Ch 1

Question 1

Scarcity

Answer 1

There are limited amounts of resources

Question 2

Economics

Answer 2

Study of how to use resources efficiently in response to problem of scarcity

Question 3

Examples of resource scarcity for consumers (buyers)

Answer 3

1 allowance
2 salary
3 credit cards
4 loans
5 friends
All have a limit

Question 4

Resource scarcity for producers (sellers)

Answer 4

1 labor (L) - labor force: -human K (knowledge)
-entrepreneur (risk taking)
2 capital (K) - physical K: machinery & tools used in a production process
- Financial K: money, stocks, bonds etc.
3 land

Question 5

Methodology of Economics

Answer 5

1 problem identification (ask the right question)
2 model development - a simplified version of reality (a map)
3 test the theory - a model is valid only if different people can get the same results

Question 6

How to use a model

Answer 6

Focus on 2-3 variables and explore their relationship.

For remaining variables “ceteris paribus” (assume that all else remains unchanged/constant/fixed)

Question 7

Association vs Causation Relationship

Answer 7

Association: a thing or person is connected with something else
Causation: one event is the result of another event

Question 8

Positive vs Normative Economics

Answer 8

Positive Economics: based on facts; a description of what is; objective; can be easily tested

Normative Economics: based on facts and value judgement; a prescription or opinion about what should be; subjective; cannot be easily tested
ex: good, bad, better, should, worse, shouldn’t etc.

Question 9

Positive or Normative Economics:

The U.S. unemployment rate is about 47% today.

Answer 9

Positive economics statement

Question 10

Positive or Normative Economics:

It’s bad that the U.S. unemployment rate is about 47% today.

Answer 10

Normative Economics

Question 11

What are the 3 kinds of relationships that can exist between 2 variables (x,y)?

Answer 11

1 direct relationship: they change in the same direction
2 inverse relationship: they change in opposite directions
3 independent relationship: no correlation of how they change

Question 12

How to find the maxima of a function f(x)

Answer 12

Set f”(x)=0
If f”<0 then function is concave & there is a max
If f”>0 then function is convex & there is a min

Question 13

3 fundamental economic questions

Answer 13

1 what to produce
2 how to produce
3 for whom to produce

Question 14

The 3 fundamental economic questions are determined by

Answer 14

Markets vs Governments

Socialism (more government) vs Capitalism (more markets)

Question 15

Production possibilities assumptions

Answer 15

1 fixed resources
2 fixed technology
3 full-employment of resources

Question 16

Ways to obtain more resources

Answer 16

Labor -> immigration - highly educated ones
-> education system
Capital
Land -> purchasing land such as Louisiana & Alaska

Question 17

what is opportunity cost?

Answer 17

The best ALTERNATIVE sacrificed for a decision/choice

Question 18

What is utility?

Answer 18

Satisfaction/Happiness

Question 19

Consumer equilibrium

Answer 19

If MUx/px > MUy/py => buy more x, less y
If MUx/px < MUy/py => buy more y, less x
Until MUx/px = MUy/py
(MU = marginal utility
p=price)

Question 20

What is the Law of Demand?

Answer 20

The inverse relationship between the unit price of a good & the quantity demanded (Qd)

Question 21

Draw an example of horizontal aggregation aka addition summation aggregation

Answer 21

Requires the use of 3 graphs

Question 22

Draw graphs of Marginal Analysis with and without Opportunity Cost

Answer 22

2 graphs

Question 23

Resources

Answer 23

The basic categories of inputs used to produce goods and services. Also called factors of production. Divided into 3 categories: land, labor, and capital

Question 24

Explain why both nations with high living standards and nations with low living standards face the problem of scarcity. If you won $1 million in a lottery, would you escape the scarcity problem?

Answer 24

A poor nation with many people who lack food, clothing, and shelter certainly experiences wants beyond the availability of goods and services to satisfy these unfulfilled wants. On the other hand, no wealthy nation has all the resources necessary to produce everything everyone in the nation wishes to have. Even if you had $1 million and were completely satisfied with your share of goods and services, other desires would be unfulfilled. There is never enough time to accomplish all the things that you can imagine would be worthwhile.

