Sept 22nd Session + Practice Questions I

Question 1

Why study economics?

Answer 1

Develop critical-thinking skills in a way that productively engages with the worlds we operate in

Develop a healthy skepticism in an environment that integrates data and theory.

Learn to navigate policy relevant questions

Question 2

Economics is…

Answer 2

Econ is a method rather than a doctrine. It is an aparatus of the mind. A technique of thinking.

Economics in the scientific study of human behavior

Econ is the study of how humans coordinate their wants

The study of how scarce resources are allocated against competing ends

The study of how individuals and societies allocate their limited resources to satisffy their wants

Econ is to consider how we best mitigate the costs of scarcity.

Econ focuses on human behavior so it is a social science.

Question 3

Can firms choose price and quantity?

Answer 3

Firms can choose only price or quantity. They can not set whatever price they want AND sell whatever quantity that they want.

Question 4

Collective action problem or social dilemna

Answer 4

where individuals would be better off cooperating but fail to do so because their conflicting individual interests prevent them from doing so

Question 5

Discrimination

Answer 5

It is necessary. Allocating scarce resources will always require discrimination.

It is not about whether we discriminate, it is about which forms of discrimination we encourage and which we discourage.

There is a discriminator out there and people will find it. What you want to do is influence the way people discriminate. Offer discrimination on good discriminators. Not race, gender, sexual preference… then what?

I sure hope that employers discriminate based on education after I graduate this program.

Question 6

Why Managerial economics?

Answer 6

We will place particular emphasis on applications of theory to understand the behavior of organizations and the people within them.

Thinking about how individuals and organizations behave in the face of constraints is not all we will do. We will pursue better friendships, parenting, citizenship, community.

When almost everything mutable is being directed by self interested agents, how we conduct and/or evaluate policy to promote our objectives is key.

Question 7

Micro Economics

Answer 7

focuses on the causes and consequences of the choices individual economic agents make (people, housholds, departments, agencies, firms)

What factors constrain the choices of the individuals? How do people respond when we relax constraints or impose new ones.? Do we like the consequesnces?

Question 8

Macro Economics

Answer 8

Macro: focuses on collective implications of those individual choices (typically organized by countries or collections of countris)

Given these actors how do we induce growth and avoid recessions

Given those actors how do we best absorb the cost of a global pandemic

Question 9

What is a price?
(a) A price of a good is the ratio at which it can be exchanged with a good.
(b) A price of a good represents the total value of the good to consumers.
(c) A price of a good represents the marginal value of the good to consumers.
(d) None of the above.

Answer 9

ChatGPT:

(a) A price of a good is the ratio at which it can be exchanged with another good: This is the barter concept, which is not how most modern economies operate. However, this is fundamentally what a price is—a medium for exchange.

(b) A price of a good represents the total value of the good to consumers: This is somewhat inaccurate because the price is not necessarily a reflection of the total value but rather what the market will bear. Some consumers might value it more highly or less so but still engage in buying or not buying the good at its price point.

(c) A price of a good represents the marginal value of the good to consumers: In mainstream economic theories, price is often associated with marginal utility. In a perfectly competitive market, the price should theoretically represent the additional (marginal) value a consumer gets from one more unit of the good.

So, if we have to choose among the given options, (c) comes closest to representing the majority of economic thought about what a price is. But it’s important to note that the answer can vary depending on the specifics of the market, the good, and the economic theories you’re considering.

Question 10

In economic theory which statement is true?

(a) It is difficult to change just one behavior.
(b) It is beneficial to change just one price.
(c) It is impossible to change just one policy.
(d) It is impossible to change just one price.

Answer 10

In economic theory, the statement that most closely aligns with the complexities and interconnectedness of economic variables is:

(a) It is difficult to change just one behavior.

The idea here is rooted in the concept of ceteris paribus, a Latin phrase meaning “all other things being equal.” In economics, it’s often difficult to change just one thing—like a behavior, a price, or a policy—without affecting other elements in the system. For example, a change in consumer behavior could influence market demand, which in turn could affect prices and potentially even government policy.

While it is possible to change one price or one policy, doing so will likely have a ripple effect on other economic variables. Therefore, the statement “It is difficult to change just one behavior” encapsulates the nuanced reality that any single change is likely to have multiple, sometimes unpredictable, effects.

From Class notes: “Then it must be impossible to change only one price.”

