Deck 1: Economics and Economic Reasoning

Question 1

Explain how the government might apply economic reasoning in deciding on which of many techniques it should employ to reduce or eliminate terrorist attacks on airlines. What problems can arise when using such an approach?

Answer 1

If the government believes that the marginal benefits of a particular method of reducing or eliminating terrorist attacks outweigh the marginal costs, then the economic reasoning suggests that the government should do it. One problem with this approach is that, although some of the costs and benefits are clear and measurable, one cannot clearly assign a monetary value to the intangible costs and benefits that arise from the added security measures (e.g. racial profiling or invasion of privacy).

Question 2

What role does coercion play in an economy?

Answer 2

Coercion has historically been a part of all economies as they try to solve coordination problems. Specifically coercion involves limiting people's wants and desires and increasing the amount of work individuals are willing to do.

Question 3

In the late 1970's, the U.S. mandated a maximum highway speed of 55 miles per hour to economize on fuel. Evidence showed that the lower 55-miles-per hour speed limit also significantly reduced traffic fatalities. Nevertheless, when the gas shortage eased, we have returned to the higher speed limits. Provide an economic rationale for not permanently lowering the speed limit to 55 miles per hour when we know that it will save lives.

Answer 3

Although experience proves that lower speed limits would almost certainly save lives, the opportunity costs of such a policy are considered to be excessive by most policy makers (and voters). If speed limits were set at 55 miles per hour, much more valuable time would be required for everything from commuting, to shipping goods, to leisure travel. Since people's time is scarce, it has a high opportunity cost. We are willing to trade off the costs of higher speed limits-a greater risk of fatalities-in order to avoid the even greater cost of increased time spent traveling from place to place.

Question 4

What is the invisible hand theory?

Question 5

What is scarcity? Why is it so difficult to eliminate it?

Question 6

What is economics, and what are the three coordination problems an economy must solve?

Question 7

How are the three central economic questions-What, How, and For Whom-related to the concept of scarcity?

Question 8

As newly elected President of your school's Economics Club, you must prepare the Club's annual budget of $5,000. Past budgets have included: 1) fees for guest speakers; 2) tours of local businesses; 3) charges for downloading economic statistics; 4) an end-of-semester party; and 5) the Club President's salary. How would the central coordination problems faced by any economic system apply to your task of deciding how to allocate the $5,000?

Question 9

What does the term efficiency mean?

Question 10

Explain how microeconomics differs from macroeconomics. Explain why the following headlines, taken from various issues of The Wall Street Journal, deal with either microeconomics or macroeconomics.
(a) "Microsoft posted a 26% increase in sales"
(b) "Housing starts soared 13.3% in September"
(c) "Honeywell Plans to Slash More Jobs"
(d) "Germany to Breach Key Deficit Target it Helped to Create"
(e) "China's Output Grew 8.1%"
(f) "Washington Is Urging Canada to Increase Military Spending"

Question 11

What is the difference between economic forces and market forces?

Question 12

What is the "invisible hand", and how does it work as a market force?

Question 13

What is the economic decision rule?

Question 14

How did Adam Smith deal with the problem of moving from theorems in positive economics to policy precepts in the art of economics?

Question 15

What are the three forces that control economic reality? Give an example of each.

Question 16

What is economic reasoning? Give an example.

Question 17

Explain how each of the following scenarios illustrates the interaction of economic forces, social and cultural forces, and political and legal forces.
(a) State officials are trying to move welfare recipients into jobs during a period of economic weakness, rising unemployment, and declining federal funding.
(b) The European Union is funding a massive program to explore ways of using hydrogen to replace fossil fuels both to increase energy availability and to protect the environment.
(c) In some states, many types of retail stores are prohibited from opening before noon on Sunday.
(d) In North Dakota, most colleges and universities are located in small towns. Despite shrinking student populations, state law mandates that all of these schools remain open.

Question 18

Explain the differences between positive economics, normative economics, and the art of economics. Explain why you would categorize each of the following three statements as belonging to positive economics, normative economics, or the art of economics.
(a) The unemployment rate is 6.5 percent.
(b) The unemployment rate is unacceptably high.
(c) If the government wants to reduce the unemployment rate, it should try cutting taxes.

Question 19

What are theorems? What are precepts? If two economists agree on a theorem, do they necessarily agree on precepts? If two economists agree on a precept, do they necessarily agree on theorems?

Question 20

What is opportunity cost? Give an example.

Question 21

Explain how microeconomics differs from macroeconomics and then categorize the following questions as either microeconomic or macroeconomic questions:
(a) How will interest rates change when the Federal Reserve Bank increases money supply?
(b) How will Nike's market share change when Reebok increases their marketing expenditures?
(c) How does a tariff on imported steel affect the U.S. steel industry?
(d) Should Wal-Mart renovate its stores nationwide?
(e) Should the government lower income taxes to stimulate consumption?

Question 22

Why are empirical results in economics often subject to dispute?

Question 23

Consider the following statement: Keith purchased an entire week's groceries for his family of four for $200 while Jerry spent $250 for a week's groceries for his family of four. Can we conclude that Keith is more efficient than Jerry at grocery shopping? Why or why not?

Question 24

Why does classroom attendance rise during exam days and fall during other days?

Question 25

What is a natural experiment?

Question 26

You are trying to decide which professor to take for Economics. (You don't want to take it at all, but you have to.) Professor A is known to have great classes (fascinating lectures with lots of fun stuff thrown in), but she gives very challenging exams. Professor B's classes are quite dull, but his exams are quite easy. What are the marginal costs and benefits of taking Economics from Professor A rather than from Professor B? Who would you pick?

Question 27

What is an economic institution? Why is it important? Describe three economic institutions that regularly impact our daily lives.

Question 28

Three different ways (approaches) can be used to study economics: positive, normative, and their combination (the art of economics). Describe each approach and give an example of each. Which do you think is the best approach to study economic issues? Explain why you picked the approach you did.

Question 29

How does microeconomics differ from macroeconomics?

Question 30

How do you use the concept of scarcity to explain why a highly paid, star basketball player makes more money than the average player in the league?

Question 31

Observers have noted that people often vote against what is in their economic self-interest. It has been called the Kansas paradox because a famous article discussed the phenomenon in relation to the state of Kansas. Would Adam Smith see this as a paradox?

Question 32

What is experimental economics?

Question 33

You have just finished paying off the $10,000 loan on your car, and it stops working. Your mechanic tells you that it will cost $1,000 to repair it. Your car is quite old and you are hesitant to put another $1,000 into it. Instead, you are contemplating purchasing a much newer car for $15,000. You want to get your wheels back. What should you do? How would your answer change if you took the expected life of the vehicle into consideration? NOTE: Answer this question by applying the economic decision rule.

Question 34

Describe the difference between positive economics, normative economics, and the art of economics.

Question 35

What is opportunity cost? What would be the opportunity cost of having a date on Saturday night? Alternatively, why is there no such thing as a free date (even if she/he pays)?

Question 36

Comment on the following statement that appeared in a local newspaper: "Our junior high school serves a splendid hot meal for one dollar without costing the taxpayer anything, thanks in part to a government subsidy."

Question 37

State the economic decision rule and apply it to the following situations:
(a) A personal computer costs about 2 cent per hour to operate. Every time it is turned on and off, there is a .00005 probability that the computer will fail, costing $700 to repair. Is it worthwhile to turn off your computer?
(b) Should you try out for the soccer or the baseball team?
(c) The date to withdraw from a course and get the $300 refund has passed. With 30 more classes left in the semester, should you drop the course?
(d) Your employer has offered you a 20% raise. Do you work more hours?