Chapter 1

C) A government is an example of an economic agent.

D) Resources for which the quantity that people want exceeds the quantity that which people want exceeds the quantity that is freely available.

B) Pollution

B) Having more wants than the amount of available resources.

B) Both life-saving drugs and ice cream are examples of scarce goods.

B) By comparing the costs and benefits of various options.

D) how agents choose to allocate scarce resources and how the choices affect society.

B) agents' choices and their impact on society.

A) Positive

C) Higher interest rates will encourage more savings.

B) An increase in income causes an increase in savings

D) Normative

D) An increase in social security benefits will increase the welfare of all economic agents.

A) An increase in government expenditure will lead to an increase in well-being.

B) Normative statements depend on personal preferences.

A) Positive economics is descriptive, whereas normative economics is advisory.

D) It explains what has happened or predicts what will happen.

C) Positive economics generates objective descriptions that can be verified with data.

B) Microeconomics

B) Price determination by a firm

A) Energy consumption by a firm

D) Macroeconomics

A) Aggregate demand in an economy

C) Total output of an economy

D) The study of the unemployment rate is covered

C) Microeconomics deals with a small part of the economy, whereas macroeconomics deals with aggregate economic performance.

A) macroeconomics

A) microeconomics

B) macroeconomics

A) microeconomics

Economics is the study of how agents choose to allocate scarce resources and how these choices affect society. An economic agent is an individual or a group that makes choices.

Scarce resources are resources for which the quantity that people want exceeds the quantity that is freely available. Economic agents need to satisfy their unlimited wants in a world of limited resources. This makes it important for them to understand how these scarce resources are to be used and distributed in order to optimize allocation.

Positive economics is analysis that generates objective descriptions or predictions about the world that can be verified with data. It is analysis that describes what people actually do. "A 5% fall in the unemployment rate will lead to a 2% increase in the inflation rate" is an example of a positive economic statement. Normative economics, on the other hand, is analysis that prescribes what an individual or society ought to do. It is subjective and depends on personal preferences, tastes, attitudes, feelings, or ethical judgments. "Pollution in developing countries is one of the biggest global environmental problems" is an example of a normative economic statement.

Microeconomics is the study of how individuals, households, firms, and governments make choices, and how those choices affect prices, the allocation of resources, and the well-being of other agents. On the other hand, macroeconomics is the study of the economy as a whole. The scope of macroeconomics extends to the study of economy-wide phenomena, like the growth rate of an economy, the nation-wide unemployment rate, or the inflation rate.

Robert claims that a 5% reduction in unemployment will lead to a rise in a 2% in inflation. This statement represents predictions that can be verified with data. Therefore, Robert's approach is positive, which means it is an analysis of things as they are. Positive economics describes what has happened or predicts what will happen. The conclusion of his statement can be verified with data and is not subject to his tastes and preferences. Janet claims that inflation is a far bigger problem than unemployment and should be addressed with prime importance. Janet's statement is normative. Normative economics is analysis that recommends what people ought to do. Unlike Robert's statement, Janet's belief that inflation is a bigger problem than unemployment is based on her values and/or ethical judgments. Therefore, while Robert's statement is descriptive in nature, Janet's statement is advisory.

a) An increase in an individual's income increases consumption, but by an amount less than the increase in income: Positive economic statement b) The government should undertake the responsibility of providing healthcare to all its citizens: Normative economic statement c) A trade deficit can be advantageous to an economy: Normative economic statement d) An increase in net exports has a positive effect on a country's national income: Positive economic statement e) The gross domestic product of India is increasing at 5% annually: Positive economic statement

a) This report will pertain to macroeconomics. Macroeconomics refers to the study of an economy as a whole. Macroeconomics covers economy-wide phenomena, like the growth rate of a country's total economic output, the inflation rate, or the unemployment rate. The report suggests that the total unemployment rate in Lithasia has increased from 10.2% to 18.2% from 2003 to 2013. This estimation is a measure of the economy-wide aggregate unemployment, and is covered under macroeconomics. b) Microeconomics is the study of how individuals, households, firms, and governments make choices. The students are discussing how a firm should determine its profit-maximizing output. This is a discussion of an individual entity and so is considered microeconomic analysis.

