ECON 211 Problems, Spring 2008

Multiple Choice 1) According to the text, the reason to study economics is A) to learn a way of thinking. B) to understand society and global affairs. C) to be an informed voter. D) All of the above Answer: D Diff: 1 Type: F 2) Fundamental concepts in economics is(are) A) opportunity cost. B) marginalism. C) efficient markets. D) All of the above Answer: D Diff: 1 Type: F 3) One of its most basic economic problems is that society A) must decide how to lower a product price. B) has more products available than it needs. C) has more resources available than it needs. D) must decide how to allocate available resources. Answer: D Diff: 2 Type: C 4) Which of the following statements is FALSE? A) Economics is a behavioral science. B) In large measure, economics is the study of how people make choices. C) If poverty were eliminated there would be no reason to study economics. D) Economic analysis can be used to explain how both individuals and societies make decisions. Answer: C Diff: 1 Type: F 5) The process of analyzing the additional or incremental costs or benefits arising from a choice or decision is called ______. A) marginalism B) efficiency C) equity D) growth Answer: A Diff: 1 Type: D 6) In calculating marginal costs, we ___________ costs. A) include sunk and average B) include only sunk C) exclude sunk D) exclude all Answer: C D i f f: 3 7) You purchased a ticket to a concert for $30 a month ago. Last week someone invited you to a party on the same night as the concert. You would much rather go to the party than the concert. You have tried unsuccessfully to sell the concert ticket. Which of the following statements regarding this situation is correct? A) The $30 you paid for the concert ticket is relevant to the decision, as this represents the opportunity cost of attending the party. B) You should base your decision on whether or not the party will provide you with more than $30 in satisfaction. C) The $30 you paid for the concert ticket should be irrelevant in your decision making, because it is a sunk cost. D) The $30 concert ticket should be irrelevant in your decision making, because it represents the marginal cost of attending the party. Answer: C Diff: 2 Type: C 8) You spent a total of $5 buying songs for your MP3 player. After you buy one more song, your total cost rises to $6. The marginal cost of the last song that you bought is _____. A) $0.50 B) $1.00 C) $5.00 D) $6.00 Answer: B Diff: 2 Type: A 9) The concept of opportunity cost A) is relevant only to economics. B) can be applied to the analysis of any decision-making process. C) applies to consumers but not to firms. D) refers only to actual payments and incomes. Answer: B Diff: 3 Type: C 10) Opportunity cost is A) that which we forgo, or give up, when we make a choice or a decision. B) a cost that cannot be avoided, regardless of what is done in the future. C) the additional cost of producing an additional unit of output. D) the additional cost of buying an additional unit of a product. Answer: A Diff: 2 Type: D 11) You have $100 in savings. You could earn four percent interest if you put the $100 in a bank savings account for a year. What is your opportunity cost if you put the $100 under the pillow of your bed instead? A) $0.00. B) $4.00. C) $100.00. D) $104.00. Answer: B Diff: 2 Type: A 12) The ______________ is NOT an opportunity cost of attending college. A) tuition you pay B) income you could have earned if you didn't attend college C) alternative uses of the time you spend studying D) cost of the food that you consume while you are attending college Answer: D D i f f: 3 The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units is Multiple Choice 1) Positive economics is an approach to economics that A) seeks to understand behavior and the operation of systems while making judgments about their usefulness to society. B) analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe preferred courses of action. C) describes the economy and how it works. D) prescribes roles for government in an economy. Answer: C Diff: 1 Type: F 2) Normative economics is an approach to economics that A) seeks to understand behavior and the operation of systems without making judgments. B) analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe preferred courses of action. C) describes the economy and how it works. D) would never prescribe a role for government in the economy. Answer: B Diff: 1 Type: F 3) “High taxes reduce the incentive of workers to work” is best described as a _________ statement. A) positive B) Marxist ideology C) normative D) descriptive economics Answer: