Week 1 Quiz

Wk 1 Quiz 2. Determining opportunity cost Juanita is deciding whether to buy a skirt that she wants, as well as where to buy it. Three stores carry the same skirt, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $105 for the skirt: Store Travel Time Each Way Price of a Skirt (Minutes) (Dollars per skirt) Local Department Store 15 Across Town 30 Neighboring City 105 88 60 65 Juanita makes $20 an hour at work. She has to take time off work to purchase her skirt, so each hour away from work costs her $20 in lost income. Assume that returning to work takes Juanita the same amount of time as getting to a store and that it takes her 30 minutes to shop. As you answer the following questions, ignore the cost of gasoline and depreciation of her car when traveling. Complete the following table by computing the opportunity cost of Juanita's time and the total cost of shopping at each location. Store Opportunity Cost of Time Price of a Skirt Total Cost (Dollars) (Dollars per skirt) (Dollars) 1/20 Local Department Store 20.00Correct 105 Across Town 118.00Correct 30.00Correct Neighboring City 88 50.00Correct 65 125.00Correct 115.00Correct Points: 1/1 The opportunity cost of driving to each location is what Juanita gives up to make the trip. Getting to the local store takes her 15 minutes, and returning to work takes her 15 minutes (a total of 30 minutes). Shopping takes her another 30 minutes. Since she loses $20 per hour by not working, the opportunity cost of her time is (0.5×$20)+(0.5×$20)=$20. Because the price she pays at this store is $105, she faces a total cost of $20+$105=$125. If Juanita buys her skirt at the store across town, the opportunity cost of her time is 90 minutes: 30 minutes each to drive there, shop, and return to work. The price she pays is $88, so she faces a total cost of $30+$88=$118. Finally, if Juanita buys her skirt at the store in the neighboring city, the opportunity cost of her time is 2.5 hours: 60 minutes to drive there, 30 minutes to shop, and 60 minutes to return to work. The price she pays is $65, so she faces a total cost of $50+$65=$115. Assume that Juanita takes opportunity costs and the price of the skirt into consideration when she shops. Juanita will minimize the cost of the skirt if she buys it from thestore in the neighboring city Correct . Points: 1/1 Juanita will base her decision on the total cost of the skirt, including the opportunity cost of the time required to obtain the skirt and the price of the skirt. In this scenario, she incurs the lowest total cost if she buys her skirt from the store in the neighboring city. 3. Efficiency in the production possibilities model Suppose South Africa produces only two goods: alfalfa and blu rays. The following graph shows South Africa's current production possibilities frontier, along with six output combinations represented by black points (plus symbols) labeled A to F. 020406080100100806040200BLU RAYS (Millions)ALFALFA (Millions of bushels)PPFAFEDCB 2/20 Complete the following table by indicating whether each point represents output combinations that are inefficient, efficient, or unattainable. Check all that apply. Point Inefficient Efficient Unattainable A B C D E F Points: 1/1 Close Explanation Explanation: Every output combination on the production possibilities frontier shows an efficient output combination for South Africa. The points on the production possibilities frontier represent all combinations of output produced using all of the nation's available resources and its current technology, such that the nation cannot produce more of one good without producing less of the other. Points located inside the production possibilities frontier, such as A and F, represent inefficient output combinations. At these points, it is possible to increase the production of 3/20 both goods because some resources are unemployed. For example, point A is inefficient because it is possible for South Africa to produce at point B instead, where the economy is producing both more alfalfa and more blu rays. Points located on the production possibilities frontier, such as C and B, represent efficient output combinations. At these points, it is impossible to increase the production of one good without producing less of the other. For instance, if South Africa is currently producing at point B and decides that it wants to produce more alfalfa, it must produce fewer blu rays. Points located outside the production possibilities frontier, such as E and D, represent output combinations that are unattainable, given current resources and technology. Recall that each point on the production possibilities frontier shows the maximum quantity of alfalfa South Africa can produce if it also wants to produce the given quantity of blu rays. For example, compare point B (36 million blu rays and 46 million bushels of alfalfa) with point D (36 million blu rays and 90 million bushels of alfalfa). Because point B is on South Africa's production possibilities frontier, you can see that if South Africa is producing 36 million blu rays, it can produce at most 46 million bushels of alfalfa. Therefore, point D must be unattainable, given current resources and technology. 