Ah, the context in which Professor Waddell presents the answer as “(d) It is impossible to change just one price” could be related to the idea of general equilibrium in economics, where the prices of all goods and services are interrelated. Changing the price of one good could affect the demand and supply for other goods, potentially altering their prices as well. In a managerial context, this could also relate to the idea that changing one price can affect complementary or substitute goods, thus impacting broader pricing strategies.

It’s also possible that the statement is being made in a specific context or framework that emphasizes how intertwined economic variables are, making it difficult to change just one without affecting others.

In academic settings, the “correct” answer often depends on the framework or assumptions laid out in the course material. Since Professor Waddell suggests “(d),” it would be interesting to delve deeper into the specific arguments or models being used to support that viewpoint. Thank you for bringing up an alternative perspective; it adds an additional layer of complexity to the discussion.

Waddel’s Slides:

Prices are ratios? Then it must be impossible to change only one price

When the dollar price of something changes, it changes not only in terms of dollars but also in terms of all other things dollars exchange with

Question 11

What is the strongest statement that we should make in support of a theory?
(a) The theory predicts behavior well.
(b) Evidence has failed to disprove the theory.
(c) The theory is correct.
(d) The theory we’ve tested is the right theory.

Answer 11

In the context of scientific rigor and empirical analysis, the strongest statement that can generally be made in support of a theory is “(b) Evidence has failed to disprove the theory.”

The scientific method doesn’t really allow us to definitively say a theory is “correct” or “the right theory” (options c and d). This is because science is always open to revision based on new evidence. Saying a theory is “correct” or “right” would imply a level of certainty that is not in line with the provisional nature of scientific knowledge.

Similarly, while a theory that “predicts behavior well” (option a) is highly useful and more likely to be robust, prediction alone does not make a theory incontrovertibly true. There may be other theories that can also predict the same behavior, or the theory might be an approximation that works only in specific conditions.

So, option (b), “Evidence has failed to disprove the theory,” is the strongest statement in accordance with the principles of scientific investigation. It keeps the door open for further inquiry and acknowledges that our understanding is based on the best available evidence, which has yet to refute the theory in question.

Question 12

If wine and US dollars exchange at a ratio of 1 glass to $10, and cocktails and US
dollars exchange at a ratio of 1 cocktail to $15, what is the price of cocktails in terms
of wine?
(a) The price of a cocktail is 2/3 glasses of wine.
(b) The price of a cocktail is 1.5 glasses of wine.
(c) The price of a cocktail is 15 glasses of wine.
(d) The price of a cocktail is equal to $10 worth of wine.
(e) The price of a cocktail cannot be determined without more information.

Answer 12

To determine the price of cocktails in terms of wine, we can set up a ratio.

To find out how many glasses of wine a cocktail is worth, we divide the price of a cocktail by the price of a glass of wine:

15 / 10 = 1.5

So, 1 cocktail is worth 1.5 glasses of wine.

The correct answer is (b) The price of a cocktail is 1.5 glasses of wine.

Question 13

If the dollar-price of wine falls from US$10 per glass to US$9 per glass,
(a) the price of cocktails implicitly falls.
(b) the price of cocktails implicitly rises.
(c) the price of cocktails does not change.

Answer 13

The change in the price of wine does not inherently dictate a change in the price of cocktails. Therefore, the correct answer would be:

(c) the price of cocktails does not change.

However, the market dynamics could vary based on a number of factors. For example, if wine and cocktails are seen as substitutes, a drop in the price of wine might encourage consumers to switch from cocktails to wine, potentially affecting the demand for cocktails. But these are demand-side dynamics and don’t necessarily imply a change in the actual price of cocktails, unless the bar or restaurant decides to adjust cocktail prices in response to the change in demand.

Question 14

If we increase the reward associated with completing task 1,
(a) we have at the same time increased the reward associated with task 1 quality.
(b) we have at the same time decreased the reward associated with completing all
other tasks.
(c) we have also increased the reward associated with sabotaging others in their
completion of task 1.
(d) None of the above.

Answer 14

The relationship between increasing the reward for completing task 1 and its impact on other tasks or behaviors can be quite complex and depends on various factors, including the nature of the tasks, the motivational drivers of the individuals involved, and the organizational culture. Below are some considerations for each option:

(a) Increasing the reward for task 1 may or may not increase the incentive for quality. If the reward is directly tied to the quality of task 1, then yes, quality may improve. However, if the reward is solely for completion, regardless of quality, then there may not be a direct impact on quality.

