sound economic theory

c. A judgment that the effects of the policy are desirable or undesirable

7. Theory A is considered to be better than Theory B if: a. the assumptions of B are more realistic than the assumptions of A. b. A takes into consideration more facts than B. c. A predicts or explains a certain phenomenon better than B. d. A uses more mathematics than B.

c. A predicts or explains a certain phenomenon better than B.

52. In the production possibility frontier in Figure 1-1, which point(s) is (are) efficient? a. A, B, and C b. A and E c. B and C d. E

c. B and C

42. Which of the following is true of sunk costs? a. It is a type of opportunity cost. b. It is a type of implicit cost. c. It should be ignored when making decisions. d. It includes annual costs like payroll, insurance expenses, etc

c. It should be ignored when making decisions.

6. Which of the following best describes the difference between micro and macroeconomics? a. Macroeconomics deals with bigger, more important issues, while microeconomics deals with the smaller, less significant details. b. Macroeconomics studies the actions of large firms while microeconomics studies the behavior of small firms and individuals. c. Macroeconomics is the study of aggregate factors while microeconomics is the study of individuals and individual firms. d. Macroeconomics studies long-run behavior (one-year or more) while microeconomics studies short-run or immediate behavior.

c. Macroeconomics is the study of aggregate factors while microeconomics is the study of individuals and individual firms.

55. In which of the following cases will the production possibility frontier depict an increasing opportunity cost of producing one good relative to another? a. The PPF becoming more linear b. The PPF becoming more convex to the origin c. The PPF becoming more concave to the origin d. The PPF curve becoming flatter

c. The PPF becoming more concave to the origin

40. Which one of the following is not an opportunity cost of owning a house? a. The mortgage payment made each month to own the house b. The money you would receive from selling your house c. The membership fee paid to join the neighborhood pool d. The property taxes paid to the local government

c. The membership fee paid to join the neighborhood pool

1. Which of the following is generally considered to be a microeconomic question? a. The relationship between the money supply and nominal GDP b. The responsiveness of aggregate demand to change in government expenditure. c. The relationship between productivity of workers and wages received by them d. The relationship between inflation and unemployment

c. The relationship between productivity of workers and wages received by them

53. A linear production possibility frontier exhibits a(n) _____ opportunity cost of producing either good. a. increasing b. decreasing c. constant d. variable

c. constant

35. Opportunity cost is the equivalent of: a. explicit cost. b. implicit cost. c. economic cost. d. sunk cost.

c. economic cost.

39. The implicit cost of time spent on shopping: a. has decreased because of the growth of single-wage-earner families. b. has increased because of the decline in average income levels. c. has increased, contributing to the growth of fast-food restaurants. d. has decreased, contributing to the growth of convenience stores at gas stations.

c. has increased, contributing to the growth of fast-food restaurants.

36. Opportunity cost is calculated as: a. sunk cost plus implicit cost. b. explicit cost plus economic cost. c. implicit cost plus explicit cost. d. explicit cost plus sunk cost.

c. implicit cost plus explicit cost.

23. Suppose the consumer price index was 100 in 2000 and 300 in 2010. This implies that the average price level: a. increased by 20 percent during this period. b. increased by 100 percent during this period. c. increased by 200 percent during this period. d. increased by 300 percent during this period.

c. increased by 200 percent during this period.

50. Refer to the production possibility frontier in Figure 1-1. What will be the opportunity cost of moving from point B to point A to produce 10 more computers? a. 15 apples b. 10 apples c. 5 apples d. The economy cannot move to point A.

d. The economy cannot move to point A.

3. Which of the following is generally considered a microeconomic question? a. The relationship between the money supply and nominal GDPb. b. The relationship between the unemployment and inflation c. The impact of a tax cut on public saving d. The effect of anti-discrimination laws on employers' hiring practices.

d. The effect of anti-discrimination laws on employers' hiring practices.

46. Choosing a combination of goods represented by a point inside the production possibilities frontier indicates: a. that resources are not scarce. b. that resources are scarce. c. rational behavior. d. irrational behavior.

d. irrational behavior.