4. Opportunity cost and production possibilities Amy is a skilled toy maker who is able to produce both trains and puzzles. She has 8 hours a day to produce toys. The following table shows the daily output resulting from various possible combinations of her time. Hours Producing Produced Choice A 8 0 4 0 B 6 2 3 10 C 4 4 2 16 D 2 6 1 19 E 0 8 0 20 On the following graph, use the blue points (circle symbol) to plot Amy's initial production possibilities frontier (PPF). Your AnswerInitial PPFNew PPF012345678302520151050PUZZLESTRAINS0, 20 Correct Answer 4/20 Points: 1/1 Close Explanation Explanation: Each row of the table refers to one point on the production possibilities frontier. For example, if Amy chooses to spend all of her time producing trains, then she can produce four trains and zero puzzles; so (4, 0) is one of the points on her initial PPF. Similarly, if she splits her time evenly between producing trains and puzzles, she will produce two trains and 16 puzzles; therefore, (2, 16) is another point on her initial PPF. Suppose Amy is currently using combination D, producing one train per day. Her opportunity cost of producing a second train per day is 3 puzzles per day. Points: 1/1 Now, suppose Amy is currently using combination C, producing two trains per day. Her opportunity cost of producing a third train per day is 6 puzzles per day. Points: 1/1 From the previous analysis, you can determine that as Amy increases her production of trains, her opportunity cost of producing one more train increases . Points: 1/1 Close Explanation Explanation: When using combination D, Amy is producing one train and 19 puzzles per day. Producing a second train per day would require her to move to combination C, reducing her production of puzzles to 16 per day. Since this change involves producing 3 fewer puzzles per day ( 19−16=3), the opportunity cost of producing the second train per day is 3 puzzles per day. Similarly, using combination C, Amy is producing two trains and 16 puzzles per day. Producing a third train per day would require her to move to combination B, reducing her production of puzzles to 10 per day. Since this change involves producing 6 fewer puzzles per day ( 16−10=6), the opportunity cost of producing the third train per day is 6 puzzles per day. 5/20 Amy's opportunity cost of producing the second train per day is 3 puzzles per day while the opportunity cost of producing the third train per day is 6 puzzles per day. Hence, as Amy increases her production of trains, her opportunity cost of producing more trains increases. This change is an example of the law of increasing opportunity costs. Suppose Amy buys a new tool that enables her to produce twice as many trains per hour as before, but it doesn't affect her ability to produce puzzles. Use the green points (triangle symbol) to plot her new PPF on the previous graph. Close Explanation Explanation: The new tool causes Amy's PPF to pivot to the right. In other words, for each point on her PPF, the vertical coordinate is the same as before, but the horizontal coordinate is twice its initial value. For example, under combination D, Amy spends 2 hours producing trains and 6 hours producing puzzles. Before she bought the new tool, she could have produced one train and 19 puzzles, so (1, 19) was a point on her initial PPF. With the new tool, the same allocation of time results in two trains and 19 puzzles, so (2, 19) is a point on her new PPF. Notice that one point is the same on the initial PPF and the new PPF. Because the new tool helps Amy make only trains, the tool does not change her output when she spends all of her time making puzzles. This occurs at output combination E. Because she can now make more trains per hour, Amy's opportunity cost of producing puzzles is higher than it was previously. Points: 1/1 Close Explanation Explanation: The shift in Amy's PPF is reflected in a corresponding change in her opportunity costs. Again, consider combination D, and consider the effects of moving from there to combination E. Both before and after Amy buys the tool, she can produce 19 puzzles if she devotes 6 hours to producing them and 20 puzzles if she devotes 8 hours to producing them. Therefore, spending her last 2 hours producing puzzles results in one additional puzzle. Before she bought the tool, she would have to give up one train. However, now that she has the tool, it means giving up two trains. Therefore, Amy's increased ability to produce trains increases her opportunity cost of producing puzzles. 6/20 5. Property rights and market failures Loggers are much more likely to supply wood to the market if property rights are enforced. Points: 1/1 Close Explanation Explanation: Property rights are the ability of individuals to own and control their own scarce resources. The enforcement of property rights, usually through the police and court systems, is essential for markets to function efficiently, since in the absence of secure property rights, individuals will have less incentive to produce goods and services. For example, without enforcement of property rights, loggers will be less likely to produce wood, as any wood produced can potentially be stolen without compensation paid to the loggers. On the other hand, if property rights are enforced, loggers can be more confident that they will be compensated for their wood and thus will be more likely to produce wood in the first place. In this way, the enforcement of property rights can help move the market toward a more efficient level of production of goods and services. In the presence of market failures, public policy can improve economic efficiency. Classify the source of market failure in each case listed. Market Failure Market Power Externality A person smoking in a restaurant emits second-hand smoke that harms other restaurant patrons. A single grocery store is the only source of food in a small town, giving the store the ability to influence the price of food. Points: 1/1 7/20 Close Explanation Explanation: While markets, guided by the invisible hand, usually produce efficient outcomes, there are instances in which markets do not allocate resources efficiently and thus fail to maximize the size of the economic pie. Economists use the term market failure to refer to situations in which the market, left to itself, fails to allocate resources efficiently. Two common sources of market failures are externalities and market power. Market