Exam 2: Thinking Like an Economist

-Refer to Table 2-1. What is the opportunity cost to Toyland of increasing the production of dolls from 200 to 300?

In the markets for goods and services, as in the markets for the factors of production, households are buyers and firms are sellers.

What are the four sectors in a more complex circular-flow diagram?

What would a macroeconomist NOT study?

An economy is being efficient if it is impossible to produce more of one good without producing less of another.

What does a relatively steep demand curve mean?

What is the opportunity cost of obtaining more of one good, as it relates to the production possibilities frontier?

Which of the following is an example of a normative statement?

Figure 2-4 -Refer to Figure 2-4. What is the opportunity cost in terms of toothbrushes of getting 10 additional toasters by moving from point B to point A?

Economists outside the government also offer policy advice. Which institution does NOT publish reports by economists?

What does a demand curve show?

This exercise will show you how different theories (models) can lead to very different courses of action. Suppose we ask the following question: Does income inequality promote economic growth and society's overall prosperity? Suppose two economists come up with the following theories (models):?Economist A believes that wealth accumulation in just a few hands increases savings because consumption is necessarily limited. Higher savings, in turn, allow investing in new production facilities that increase the country's overall income and everybody is better off. So, Economist A advocates a non-equalitarian society. Economist B thinks that a very unequal distribution of wealth will increase capacities of production beyond the purchasing power of an essentially poor mass of consumers. For a while, consumers will increase their consumption, and prosperity, by borrowing from the rich, but eventually they will not be able to repay their debts and the economy will collapse for lack of demand. At that point, investing in new production facilities becomes unnecessary. In conclusion, Economist B thinks that extreme income inequality is counterproductive. a. What are the policy implications of the two theories? (In other words, does it matter which theory is correct? b. How would a scientist determine which theory is correct? c. Under what conditions would each of the two models be correct? Could one use both models under different circumstances?

The prairie dog has always been considered a problem for Canadian cattle ranchers. They dig holes that cattle and horses can step in, and they eat grass necessary for cattle. Recently, ranchers have discovered that there is a demand for prairie dogs as pets. In some areas, prairie dogs can sell for as high as $150. Cattlemen are now fencing off prairie dog towns on their land so these towns will not be disturbed by their cattle. Draw a production possibilities frontier demonstrating a rancher's production option between cattle production and prairie dog production, showing increasing opportunity cost and what would happen in each of the following situations (using a separate graph for each situation): a. The outcome is efficient, with ranchers choosing to produce equal numbers of cattle and prairie dogs. b. As a protest against the government introducing the grey wolf back into the wild in their province, ranchers decide not to use 25% of the available grassland for grazing. c. The price of prairie dogs increases to $200 each, so ranchers decide to allot additional land for prairie dogs. d. The government grants new leases to ranchers, giving them 10,000 new hectares of grassland each for grazing. e. A drought destroys most of the available grass for grazing of cattle, but not prairie dogs since they also eat plant roots.

What is the y-coordinate?

Which of the following is an example of a positive statement?

Figure 2-3 -Refer to Figure 2-3. At which point or points can the economy produce?

When an economy is operating inside its production possibilities frontier, what do we know?

In the circular-flow diagram, which flows are involved?

When constructing a production possibilities frontier, which of the following is NOT an assumption?

Sir Isaac Newton developed the theory of gravity after observing an apple fall from a tree. What is this an example of?