(b) In terms of diminishing the reward for completing other tasks, that would depend on how zero-sum the reward system is. If there is a fixed pool of resources or attention, then increasing the reward for task 1 could indeed lessen the focus or reward for other tasks. However, this isn’t necessarily a given.

(c) As for the potential of increased sabotage, this is more related to the culture and ethics within the team or organization. If competition is already high and if the reward for task 1 becomes significantly greater than for other tasks, it might encourage such behavior. However, this is not a direct consequence of increasing the reward for task 1 and could be mitigated through other managerial actions.

(d) “None of the above” could also be true if the conditions are such that increasing the reward for task 1 does not affect other tasks, quality, or interpersonal dynamics in the ways suggested.

So, you could argue for any of these options depending on the context. The key takeaway might be that changing incentive structures can have a variety of intended and unintended consequences, and a holistic view is crucial for effective management.

Question 15

The opportunity cost of reading a single chapter from a thirteen-chapter book
(a) has nothing to do with the dollar-price you paid for the book.
(b) is about 1/13th of the dollar-price you paid for the book.
(c) is zero, since you have already paid for the book.

Answer 15

The concept of opportunity cost relates to the value of the best alternative foregone when you make a decision. In the context of reading a single chapter from a thirteen-chapter book, here’s how the options break down:

***(a) The opportunity cost has nothing to do with the dollar-price you paid for the book: This statement is generally accurate. Opportunity cost is not about the money you spent to purchase the book; it’s about what you could have done with the time you spent reading that one chapter. The cost might be missing out on a TV show, not being able to spend time with family, or perhaps not being able to study for your Executive MBA program.

(b) It is about 1/13th of the dollar-price you paid for the book: This is a misleading way to think about opportunity cost. Again, the dollar-price you paid for the book is a sunk cost; it’s already spent, regardless of how many chapters you read. Opportunity cost is more about what you give up in choosing to read one chapter instead of doing something else.

(c) It is zero, since you have already paid for the book: This is also incorrect. Just because you’ve already paid for the book doesn’t mean there’s no opportunity cost. The real cost is in what you could have done with your time instead of reading the chapter.

So, to summarize, the opportunity cost of reading a single chapter is more related to the alternative activities you forgo during that time, rather than the financial investment you made to purchase the book. This can help inform your decision-making in balancing work, education, and leisure activities.

Question 16

A regulation is designed to alter the behavior of individuals
(a) by forcing them to cooperate with the regulation.
(b) by suppressing their desire for more, as more is assumed to be better.
(c) by creating externalities that are beneficial to society.
(d) by introducing a cost or benefit that encourages them to change their behavior in
the intended way.
(e) None of the above.

Answer 16

The purpose of a regulation is generally to introduce a cost or benefit that encourages individuals to change their behavior in the intended way. Therefore, the most accurate answer to your question is:

(d) by introducing a cost or benefit that encourages them to change their behavior in the intended way.

Regulations often come with penalties for non-compliance or rewards for adherence, thus guiding behavior towards a particular societal goal. Whether it’s environmental regulations to reduce pollution or traffic rules to maintain road safety, the underlying principle is to steer behavior through a system of incentives or disincentives.

Question 17

An equilibrium price in a market is
(a) the price that all consumers are willing and able to pay.
(b) the price at which there is no excess quantity supply or quantity demand.
(c) the price at which consumers are happiest.
(d) Both b and c.

Answer 17

An equilibrium price in a market is:

(b) the price at which there is no excess quantity supply or quantity demand.

In a market at equilibrium, the quantity of goods that consumers are willing to buy equals the quantity that producers are willing to sell. At this point, there is neither a surplus nor a shortage of goods. This concept is central to supply and demand theory in economics.

Options (a) and (c) are not accurate. Not all consumers may be willing or able to pay the equilibrium price, and consumers being “happiest” is a subjective statement that doesn’t necessarily reflect market equilibrium.

So, for a more educated understanding, option (b) captures the essence of what an equilibrium price is in the context of economic theory.

Question 18

At the equilibrium price and quantity in a market
(a) there is upward pressure on price, otherwise price would be falling.
(b) there is downward pressure on price.
(c) there is upward pressure on quantity.
(d) there is no pressure for quantity to change.
(e) None of the above.