A Diff: 2 Type: D 4) If the price of a product falls, then the quantity demanded of that product will rise. This is best described as a ________ statement. A) positive B) Marxist ideology C) normative D) descriptive economics Answer: A Diff: 2 Type: D 5) Scientists should not create life in a laboratory is an example of a _________ statement. A) positive. B) Marxist ideology C) normative D) descriptive Answer: C Diff: 2 Type: D 6) Which of the following is a normative question? A) Why do gasoline prices increase before holiday weekends? B) What will happen to gasoline consumption if excise taxes on gasoline are increased? C) To reduce the regressive nature of the gasoline excise tax, should a portion of the gasoline excise tax paid by low-income individuals be refunded to them? D) How will oil exploration be affected if the government imposes price controls on gasoline? Answer: C Diff: 2 Type: D 7) Which of the following is a positive question? A) Will the level of teenage unemployment increase if the minimum wage is increased? B) Should the minimum wage be set at one-half the average manufacturing wage to guarantee individuals a decent standard of living? C) Wouldn't it be more equitable if the minimum wage increased automatically with the cost of living? D) Wouldn't it be better to try to increase people's wages through job-training programs than by requiring employers to pay minimum wages? Answer: A Diff: 2 Refer to Scenario 1 below to answer the questions that follow. SCENARIO 1: An economist wants to understand the relationship between minimum wages and the level of teenage unemployment. The economist collects data on the values of the minimum wage and the levels of teenage unemployment over time. The economist concludes that a 1% increase in the minimum wage causes a 0.2% increase in teenage unemployment. From this information he concludes that the minimum wage is harmful to teenagers and should be reduced or eliminated to increase employment among teenagers. 13) Refer to Scenario 1. The statement that a 1% increase in the minimum wage causes a 0.2% increase in teenage unemployment is an example of ___________ economics. A) policy B) normative C) positive D) non-empirical Answer: C Diff: 2 Type: D 14) Refer to Scenario 1. The statement, "the minimum wage is harmful to teenagers and should be reduced or eliminated to increase employment among teenagers," is most likely an example of _________ economics. A) descriptive B) normative C) positive D) microeconomic Answer: B Diff: 2 Type: D 15) Refer to Scenario 1. The process of collecting data on minimum wage and teenage unemployment levels is an example of A) law and economics. B) economic history. C) econometrics. D) descriptive economics. Answer: D Diff: 2 Type: D 16) Refer to Scenario 1. The statement that an increase in the minimum wage causes an increase in teenage unemployment is an example of A) descriptive reasoning. B) economic theory. C) normative economics. D) deductive reasoning. Answer: B Diff: 3 Type: D 17) Refer to Scenario 1. A graph of the value of the minimum wage on one axis and the level of teenage unemployment on the other axis is an example of A) an economic theory. B) an economic model. C) inductive reasoning. D) a variable theory. Answer: B Diff: 2 Refer to the information provided in Figure 1.1 below to answer the questions that follow. Figure 1.1 1) Refer to Figure 1.1. There is __________ relationship between the daily temperature and the number of gallons of ice cream purchased. A) a negative B) a positive C) either a negative or a positive D) an inverse Answer: B Diff: 2 Type: A Refer to the information provided in Figure 1.2 below to answer the questions that follow. Figure 1.2 2) Refer to Figure 1.2. The slope of the line between Points A and B is A) .3. B) 2.3. C) 3.3. D) indeterminate from this information. Answer: A Diff: 2 Type: A 3) If a straight line has negative slope, a(n) ________ in X _______ Y. A) increase; increases B) decrease; lowers C) increase; lowers D) decrease; doesn’t change Answer: C Diff: 2 Type: A Refer to the information provided in Figure 1.3 below to answer the questions that follow. Figure 1.3 4) Refer to Figure 1.3. The slope of the line is A) positive. B) negative. C) increasing at an increasing rate. D) decreasing at an increasing rate. Answer: A Diff: 2 Type: A 5) Refer to Figure 1.3. The slope of the line between the origin and Point B is A) 5. B) -2. C) 0.5. D) 2. Answer: D Diff: 2 Type: A 6) Refer to Figure 1.3. If a 45 degree line were also graphed, the line shown would __________ it. A) lie above B) lie below C) cross D) indeterminant from this