Question 25

Explain the difference between macroeconomics and microeconomics. Give examples of the areas of concern to each branch of economics.

Answer 25

Macroeconomics applies an overview perspective to an economy by examining economywide variables, such as inflation, unemployment, and growth of the economy. Microeconomics examines individual economic units, such as the market for corn, gasoline, or ostrich eggs.

Question 26

Explain why it is important for an economic model to be an abstraction from the real world.

Answer 26

The real world is full of complexities that make it difficult to understand and predict the relationships between variables. For example, the relationship between changes in the price of gasoline and changes in consumption of gasoline requires abstraction from the reality that such variables as the fuel economy of cars and weather often change at the same time as the price of gasoline.

Question 27

Suppose Congress cuts spending for the military, and then unemployment rises in the U.S. defense industry. Is there causation in this situation, or are we observing an association between events?

Answer 27

The two events are associated because the first event (cut in military spending) is followed by the second event (higher unemployment in the defense industry). The point is that association does not necessarily mean causation, but it might. For example, the economy could be in recession.

Question 28

Which of the following best describes an entrepreneur?

a. A person who works as an office clerk at a major corporation.
b. A person who combines the factors of production to produce innovative products.
c. A special type of capital.
d. Wealthy individuals who provide savings that stimulate the economy.

Answer 28

b. A person who combines the factors of production to produce innovative products

Question 29

Which of the following best illustrates the application of the model-building process to economics?

a. Two economists with differing political agendas argue about the best way to solve the Social Security problem on a Sunday morning talk show.
b. A labor economist notices that unemployment tends to be higher among teenagers than more experienced workers, develops a model, and gathers data to test the hypotheses in the model.
c. A Ph.D. student in economics develops a plausible mathematical model of an industry for his dissertation, but there is no data to test the model.
d. Economists come to believe that some economic models are true simply because prominent leading economists say they are true.

Answer 29

b. A labor economist notices that unemployment tends to be higher among teenagers than more experienced workers, develops a model, and gathers data to test the hypotheses in the model.

Question 30

Which of the following is the last step in the model-building process?

a. Collect data and test the model.
b. Develop a model based on simplified assumptions.
c. Identify the problem.
d. Formulate an assumption.

Answer 30

a. Collect data and test the model.

Question 31

Which of the following correctly describes the ceteris paribus assumption?

a. If we increase the price of a good, and consumers’ incomes fall, and the quantity demanded is observed to fall, we know that the price increase caused that decline in quantity demanded.
b. If the federal government increases government spending, and the Federal Reserve Bank lowers interest rates, we know that the increase in government spending caused unemployment to fall.
c. If a company reduces its labor costs, negotiates lower materials costs from its vendors, and advertises, we know that the reduced labor costs are why profits are higher.
d. Ceteris paribus requires that we hold other factors constant so that we can isolate the effects of a change in a single factor and be confident that it caused the observable effect.

Answer 31

d. Ceteris paribus requires that we hold other factors constant so that we can isolate the effects of a change in a single factor and be confident that it caused the observable effect.

Question 32

Which of the following represents causality rather than association?

a. In years that fashion dictates wider lapels on men’s jackets, the stock market grows by at least 5 percent.
b. Interest rates are higher in years ending with a 1 or a 6.
c. Unemployment falls when the AFC champion wins the Super Bowl.
d. Quantity demanded goes up when price falls because lower prices increase consumer purchasing power, and because some consumers of substitute goods switch.

Answer 32

d. Quantity demanded goes up when price falls because lower prices increase consumer purchasing power, and because some consumers of substitute goods switch.

Question 33

Scarcity exists

a. when people consume beyond their needs.
b. only in rich nations.
c. in all countries in the world.
d. only in poor nations.

Answer 33

c. in all countries in the world.