Answer 18

In a market at equilibrium, both the supply and demand curves intersect at a particular point. At this intersection, the quantity of the good that consumers are willing to buy equals the quantity that suppliers are willing to sell. Therefore, there is neither upward nor downward pressure on the price or the quantity. In other words, the market has achieved a stable state where both buyers and sellers are content with the price and quantity.

So, the correct answer to your question would be:

(d) there is no pressure for quantity to change.

I hope this clarifies the concept of market equilibrium for you. Feel free to ask if you have more questions on this topic or any other.

Question 19

Where there is currently a shortage in a market
(a) one should expect prices to rise.
(b) one should expect prices to fall.

Answer 19

In economic terms, when there is a shortage in a market, one should generally expect prices to rise. A shortage occurs when the demand for a product or service exceeds the supply. In such a scenario, sellers have the upper hand as they are dealing with more buyers vying for limited resources. This usually leads to an increase in prices, as buyers are willing to pay more to secure the scarce commodity. This is essentially the law of supply and demand at work.

However, it’s worth mentioning that this is a generalized explanation and real-world scenarios may involve more complex factors such as government interventions, price ceilings, or consumer behavior that could influence the outcome.

Question 20

The value of a good to someone is best thought of as

(a) the price someone is observed paying to acquire the good.
(b) the cost to firms of producing the good in question.
(c) what someone is willing to give up to acquire the good.
(d) None of the above.

Answer 20

The value of a good to someone can be a complex issue that varies depending on perspective—consumer, producer, or society at large. Here’s a breakdown of each option:

(a) The price someone is observed paying to acquire the good: This is the market price, which may not fully encapsulate the value a person places on the good. For instance, someone might be willing to pay more for a medication they need but find it at a lower cost due to competition or subsidies.

(b) The cost to firms of producing the good in question: This reflects the producer’s perspective and could be completely unrelated to what a consumer values the good at. A painting might cost very little in materials to produce, but its value could be extremely high to an art collector.

***(c) What someone is willing to give up to acquire the good: This is perhaps the closest to capturing the consumer’s valuation of a good. It’s based on the economic concept of opportunity cost—the value of the next best alternative forgone. This option can reflect not only monetary considerations but also time, effort, and other sacrifices made.

(d) None of the above: This is possible if you consider that value can be subjective and multidimensional, involving emotional or cultural factors that are not easily quantified.

In an academic sense, option (c), “what someone is willing to give up to acquire the good,” often comes closest to defining the value of a good from the consumer’s perspective, as it includes a range of sacrifices and not just monetary price. However, real-world applications may require a blend of these perspectives to get a fuller understanding of value.

Question 21

When someone is seen paying more for something because it saves time, we would
predict that
(a) the time saved, when used in the next-best alternative, is relatively more valuable
to him.
(b) the time saved, when used in the next-best alternative, is relatively less valuable
to him.
(c) More information is needed to answer this question.

Answer 21

In the realm of economics, the concept of “opportunity cost” often comes into play. If someone is willing to pay more for a service or product because it saves them time, it suggests that the individual places a higher value on their time than the additional cost incurred. This often implies that the time saved, when used in the next-best alternative, would be relatively more valuable to them. Therefore, the most likely answer would be:

(a) the time saved, when used in the next-best alternative, is relatively more valuable to him.

However, it’s worth noting that the specific circumstances could introduce nuances that this general principle doesn’t cover. Yet, based on the information given, (a) would be the most logical prediction.

Question 22

We learn that individuals value the Portland police department at roughly $230 million.
We also learn that individuals value the Portland public schools at $150 million. From
this information, one can confidently conclude that
(a) new teachers will be paid more than new police officers.
(b) new police officers will be paid more than new teachers.
(c) None of the above.

Answer 22

From the information provided—that individuals value the Portland Police Department at roughly $230 million and Portland public schools at $150 million—it cannot be confidently concluded that new teachers will be paid more than new police officers or vice versa. The valuation of the entire department or system does not necessarily provide information about the salaries of new hires in those fields.

The overall budget or value placed on a department may cover a variety of costs, including but not limited to salaries, equipment, administrative costs, facilities, and more. Additionally, salary decisions are influenced by a range of factors such as labor agreements, prevailing wage rates for similar jobs, qualifications, and experience. Therefore, it is not possible to make a definitive conclusion about the salaries of new hires in either profession based solely on the overall budget or value assigned to each department.