power is the ability of an individual economic agent, or small number of economic agents, to influence the market price of a good or service. In this case, because the grocery store is the only source of food, the grocery store faces no competition from other potential suppliers, enabling the grocery store the ability, or market power, to restrict the output of food and charge higher prices. In short, the market power of the grocery store prevents the invisible hand from guiding the market to the efficient outcome. An externality is an impact, positive or negative, of one individual's activities on the well-being of a bystander. In this case, since the restaurant patrons, as bystanders, are harmed by the activities of the smoker, the second-hand smoke causes a negative externality. The presence of externalities can cause markets to produce too much or too little of a good or service, leading to an inefficient allocation of resources. In cases of externalities and market power, the government can intervene to promote efficiency in the market 6. The interaction of individual choices Immediately after an ice storm brought down power lines throughout the region, hardware stores were sold out of batteries and flashlights. However, within a couple of days, special deliveries brought in extra batteries and flashlights, and everyone who wanted to buy a flashlight or batteries was able to do so. Which of the following principles of economic interaction best describes this scenario? Markets allocate goods effectively. All costs are opportunity costs. When markets do not achieve efficiency, government intervention can improve overall welfare. There are gains from trade. 8/20 Points: 1/1 Close Explanation Explanation: After the ice storm, people rushing to the store to purchase batteries and flashlights created a shortage of these items, causing their prices to rise. Hardware stores responded to the higher prices and the increased profit opportunities by requesting special deliveries to restock their inventories. 7. Changes in incentives Because of the violent nature of the sport, professional American football players are at risk of suffering concussions (or brain injuries) during the violent collisions that occur between players during the game. Violent collisions involving hits to the head are particularly risky. Suppose the commissioner of the National Football League (NFL) institutes a rule requiring players to wear a new, lighter helmet that is designed to reduce head trauma during collisions between players on the field. While the new helmets decrease the probability of a concussion resulting from each individual collision, at the same time the new helmets could also give football players an incentive to play more recklessly , which could potentially increase the amount of violent collisions and thus the number of concussions suffered by NFL players, all else equal. Points: 1/1 Close Explanation Explanation: Although the new helmets may have the direct effect of reducing the probability of a concussion during a given collision on the football field, this reduction in concussion probability can also change the incentives of players. In particular, it may give football players an incentive to alter their behavior and style of play. A rational football player compares the costs and benefits of playing safely on the field. For instance, if football players played with no helmets, the marginal benefit of playing safely (e.g., not leading with 9/20 one's head during a tackle) would be high, giving players an incentive to play more carefully to avoid head trauma. The new helmets, however, change these incentives by altering the cost-benefit analysis that a rational football player would undertake. If the helmets reduce head trauma during collisions, the marginal benefits of playing safely are reduced, giving players an incentive to play less cautiously (or more recklessly). This change in behavior may even lead to an increase in the number of violent collisions. If the increase in violent collisions is large enough, the number of concussions could actually increase. In fact, the NFL also imposes penalties and fines for violent hits to the head and takes other measures to reduce the number of concussions 8. Factors that influence standard of living Which of the following factors played the biggest role in the slow growth of average incomes in the United States during the 1970s and 1980s? Increased competition from India Slow growth in productivity Disinflation of the dollar Increased competition from Japan Points: 1/1 Close Explanation Explanation: Productivity is the amount of goods and services that can be produced for each unit of labor input. Countries with high productivity, in which workers can produce large amounts of goods and services, tend to have higher standards of living. On the other hand, countries with low productivity, where workers produce relatively fewer goods and services, often experience lower standards of living. Similarly, the growth rate of productivity is the driving force behind changes in average income and living standards over time. While many analysts claimed that increased competition from foreign countries, such as Japan, caused a slowing of income growth in the 1970s and 1980s, slow growth in the productivity of U.S. workers played a much bigger role in the slow growth of average income. 