information Answer: A Diff: 3 Type: C 7) Refer to Figure 1.3. At Point A, what is the value of Y? A) 7. B) 8. C) 12. D) Indeterminate from this information Answer: B Diff: 2 Type: A 8) Refer to Figure 1.3. At Point A the slope of the line is 2, so at Point D the slope would be A) greater than 2. B) less than 2. C) equal to 2. D) indeterminate from this information. Answer: C Diff: 2 Type: A Situation #1 Assume that you have hired three executives to run your company each with a different job. All are equally productive and each can do the other person’s job if necessary. Assume that the first executive’s contribution to the company is worth $1,000,000; the second one is worth $800,000 and the third one is worth $500,000. 1. Referring to Situation #1 suppose that for the time being you can only afford to hire the first executive. What is the opportunity cost of the first executive’s work from the viewpoint of the company? Explain. The opportunity cost of the first executive is $800,000. That is the value of the next best available alternative which is currently forgone. Difficulty: E Type: C 2. Referring to Situation #1 suppose that you can now hire two workers. What is the opportunity cost of the second executive’s work from the viewpoint of the company? Explain. The second executive’s work is simply the value of the next best opportunity which is the work that could have been done by the third executive which is $500,000 Difficulty: E Type: C 3. Referring to Situation #1 suppose that you decide that you have to fire the first and the third executive without hiring any replacements. What would be the opportunity cost of the second executive’s work? Explain why your answer is not the same as in the question above. The opportunity cost of second executive’s work is $800,000. The reason is that since each executive can perform any work that they other can then it makes sense to change the second executive’s job so that he is now doing the most highly valued work – that with the $1,000,000 value. That leaves the $800,000 job undone which means that becomes the opportunity cost of the second executive’s work. Difficulty: D Type: C 4. Explain why it is more likely that the opportunity cost of attending a 7:00 a.m. class is forgone sleep but that this is not reasonably likely to be the case for a class that meets at 12:00 noon. At 7:00 a.m. there might not be too many other opportunity costs for your time. Forgone sleep might reasonably be an opportunity cost of your time. However, at 12:00 noon while it is possible that forgone sleep is your opportunity cost it is not likely since there are probably other things of higher value that you have given up by then unless you are a very later sleeper. 5. What are sunk costs? Sunk costs are costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred and cannot be refunded. Difficulty: E Type: D 6. Suppose that you have purchased a round-trip ticket to the Bahamas for spring break. The ticket is non-refundable and cannot be changed. Your best friend tells you that she is getting married during the same week in Chicago (where you live) and has asked you to be in the wedding party. Does the price you paid for your Bahamas trip matter in your decision of whether to go to the Bahamas or Chicago? Why or why not? It should not matter because the plane fare is a sunk cost. No matter what decision you make, you will have to pay for the ticket to the Bahamas. 7. Explain the difference between positive economics and normative economics. Positive economics seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works. Normative economics analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Difficulty: E Type: D 8. Give an example of a positive economic statement and a normative economic statement. Student responses will vary. What is important is that the positive statement is objective and attempts to explain "what is". The normative statement should include some value judgment or "what should be". Difficulty: E Type: D 9. For each of the following, note whether the statement is an example of positive economic analysis or an example of normative economic analysis: (a.) An increase in the minimum wage will lead to a higher rate of teenage unemployment. (b.) If the government reduces the tax on tobacco, more individuals will start smoking. (c.) The government should lower taxes because tax rates are too high for the average U.S. family. (d.) Wealthy senior citizens can afford to buy their own health insurance and therefore should not be given Medicare coverage. (e.) If the price of apples increases, people will buy more bananas. (a.) Positive. (b.) Positive. (c.) Normative. (d.) Normative. (e.) Positive. Difficulty: E Type: D 10. List and describe the two areas of positive economics. Descriptive economics involves the compilation of data that describe economic phenomena and facts. Economic theory involves a statement or a set of related statements about cause and effect (action and reaction). 