B) It refers to a situation where all agents are simultaneously optimizing.

C) A situation where no economic agent would benefit by changing his or her behavior.

A) data

D) substitution

a) Optimization: Optimization refers to the process of choosing the best option from a set of alternatives, given the available information. b) Equilibrium: Equilibrium is a special situation where everyone is simultaneously optimizing, so that nobody would benefit personally by changing his or her behavior. c) Empiricism: Empiricism is analysis that is evidence-based as it uses data to test theories and to determine what is causing things to happen in the world.

D) Economic agents who optimize attempt to choose the best feasible option, given the information that they have.

A) that are available and affordable.

A) the book

B) is not necessarily risk free

C) An optimizing individual is also likely to exhibit rationality.

A) rational economic agents maximize more than just monetary income.

D) The amount of one good that has to be given up to purchase an additional unit of the other good.

B) goods and services an economic agent can choose given her limited income.

B) A budget constraint quantifies the trade-offs that economic agents face while making decisions.

B) $20 = ($2 x Quantity of pens) + ($1 x Quantity of pencils)

D) 5 hours of reading and 3 hours of writing

B) 2 magazines and 4 DVDs

C) a budget constraint is an economic tool that quantifies the trade-off between consumption of two goods.

D) opportunity cost

D) $100

A) cost-benefit analysis

A) When deciding between both jobs, she should consider both wage and non-wage attributes of each job.

D) the benefits received from the alternative minus the costs incurred in choosing the alternative.

A) highest net benefit

C) -$10

C) $30 per hour

B) cost-benefit analysis can also be used for normative economic analysis.

D) Economic reasoning helps people make the best use of scarce resources.

Trade-offs occur because of scarcity: economic agents need to satisfy their wants with limited resources. Therefore, in most cases, some benefits have to be given up in order to gain some other benefits. Budget constraints quantify the relevant trade-offs that an economic agent faces. Once trade-offs are quantified, rational decision making becomes easier allowing the individual to make an optimal decision.

Opportunity cost is the best alternative use of a resource. It is what an economic agent is giving up when he chooses a particular option. If the individual decides to take the first job; he will earn $35,000 a year. The opportunity cost of taking this job is the next best offer that he could have taken up. Therefore, the opportunity cost of the first job is $23,000 a year

Cost-benefit analysis is a calculation that adds up the costs and benefits of a particular choice using a common unit of measurement. It involves the conversion of all costs and benefits into a common unit of measurement so that they can be compared. The difference between the benefits and costs of choosing an alternative is referred to as the net benefit of the alternative. The alternative with the highest net benefit is the optimal choice.

Kevin's optimal choice would depend on the net benefits of both options. Net benefit of taking up art classes = $100 - $70 = $30 Net benefit of taking up cooking classes = $160 - $120 = $40 Therefore, given the costs and benefits involved, Kevin should sign up for the French cooking classes rather than the art classes.

Opportunity cost refers to the best alternative use of a resource. In this case, the resource is time. So, if Tom decided to work instead of spending time on Facebook, he would earn $7 every hour. Therefore, Tom's opportunity cost of spending time on Facebook is equal to 7 × 4 = $28. No, economic analysis does not dictate choices. Economics would not tell Tom what to do; it will only help him identify the trade-offs that he is making in his decisions. Whether Tom chooses to work or spend time on Facebook is a normative choice that Tom should make based on costs and benefits.

