Econ Chapter 1

6 October 2022
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question
TRUE or FALSE: Efficiency means everyone in the economy should receive an equal share of the goods and services produced.
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False - this is the definition of equality.
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TRUE or FALSE: A rational decision maker takes an action if and only if the marginal cost exceeds the marginal benefit.
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False - a rational decision maker would only take action if the marginal cost was lower than the marginal benefit.
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TRUE or FALSE: The invisible hand ensures that economic prosperity is distributed equally.
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False - The invisible hand works through the price system: The interaction of buyers and sellers determines prices. Each price reflects the good's value to buyers and the cost of producing the good. Prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being.
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TRUE or FALSE: Productivity is defined as the quantity of goods and services produced from each unit of labor input.
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True - Productivity is defined as the amount of goods and services produced per unit of labor
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One tradeoff society faces is between efficiency and equality. Define each term. If the U.S. government redistributes income from the rich to the poor, explain how this action affects equality as well as efficiency in the economy.
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Efficiency is the property of society getting the most it can from its scarce resources. Equality is defined as the property of distributing economic prosperity fairly among the members of society. Often, these two goals conflict. When the government redistributes income from the rich to the poor, it reduces the reward for working hard. Fewer goods and services are produced and the economic pie gets smaller. When the government tries to cut the economic pie into more equal slices, the pie gets smaller. Policies aimed at achieving a more equal distribution of economic well-being, such as the welfare system, try to help those members of society who are most in need. The individual income tax asks the financially successful to contribute more than others to support the government.
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Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run.
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To lower inflation, the government may choose to reduce the money supply in the economy. When the money supply is reduced, prices don't adjust immediately. Lower spending, combined with prices that are too high, reduces sales and causes workers to be laid off. Hence, the lower price level is associated with higher unemployment.
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The adage, "There is no such thing as a free lunch," is used to illustrate the principle that a. goods are scarce. b. people face tradeoffs. c. income must be earned. d. households face many decisions.
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B. People face tradeoffs
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When the government redistributes income from the wealthy to the poor, a. efficiency is improved, but equality is not. b. both wealthy people and poor people benefit directly. c. people work less and produce fewer goods and services. d. the government collects less revenue in total.
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C. People work less and produce fewer goods and services
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Making rational decisions "at the margin" means that people a. make those decisions that do not impose a marginal cost. b. evaluate how easily a decision can be reversed if problems arise. c. compare the marginal costs and marginal benefits of each decision. d. always calculate the marginal dollar costs for each decision.
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C. compare the marginal costs and marginal benefits of each decision.
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Tom is restoring a car and has already spent $3500 on the restoration. He expects to be able to sell the car for $5000. Tom discovers that he needs to do an additional $2000 of work to make the table worth $5000 to potential buyers. He could also sell the car now, without completing the additional work, for $2800. What should he do? a. He should sell the car now for $2800. b. He should keep the car since it wouldn't be rational to spend $5500 restoring a car and then sell it for only $5000. c. He should complete the additional work and sell the car for $5000. d. It does not matter which action he takes since the outcome will be the same either way.
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C. He should complete the additional work and sell the car for $500
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If Japan chooses to engage in trade, it a. will only benefit if it trades with countries that produce goods Japan cannot produce. b. cannot benefit if it trades with less developed countries. c. should first attempt to produce the good itself. d. can benefit by trading with any other country.
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D. can benefit by trading with any other country
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Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, where Sandy can make 6 tables or 18 chairs. Given this, we know that the opportunity cost of 1 chair is a. 1/5 table for Mike and 1/3 table for Sandy. b. 1/5 table for Mike and 3 tables for Sandy. c. 5 tables for Mike and 1/3 table for Sandy. d. 5 tables for Mike and 3 tables for Sandy.
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A. 1/5 tables for Mike and 1/3 tables for Sandy.
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What is the limited nature of society's resources called?
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scarcity
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What is the study of how society manages its scarce resources?
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economics
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__________ is when society gets the most from its scarce resources
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Efficiency
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_______ is when prosperity is distributed uniformly among society's members
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Equality
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The ___________ of any item is whatever must be given up to obtain it.
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opportunity cost
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What is something that induces a person to act, i.e. the prospect of a reward or punishment.
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incentive
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A ________ allocates resources through the decentralized decisions of many households and firms as they interact in markets.
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market economy
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_________ is when the market fails to allocate society's resources efficiently. This can be caused by externalities or market power.
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market failure
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________ are when the production or consumption of a good affects bystanders (e.g. pollution)
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externalities
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______ is when a single buyer or seller has substantial influence on market price (e.g. monopoly)
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market power
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What is the amount of goods and services produced per unit of labor?
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productivity
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What is an increase in the general level of prices called?
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inflation
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What are the fluctuations in economic activity, such as employment and production called?
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business cycle
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What are small incremental adjustments to a plan of action called?
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marginal changes
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What is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services?
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the market economy
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What is the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices?
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market power
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What is the ability of an individual to own and exercise control over scarce resources?
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property rights
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What are people called if they systematically and purposefully do the best they can to achieve their objectives?
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rational people