11. Explain what post hoc fallacy means and give an example. Post hoc fallacy is a common error in thinking about causation. An example would be "if Event A happens before Event B, Event A must have caused Event B to occur". Difficulty: E Type: D 12. Suppose an economics forecaster discovers that on days when the sunspot count is high stock market on the following day is bullish, that is stock market prices edge upwards. In addition, he also observes that on days with a low sunspot count the following day the stock market tends to be bearish, that is stock market prices tend to fall. The forecaster then concludes that there is a positive relationship between the sunspot count and stock market prices and proceeds to base his investment decisions on this premise. What kind of an error has this forecaster made? The forecaster has fallen into the post hoc fallacy. Simply because one set of events precedes another is not enough to say that one is the cause of the other. Difficulty: E Type: D 13. If crime rates in the United States fall, can incumbent lawmakers rightfully claim credit? Why or why not? Probably not. Lower crime rates can occur for many reasons including a change in the age distribution of the population and lower unemployment rates. One cannot simply conclude that the lawmakers in office were responsible for the lower crime rates, until other plausible reasons have been ruled out. Difficulty: E Type: C 14. Explain what the fallacy of composition is and give an example. The fallacy of composition is the incorrect belief that what is true for a part is necessarily true for the whole. For example, intensive fishing in an area by a boat may increase profits earned by the boat owner. However, if many boats excessively fish in the same area, the stock of fish will become depleted and all will be worse off. Difficulty: M Type: D 1. Michael Jordan has more athletic ability than most individuals. Thus, he is more productive at most tasks involving physical skill. Explain why then, it is more efficient for Michael Jordan to pay someone else to mow his lawn. While Michael Jordan probably has an absolute advantage in mowing his lawn, the opportunity cost of his time is very high. He could spend the time it takes to mow his lawn in a variety of ways including earning a large amount of money making a commercial endorsement. Thus, it is likely that he does not have a comparative advantage in mowing his lawn. Difficulty: E Type: C 2. Because of the quantity and quality of its resources, the U.S. has an absolute advantage in the production of many goods and services. Does this imply that the U.S. cannot benefit from trading with a developing country that has less productive ability? Why or why not? The U.S. can benefit from trading with less productive countries as long as it produces the goods for which it has a comparative advantage and trades to receive the goods for which it does not. Difficulty: M Type: C 3. Explain Ricardo's theory of comparative advantage. Specialization and free trade will benefit all trading partners, including those that may be absolutely more efficient producers. Difficulty: E Type: D 4. The following table shows output per hour for Martha and Stewart who make gift baskets and potholders: Output per Hour Martha Stewart Gift Baskets 10 8 Potholders 20 12 What is the opportunity cost of a gift basket for Martha? What is the opportunity cost of a gift basket for Stewart? Who has a comparative advantage in producing gift baskets? How can you tell? The opportunity cost of a gift basket for Martha is 2 potholders. The opportunity cost of a gift basket for Stewart is 1.5 potholders. Stewart has a comparative advantage in the production of gift baskets. His opportunity cost of producing a gift basket is lower. Difficulty: E Type: A 5. Explain the difference between absolute advantage and comparative advantage. A person has an absolute advantage in the production of a good if he or she is more productive at producing the good. A person has a comparative advantage in the production of a good if he or she can produce it at the lowest opportunity cost. Difficulty: E Type: D 6. The following table shows output per hour for Martha and Stewart who make gift baskets and potholders: Output per Hour Martha Stewart Gift Baskets 10 8 Potholders 20 12 What is the opportunity cost of a potholder for Martha? What is the opportunity cost of a potholder for Stewart? Who has an absolute advantage in producing potholders? Who has a comparative advantage in producing potholders? The opportunity cost of a potholder for Martha is 1/2 of a gift basket. The opportunity cost of a potholder for Stewart is 2/3 of a gift basket. Martha has an absolute advantage and a comparative advantage in the production of potholders. 