Midterm 1: Chapter 1

Question 1

What is economics?

Answer 1

The study of how to manage scarce resources

Question 2

What is scarcity?

Answer 2

the limited nature of resources

Question 3

What does it mean that people face trade-offs (principle #1)?

Answer 3

We have to give something up in order to get something else. This is due to scarcity.

Question 4

What is opportunity cost (principle #2)?

Answer 4

the opportunity cost of an item is whatever must be given up to obtain it.

Question 5

How do we decide what to pick in a trade-off?

Answer 5

look at the opportunity cost

Question 6

Does everyone have the same opportunity cost?

Answer 6

NO, because everyone is giving up something different

Question 7

Who has the highest opportunity cost?

Answer 7

Whoever has to give up the most

Question 8

Who has the highest opportunity cost?
A. a promising young mathematician who will command a high salary once she earns her college degree
B. a student with avg. grades and has never had a job
C. a famous rich actor who wants to go to college
D. a student who is the best basketball player on college team, but isn’t good enough to play professional

Answer 8

C. because he is giving up a real job with a high salary to go to college

Question 9

Example: You can stay home and study to do well on your exam or you can go to the movies with your friends, but not both. Does this example use scarcity, tradeoffs, both or neither.

Answer 9

Both

Question 10

Do rational people think a the margin or not (principle #3)?

Answer 10

Yes

Question 11

True or False: Rational people systemically and purposefully do the best they can to achieve their objectives.

Answer 11

True

Question 12

How do rational people make decisions at the margin?

Answer 12

by evaluating costs and benefits of marginal changes (adjustments to an existing plan)

Question 13

When do Rational people “take the action”?

Answer 13

Marginal Benefit (MB)>Marginal Cost (MC)

Question 14

When do Rational people not “take the action”?

Answer 14

MB < MC

Question 15

You are selling your 1996 Mustang. You have spent $1000 on repairs. Then the transmission dies. The repair will cost $600. The blue book value is $6500 w/ working transmission and $5700 w/o working transmission.

Answer 15

$800 if fixed= MB
$600 to fix = MC
MB>MC
fix it

Question 16

You are selling your 1996 Mustang. You have spent $1000 on repairs. Then the transmission dies. The repair will cost $600. The blue book value is $6000 w/ working transmission and $5500 w/o working transmission.

Answer 16

$500 if fixed = MB
$600 to fix = MC
MB

Question 17

Do people respond to incentives? (principle #4)

Answer 17

Yes

Question 18

What is an incentive?

Answer 18

Something that induces a person to act (the prospect of a reward or punishment)

Question 19

True or False: Rational people DON’T respond to incentives.

Answer 19

False. Rational people do respond to incentives

Question 20

Example: When gas prices rise, do people buy more hybrid cars or more gas guzzling cars?

Answer 20

buy more hybrid cars

Question 21

True or False: Trade can make everyone better off (principle #5).

Answer 21

True

Question 22

Should people do everything or specialize in one thing?

Answer 22

Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods.

Question 23

How can countries benefit from trade and specialization?

Answer 23

• get a better price abroad for goods they produce

- buy other goods cheaper than we could produce them for.

Question 24

Example: Trade between countries tends to…
A. reduce specialization and can make everyone better off
B. reduce specialization and make everyone worse off
C. Raise specialization and can make everyone better off
D. Raise specialization but make everyone worse off

Answer 24

C.