So, the answer would be (c) None of the above.

Question 23

Are market equilibria, as we’ve described them, attractive?
(a) Yes.
(b) No.

Answer 23

The concept of market equilibrium in economics refers to a state where the quantity supplied matches the quantity demanded at a particular price level, leading to stability in the market. Whether market equilibria are “attractive” or not can be viewed through different lenses, each with its own merits.

Advantages of Market Equilibrium:

Predictability: Both consumers and producers know what to expect in terms of prices and quantities, facilitating better planning and decision-making.
Resource Allocation: In an equilibrium state, resources are said to be allocated efficiently, meaning that producers are using their resources to make goods that consumers actually want.
Stability: Market equilibrium suggests a stable environment which could be favorable for long-term investment and growth.
Disadvantages of Market Equilibrium:

Static Nature: The notion often assumes ceteris paribus (all other things being equal), which is rarely the case in real-world markets. Economic variables are dynamic and always changing.
Inequality: Equilibrium doesn’t necessarily ensure that resources are allocated equitably. Some groups may still be at a disadvantage.
Market Imperfections: Factors such as imperfect information, externalities, and market power can distort market equilibrium, making it less “attractive.”
So, is market equilibrium attractive? If stability, predictability, and efficient allocation of resources are high on your list of priorities, then the answer could lean towards “Yes” (a). However, if you’re concerned about issues like inequality, changing variables, and market imperfections, you might lean more towards “No” (b).

It’s worth contemplating these points critically, especially considering your role in operations and ongoing executive education. The intricacies of market behavior can offer valuable insights into both academic and practical applications.

Question 24

If the surplus in the market for A is currently larger than the surplus in the market
for B, is the price in market A also higher than the price in market for B?
(a) Yes.
(b) No, it doesn’t have to be.

Answer 24

(b) No, it doesn’t have to be.

The concept of surplus in a market generally refers to an excess supply of a product or service, indicating that there is more of the product available than consumers are willing to buy at the current price level. Surplus doesn’t inherently dictate the level of price; rather, it suggests that the price might be too high for the current supply-demand equilibrium in that specific market.

Market A having a larger surplus than Market B does not necessarily mean that the price in Market A will be higher than in Market B. Different markets can have various factors affecting their pricing mechanisms, including but not limited to production costs, consumer demand, or even government regulations.

In a basic economic sense, a surplus often prompts sellers to lower prices to increase demand, but that’s a reactive measure and not an indication that higher surplus markets have higher prices to begin with.

Therefore, while surplus can be an indicator of market dynamics, it does not directly translate to price levels when comparing two different markets.

Question 25

We would expect the prices of normal goods to increase as the economy goes into a
recession (e.g., as incomes fall).
(a) True
(b) False
(c) We need more information to answer this question.

Answer 25

The statement that we would expect the prices of normal goods to increase as the economy goes into a recession (e.g., as incomes fall) is generally considered to be:

(b) False

In a recession, demand for many goods and services typically decreases as consumers tighten their belts due to uncertainty or reduced income. Businesses may lower prices in an attempt to stimulate demand. Additionally, recessions are often characterized by lower inflation rates or even deflation, which suggests that prices are stable or decreasing rather than increasing.

However, the above is a broad generalization and could vary based on specific market conditions, government interventions, or other factors that could influence the price of goods during a recession.

Question 26

The service you provide is a complement to an inferior good. If the economy goes into
a recession (e.g., as incomes fall) we would expect the revenue from selling this service
to decrease.
(a) True
(b) False
(c) We need more information to answer this question.

Answer 26

The answer is generally considered to be (b) False.

In economics, an “inferior good” is a type of good for which demand increases when consumer incomes fall. In other words, when the economy is in recession and incomes drop, people tend to buy more of these goods rather than less.

If the service you provide is a complement to an inferior good, then it stands to reason that the demand for your service would also increase during a recession, just like the demand for the inferior good it complements. Complementary goods are those that are typically consumed together. So if more people are buying the inferior good, it’s likely they will also purchase the complementary service, increasing your revenue.

Of course, real-world scenarios can introduce complexities that may affect this outcome, but based on the information given, the most appropriate answer is False.