Exam 1: The Scope and Method of Economics

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 and is assigned to this task; the second one is worth $800,000 and the third one is worth $500,000. -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.

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 and is assigned to this task; the second one is worth $800,000 and the third one is worth $500,000. -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.

Why would an economist argue that tuition is not the largest cost of attending a state university?

The manager of a company has been told by his engineers and cost accountants that the marginal cost of producing additional electronic wafers is likely to remain constant at a $.50 each for the hundred thousand in production. Explain what the marginal cost function would look like and why. What is the slope of this cost function?

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.

Evaluate the following statement: "Water is plentiful, therefore it can't be a scarce resource like oil which is not as plentiful."

Draw a graph showing a line with a positive slope. Draw a graph showing a line with a negative slope. Explain what the shape of these lines implies about the relationship between the variable on the x-axis and the variable on the y-axis?

Assume that the research team of a major company is building a model of consumer demand that contains approximately 250 variables. Can you think of a principle that might be violated here that was discussed in chapter 1? Explain.

Give an example of a positive economic statement and a normative economic statement.

Your boss explains to you that the total fixed costs of the company are $1 million. He also informs you that each unit of production will cost twenty five cents more with each 100-unit increase. He has asked you to draw the fixed costs of the company with costs on the vertical axis and quantity of goods sold on the horizontal axis. Without drawing a graph tell your boss what the graph will look like using words. What information did your boss give you that you didn't need in order to draw the graph?

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?

Assume that at very low tax rates the government collects a very modest amount of revenue from personal taxes. As the rate is raised the government collects more revenue but at a decreasing rate. Suppose furthermore that at some tax rate of let's say 30% the total amount of tax revenue is maximized. Any tax rate above that leads to a reduction in tax revenue collected. From this information and that contained in the table below graph the relationship between the tax rate and tax revenue with the tax rate on the horizontal axis and tax revenue on the vertical axis.

Explain how to calculate the slope of a non-linear function. What does the slope measure?

Define an efficient market.

Create a time series graph with the data in the table below:

Most economists will argue that the minimum wage causes unemployment. Even politicians will recognize this when pressed. However, typically liberals will tout the benefits of the minimum wage while conservatives will decry the disruption that it causes in the labor market. Which economic objective seems to be more important for liberals and which is more important to conservatives if this general observation is correct? Which side is right?

Graph the relationship between variables X and Y according to the table below:

Explain what is meant by allocative efficiency.

Describe what is meant by the Cartesian coordinate system.

Your younger brother likes to yell at the dinner table so the rest of the family will give him what he wants. Assume that this has proved quite successful for him time and again. Let's say that you are from a family of eight and every member of your family starts to adopt the same strategy. Would this work? Why or why not? Explain.