Question 34

Which of the following would eliminate scarcity as an economic problem?

a. Moderation of people’s competitive instincts.
b. Discovery of large new energy reserves.
c. Resumption of steady productivity growth.
d. None of the above because scarcity cannot be eliminated.

Answer 34

d. None of the above because scarcity cannot be eliminated.

Question 35

Which of the following is not a resource?

a. Land.
b. Labor.
c. Money.
d. Capital.

Answer 35

c. Money.

Question 36

Economics is the study of

a. how to make money.
b. how to operate a business.
c. people making choices because of the problem of scarcity.
d. the government decision-making process.

Answer 36

c. people making choices because of the problem of scarcity.

Question 37

Microeconomics approaches the study of economics from the viewpoint of

a. individuals or specific markets.
b. the operation of the Federal Reserve.
c. economy wide effects.
d. the national economy.

Answer 37

a. individuals or specific markets.

Question 38

A review of the performance of the U.S. economy during the last five years is primarily the concern of

a. macroeconomics.
b. microeconomics.
c. both macroeconomics and microeconomics.
d. neither macroeconomics nor microeconomics.

Answer 38

a. macroeconomics.

Question 39

An economic theory claims that a rise in gasoline prices will cause gasoline purchases to fall, ceteris paribus. The phrase “ceteris paribus” means that

a. other relevant factors like consumer incomes must be held constant.
b. gasoline prices must first be adjusted for inflation.
c. the theory is widely accepted, but cannot be accurately tested.
d. consumers need for gasoline remains the same regardless of price.

Answer 39

a. other relevant factors like consumer incomes must be held constant.

Question 40

An economist notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. The economist has

a. confused association with causation.
b. misunderstood the ceteris paribus assumption.
c. used normative economics to answer a positive question.
d. built an untestable model.

Answer 40

a. confused association with causation.

Question 41

Which of the following is a statement of positive economics?

a. The income tax system collects a lower percentage of the incomes of the poor.
b. A reduction in the tax rates of the rich makes the tax system fairer.
c. Tax rates ought to be raised to finance health care.
d. All of the above are primarily statements of positive economics.

Answer 41

a. The income tax system collects a lower percentage of the incomes of the poor.

Question 42

Which of the following is a statement of positive economics?

a. An unemployment rate of greater than 8 percent is good because prices will fall.
b. An unemployment rate of 7 percent is a serious problem.
c. If the overall unemployment rate is 7 percent, unemployment rates among African Americans will average 15 percent.
d. Unemployment is a more severe problem than inflation.

Answer 42

c. If the overall unemployment rate is 7 percent, unemployment rates among African Americans will average 15 percent.

Question 43

Which of the following is a statement of normative economics?

a. The minimum wage is good because it raises wages for the working poor.
b. The minimum wage is supported by unions.
c. The minimum wage reduces the number of jobs for less skilled workers.
d. The minimum wage encourages firms to substitute capital for labor.

Answer 43

a. The minimum wage is good because it raises wages for the working poor.

Question 44

Select the normative statement that completes the following sentence. If the minimum wage is raised rapidly, then

a. inflation will increase.
b. workers will gain their rightful share of total income.
c. profits will fall.
d. unemployment will rise.

Answer 44

b. workers will gain their rightful share of total income.

Question 45

Computer programs, or software, are an example of

a. land.
b. labor.
c. capital.
d. None of the answers above are correct.

Answer 45

c. capital.

Question 46

Which of the following would not be classified as a capital resource?

a. The Empire State Building.
b. A Caterpillar bulldozer.
c. A Macintosh computer.
d. 100 shares of stock in General Motors.

Answer 46

d. 100 shares of stock in General Motors.

Question 47

A model (or theory)

a. is a general statement about the causal relationship between variables based on facts.
b. helps explain and predict the relationship between variables.
c. when expressed as a downward (negatively) sloping graph implies an inverse relationship between the variables.
d. All of the answers above are correct.

Answer 47

d. All of the answers above are correct.