Deck 1: The Scope and Method of Economics

Question 1

Assume that you have heard news that a local radio station is hosting a luncheon at your school by offering hot dogs, chips and cola at no expense to the student body. Why would economists say that this lunch is not truly free?

Answer 1

The lunch is not free for a couple of reasons. First, in order for the radio station to offer it they had to give up real resources in order to provide it. Secondly, it is likely that if the luncheon is offered at no expense to the students they will likely have to spend at least some amount of time waiting in line to get it. This time represents an opportunity cost which is not likely to be free.

Question 2

Explain the concept of marginalism as it is used in economics.

Answer 2

The process of analyzing the additional or incremental costs or benefits arising from a choice or decision.

Question 3

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 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.

Answer 3

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.

Question 4

Review the following statement. "He who has choice has pain." What is meant by this?

Question 5

Define the term economics.

Question 6

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.

Question 7

It is widely known among baseball enthusiasts that Babe Ruth actually performed quite well as a pitcher before leaving the Boston Red Sox for the New York Yankees. He was also of course a famously successful hitter. Why do you believe the Yankees chose not to use him as a pitcher? Explain using economic reasoning. Hint: pitchers typically only play every third or fourth game whereas other players in other positions play in nearly every game. Baseball has a season of 162 games.

Question 8

Consider the following scenario. Assume the price of gold in London is selling for $1400 an ounce while in New York it is fetching a price of $1450 an ounce. What would an economist say about the efficiency of this market? What would an economist predict about what would happen next?

Question 9

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.

Question 10

If a good is scarce, does that imply that there is a shortage of it?

Question 11

What is meant by the phrase, "There is no such thing as a free lunch"?

Question 12

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

Question 13

Define an efficient market.

Question 14

Explain how and why an all-volunteer army may actually be cheaper than an army staffed with drafted soldiers.

Question 15

When is it more expensive for a country to go to war - during a recession or during an economic boom? Explain.

Question 16

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.

Question 17

List three key reasons to study economics.

Question 18

Why would a company be more enthusiastic in providing more training to its workers during an economic downturn than during an economic boom (assuming that they do not layoff their workers and can keep them when the economy recovers)?

Question 19

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

Question 20

Explain what is meant by the term opportunity cost.

Question 21

Describe what took place during the Industrial Revolution.

Question 22

Explain what a model is.

Question 23

Should economics be considered a science? Why or why not?

Question 24

If crime rates in the United States fall, can incumbent lawmakers rightfully claim credit? Why or why not?

Question 25

Explain what the fallacy of composition is and give an example.

Question 26

Explain how a model can be useful even if it is not realistic.

Question 27

Explain the difference between positive economics and normative economics.

Question 28

List and describe four fields of economics.

Question 29

Evaluate the following statement - "Economists are fond of saying that there are positive statements and normative ones but the truth is that all questions are really normative".

Question 30

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.

Question 31

Explain what post hoc fallacy means and give an example.

Question 32

For each of the following, list whether the topic is microeconomic or macroeconomic in nature:
(a.) The price of gasoline.
(b.) The national unemployment rate.
(c.) The quantity of new cars sold each year.
(d.) The wage rate paid to steel workers.
(e.) The amount of national output in an economy.

Question 33

Explain what is meant by the term ceteris paribus. Why is this concept often used in economic models?

Question 34

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

Question 35

What branch of economics involves the collection and use of data to test economic theories? Why is this task often more difficult in economics than it is in physical sciences?

Question 36

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.

Question 37

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?

Question 38

List and describe the two areas of positive economics.

Question 39

A globe is a model. However, it lacks much of the detail that one would find on a map. Does that make the globe an inferior model? Why not?

Question 40

Explain the difference between microeconomics and macroeconomics.

Question 41

An engineer has informed the city manager that the marginal cost of an additional car crossing the city bridge is zero? If you were required to draw this cost function on a graph what would it look like? What is the slope of this graph?

Question 42

Explain how to calculate the slope of a line. What does the slope measure?

Question 43

Define a variable and give two examples that would apply to economics.

Question 44

Use the Cartesian coordinate system (and putting income on the horizontal axis) to plot the following data:

Question 45

Assume that you are the new CEO of a major corporation that has five major product lines each run as separate corporations. You discover that if you invested the company's money outside of the firm that it could earn a 15% rate of return on the investment. You tell all the presidents of each of these subsidiary companies that in order for them to remain with the company that their return on capital must equal to or exceed 15% rate of return. Use two economic principles discussed in chapter 1 to explain why the CEO's advice is sound.

Question 46

Explain the difference between economic growth and stability. Can a country experience both at the same time? Why or why not?

Question 47

Some politicians have recently suggested changing the income tax system in the U.S. to a flat tax system where all taxpayers would pay the same percentage of their income in tax to the federal government. Explain how such a change can be analyzed in terms of efficiency. Do you believe that this tax will have equity effects as well?

Question 48

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

Question 49

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?

Question 50

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?

Question 51

Explain what is meant by allocative efficiency.

Question 52

Describe what is meant by the Cartesian coordinate system.

Question 53

Define the concept used in economics known as Ockham's Razor.

Question 54

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?

Question 55

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?

Question 56

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

Question 57

Explain what a graph is and how it can be used.

Question 58

List the four criteria that are generally used to evaluate economic outcomes.

Question 59

What does the phrase "post hoc, ergo propter hoc" mean?

Question 60

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.

Question 61

Suppose that as wages increase the quantity of labor supplied increases as well. However, assume that at some point as indicated in the table below increases in wages actually lead to a reduction in the quantity of labor supplied. Graph this relationship with the quantity of labor on the horizontal axis and the wage rate on the vertical axis.

Question 62

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

Question 63

Examine the following function: Y = 3x + 2. What is the slope of this function and why?

Question 64

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.

Question 65

The following table shows how the unit costs of producing cotton rugs varies with daily output for a given factory:
Plot the points and trace a curve through them. Describe the relationship between cost per rug and the number of rugs produced daily.