Chapter 1 Homework PDF

Preview

Summary

Chapter 1 assignment with questions and answers. (Graphs not included)...

Description

Homework Chapter 1 1. When the federal government crafts environmental policies that make it less expensive for firms to follow green initiatives, a. The policies are consistent with economic incentives—economists emphasize that consumers and firms consistently respond to economic incentives, they choose the option that provides the most money. So, ceteris paribus, (everything else equal) people choose the option that returns the highest net monetary benefits. 2. Economics is the study of the choices people make to attain their goals, given their scarce resources. 3. Economists use the word marginal to mean an extra or additional benefit or cost of a decision. An optimal decision occurs when a. Marginal benefit equals marginal cost—economists use the word marginal to mean an extra or additional benefit or cost of a decision. Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost—in symbols, where MB=MC. Marginal analysis involves comparing marginal benefits and marginal costs. 4. A market is a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. 5. Microsoft charges a price of $599 for a copy of Windows 7. Is this pricing decision rational? a. When we assume the managers at Microsoft have used all available information and have weighed all known benefits and costs, we are assuming rationality— rationality is the assumption economists make that consumers and firms use all available information as they act to achieve their goals. Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs. 6. One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economists calls a. Scarcity 7. Societies organize their economies in two main ways to answer the three questions of what, how, and who. A society can have a centrally planned economy in which the government decides how economic resources will be allocated. Or a society can have a marker economy in which the decisions of households and firms interacting in markets allocate economic resources. a. Centrally planned economy—an economy in which the government decides how economic resources will be allocated b. Market economy—an economy in which the decisions of households and firms interacting in markets allocate economic resources c. Mixed economy—an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources 8. Productive efficiency occurs when a good or service is produced at the lowest possible cost. Allocative efficiency occurs when production is in accordance with consumer preferences.

a. Productive efficient—the situation in which a good or service is produced at the lowest possible cost. b. Allocative efficiency—a state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it. 9. Equity is the fair distribution of economic benefits a. Equity is harder to define that efficiency, but it usually involves a fair distribution of economic benefits. For some, equity involves a more equal distribution of economic benefits that would result from an emphasis on efficiency alone 10. Firms choose how to produce the goods and services they sell. In many cases, firms face a trade-off between using more workers or using more machines. For example, a. Many times, in the past several decades, firms may have chosen between a production method in the United States that uses fewer workers and more machines and a production method in China that uses more workers and fewer machines. 11. A mixed economy is an economy in which most economic decisions result from the interaction of buys and sellers in markets but in which the government plays a significant role in the allocation of resources. 12. Opportunity cost is the highest valued alternative that must be given up to engage in an activity. 13. Trade-offs force society to make choices, particularly when answering the following three fundamental questions: a. one, what goods and services will be produced? Two, how will the goods and services be produced? Three, who will receive the goods and services produced? 14. Consumers, firms, and government decide(s) what goods and services will be produced. a. Consumers, firms, and the government face the problem of scarcity by trading off one good or service for another. Each choice is made comes with an opportunity cost measured by the value of the best alternative given up 15. In the United States, who receives the goods and services produced depends largely on how income is distributed—Individuals with the highest income have the ability to buy the most goods and services. 16. A hypothesis in an economic model is a statement that may be either correct or incorrect about an economic variable. a. Tested before it can be accepted (or not rejected). b. A statement that ma either current or incorrect about an economic variable. c. Usually about a causal relationship. d. All of the above—An economic variable is something measurable that can have different values. An economic hypothesis is usually about a causal relationship. Before accepting a hypothesis, we must test it. 17. Any model is based on making assumptions because a. Models have to be simplified to be useful. b. We cannot analyze an economic issue unless we reduce its complexity. c. Both a and b—Economic models make behavioral assumptions about the motives of consumers and firms. Economists assume that consumers will buy the goods and services that will maximize their well-being or their satisfaction. Similarly,

economists assume that firms act to maximize their profits. These assumptions are simplifications because they do not describe the motives of every consumer and every firm. d. Neither a nor b 18. Positive analysis is concerned with what is, and normative analysis is concerned with what ought to be. Economics is about positive analysis, which measures the costs and benefits of different courses of action. 19. Economics is a social science because it applies the scientific method to the study of the interactions among individuals. Because economics is based on studying the actions of individuals, it is a social science. As a social science, economics considers human behavior—particularly decision-making behavior—in every context, not just in the context of business 20. Macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. 21. Microeconomics is the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. 22. Which of the following covers the study of topics such as inflation or unemployment? a. Macroeconomics 23. When we graph the relationship between two variables, we often want to draw conclusions about whether changes in one variable are causing changes in the other variable. Doing so, however, can lead to incorrect conclusions. Reasons for drawing incorrect conclusions about cause and effect include a. Reverse causality b. An omitted variable c. Both a and b-- When we graph the relationship between two variables, we often want to draw conclusions about whether changes in one variable are causing changes in the other variable. Doing so, however, can lead to incorrect conclusions. One reason for drawing an incorrect conclusion is an omitted variable. An omitted variable is one that affects other variables, and its omission can lead to false conclusions about cause and effect. A related problem in determining cause and effect is known as reverse causality. The error of reverse causality occurs when we conclude that changes in variable X cause changes in variable Y when, in fact, it is actually changes in variable Y that cause changes in variable X. d. None of the above...