Opportunity cost is the best alternative use of a resource. Buying one rug costs $10, and each chair costs $5. So, one rug can be purchased with the same amount of money used to buy two chairs. Therefore, the opportunity cost of buying a rug is 2 chairs. Similarly, the opportunity cost of buying a chair is half a rug. The consumer's budget constraint is given by: $100 = 10 × (Quantity of rugs) + 5 × (Quantity of chairs) The following table shows the various combinations of rugs and chairs that the consumer can buy with $100.

a) Sam's opportunity cost will measure the next best use of an hour of his time plus the hourly cost of guitar classes. Once he pays the nonrefundable $600, there is no other cost other than the value of his time. With an hour of time, he has two options: work for $5 per hour, or work for $9 per hour. Therefore, the next best use of an hour that Sam spends on guitar classes is equal to the $9 he could have earned per hour by working at the fast-food outlet. Sam's opportunity cost of attending his guitar classes is $9 per hour. b) With an increase in their hourly wage rates, workers work more and consume less leisure due to a change in their opportunity cost. Assuming that the initial wage of an employee is $10 per hour, the opportunity cost of one hour of rest or leisure is $10 per hour. Now, if the wage rate increases from $10 to $20 per hour, the opportunity cost of one hour of rest or leisure also increases to $20 per hour. Therefore, taking an hour of rest becomes more expensive for employees and they tend to work more than they used to.

Cost-benefit analysis is a calculation that adds up costs and benefits using a common unit of measurement. It is used to identify the alternative that has the greatest net benefit, which is equivalent to benefits minus costs. If Wendy decides to drive down instead of flying, she saves ($800 - $300) = $500. But driving down to California takes an additional 8 hours of travelling time. Therefore, the net benefit of driving relative to flying = ($500 cost saving) - (8 hours of additional travelling time) × ($20/hour) = $500 - $160 = $340. Because the net benefit of driving is positive, driving to California is an optimum choice for Wendy when the opportunity cost of time is $20 per hour. If the opportunity cost of time changes, the net benefit of driving relative to flying will also change. Net benefit of driving relative to flying when the opportunity cost of time is $200 per hour = ($500 cost saving) - (8 hours of additional travelling time) × ($200/hour) = $500 - $1,600 = -$1,100. Because the net benefit of driving relative to flying is negative, flying to California is an optimum choice for Wendy when the opportunity cost of time is $200 per hour.

D) In equilibrium, all economic agents are choosing the best feasible options simultaneously.

B) The quantity of cameras produced will equal the quantity of cameras bought in the market.

A) no economic agent will want to change his or her behavior.

B) Equilibrium refers to a situation where all economic agents simultaneously optimize after considering each other's actions.

A) Don't contribute but still benefit from others' actions.

A) An individual who sneaks inside a music concert.

B) A tax evader enjoying national security.

B) free riding

B) Free riding reduces with social pressure.

B) Require every roommate to contribute to a cleaning service.

In most economic situations, an economic agent is not optimizing individually. His decision is influenced by the decisions taken by other economic agents. In equilibrium, each and every economic agent is doing the best that they can do, given the information they have and given the actions of other economic agents. Therefore, nobody perceives a benefit from changing his or her behavior.

The conditions that are satisfied when the market for pizza slices is in equilibrium are: a) The number of pizza slices manufactured by sellers will equal the number of pizza slices purchased by buyers. b) Pizza sellers will produce pizzas at the point where the cost of production is less than or equal to the market price of $1. c) Buyers will consume pizza as long as the benefit that they derive from consumption is at least equal to the market price of $1.

Free riders are people who don't contribute but still benefit from the actions that others undertake. Sometimes people pursue their own private interests and don't contribute voluntarily to the public interest, and this causes free riding. For example, a free rider may avoid paying taxes but enjoy the same benefits enjoyed by tax payers.

B) testing ideas using data

A) Data help establish whether theories match reality.

A) Data help in verifying casual relationships

A) Testing with data is essential to develop a goo theory

D) A good theory closely predicts actual behavior

Empiricism refers to the use of data to test theoretical ideas or concepts. Empiricism is important as it enables economists to determine whether economic theories are consistent with actual human behavior. This enables economists to refute faulty theories or modify them such that they would better fit the real world. Empiricism also enables researchers to identify causal relationships between sets of variables.

B) Economics can be used to predict people's actions.