7. The following table shows output per hour for Mexico and Canada, two countries that produce beer and T-shirts: Output per Hour Mexico Canada Beer (thousands of bottles) 5 10 T-shirts (thousands) 10 12 What is the opportunity cost of a bottle of beer for Mexico? What is the opportunity cost of a T-shirt for Mexico? Who has a comparative advantage in producing beer? How can you tell? The opportunity cost of a bottle of beer for Mexico is 2 T-shirts. The opportunity cost of a T-shirt for Mexico is 1/2 bottle of beer. Canada has a comparative advantage in the production of beer. Canada's opportunity cost of producing a bottle of beer is 1.2 T-shirts and Mexico's opportunity cost of producing a bottle of beer is 2 T-shirts. Difficulty: M Type: A 8. Suppose that Rosie and Betty spend their free time making cakes and cookies. Is it possible for Betty to have an absolute advantage in the production of both cakes and cookies? Is it possible for Betty to have a comparative advantage in the production of both cakes and cookies? Explain. Yes, it is possible for Betty to have an absolute advantage in the production of cakes and cookies. This simply means that she is able to produce more per hour. However, Betty cannot have a comparative advantage in producing both cakes and cookies. Because the opportunity cost of producing a cookie is the reciprocal of the opportunity cost of making a cake, it is impossible to have the lower opportunity cost of each. Difficulty: E Type: C SCENARIO 1: Consider the following data for the harvest of crabs versus the harvest of fish off the coast of Virginia in answering the following questions. 9. Refer to Scenario 1. Graph the production possibilities frontier and calculate the average opportunity cost of any of the first fifteen crabs produced. The opportunity cost of the first fifteen crabs is of course the 10 fish given up (15C = 10F). Therefore, the opportunity cost of any one crab is 10/15 F or 2/3 of a fish. 10. Refer to Scenario 1. What is the economic significance of 25 fish captured and 25 crabs captured? The economic significance of capturing 25 fish and 50 crabs is that the harvest would be inside the production possibilities frontier, which suggests some resource unemployment. That resource unemployment could be land, labor or capital. Difficulty: M Type: C 11. Refer to Scenario 1. Explain how this economy might be able to produce 45 fish and 45 crabs? The economy could do this with the benefits of an increase in resources or a technological advance in fishing. Difficulty: M Type: C Refer to the information provided in Scenario 2 below to answer the questions that follow. SCENARIO 2: Assume that two countries are the same in every way except that one allocated more of its resources to the production of capital goods as opposed to consumer goods. 12. Refer to Scenario 2. Graphically illustrate the production choices on a production possibilities frontier. Which country’s PPF will likely move out farther in the future and why? The country with the capital intensive allocation will have its PPF move out farther since the economy will have greater productive capacity. Difficulty: E Type: C 13. Refer to Scenario 2. Now assume that the countries are not alike, but that one is wealthier than the other in that it has more resources. Graphically illustrate this scenario using the production possibilities frontiers. Difficulty: M Type: C 14. Refer to Scenario 2. What would be the impact of improvements in technology assuming that each country spends one-half of its resources on capital goods? There should be a greater improvement in wealth for the wealthier country if each country continues to spend the same percentages. Difficulty: E Type: C 15. Refer to Scenario 2. What happens to the relative income distribution between the two countries under the conditions in the previous question? Explain. The relative income distributions, with income of the capital-good intensive country greater than the consumer-good intensive country, would be expected to widen as the growth is greater in the capital-good intensive country. Difficulty: D Type: C