10/20 9. Inflation and unemployment Suppose that, in an attempt to combat severe unemployment, the government decides to increase the amount of money in circulation in the economy. This monetary policy increases the economy's demand for goods and services, leading to higher product prices. In the short run, the change in prices induces firms to produce goods and services. This, in turn, leads to a more lower level of unemployment. Points: 1/1 In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to lower unemployment. Points: 1/1 Close Explanation Explanation: When the government uses monetary policy to increase the quantity of money, then the demand for goods and services increases. This change in the demand will lead to higher prices, causing firms to produce more goods and services—which requires more workers. Therefore, higher prices lead to lower unemployment levels in the short run. In the long run, however, an increase in the quantity of money will lead only to an increase in the price levels but will have no effect on the unemployment level. The economy faces a trade-off between inflation—an increase in the overall price levels—and unemployment in the short run. In particular, higher inflation rates usually correspond to lower unemployment levels, while lower inflation rates correspond to higher levels of unemployment. 10. Normative and positive statements The following table contains statements that provide some analysis of policies that address taxes. Categorize each of these statements as either positive or normative. 11/20 Statement Positive Normative Taxes are too high. In some circumstances, if taxes are lowered, government revenues actually increase. It is immoral for a government to redistribute money from one person to another. When the government increases taxes, rates of tax evasion increase. Points: 1/1 Close Explanation Explanation: A positive statement is one that seeks to describe the world as it is. The second and fourth statements fall into this category. A normative statement is one that offers an opinion as to the way the world should be. The first and third statements fall into this category. Note that describing a statement as positive or normative is not the same as describing it as true or false. Positive statements may be false (for example, “You are the king of Spain”), and normative statements may reflect the value judgments of a large majority of people (for example, “It is wrong to kill innocent children”). However, positive statements can always be supported or refuted by data, while normative statements require a larger philosophical framework to evaluate. It's quite easy to prove that you are not the king of Spain, but to argue that it is wrong to kill innocent children, you must appeal to a larger moral framework. Such a framework is based on values and cannot be confirmed or refuted by evidence. 11. Agreement and disagreement among economists 12/20 Suppose that Raphael, an economist from a business school in Georgia, and Susan, an economist from a nonprofit organization on the West Coast, are arguing over health insurance. The following dialogue shows an excerpt from their debate: Susan: A popular topic for debate among politicians as well as economists is the idea of providing government assistance for health benefits. Raphael: I think it is oppressive for the government to tax people who take care of themselves in order to pay for health insurance for those who are obese. Susan: I disagree. I think government funding of health insurance is useful to ensure basic fairness. The disagreement between these economists is most likely due to differences in values . Points: 1/1 Close Explanation Explanation: There are two main reasons that economists tend to disagree: differences in values and differences in scientific judgments. In this case, the economists disagree due to differences in values because they disagree about a normative issue: the extent of the moral obligation that one human or citizen has to another. In contrast, differences in scientific judgments are due to differing opinions about factual matters, e.g., the relative merits of competing theories or the values of economic parameters. Despite their differences, with which proposition are two economists chosen at random most likely to agree? Immigrants receive more in government benefits than they contribute in taxes. Having a single income tax rate would improve economic performance. Rent ceilings reduce the quantity and quality of available housing. Points: 1/1 Close Explanation Explanation: While many economic questions are open to debate, the field is largely in agreement on some points. For example, two economists chosen at random are most likely to agree that rent ceilings reduce the quantity and quality of available housing. Indeed, one survey that 93% of economists agree with this 13/20 proposition. It would be harder to find two randomly chosen economists who both agree with either of the other propositions. 12. Economic models The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Which of the following is true regarding this economic model? Because it does not take into account the role of government, the circular-flow diagram is useless for the purposes of modeling how dollars and resources move throughout an economy. While simple, the circular-flow diagram can still be useful for the purposes of modeling how dollars and resources move throughout an economy. Because it does not take into account international trade, the circular-flow diagram is useless for the purposes of modeling how dollars and resources move throughout an economy. Because, in reality, the economy is very large, the simplicity of the circular-flow diagram makes it useless for the purposes of modeling how dollars and resources move throughout an economy. Points: 1/1 Close Explanation Explanation: Scientists of all types make assumptions in their models to simplify the complex world they are trying to describe. These simplifying assumptions allow scientists to focus on only the most important and generalizable components of the topic of study. Economists also make simplifying assumptions to focus on only the most important and generalizable aspects of the economy. Economies typically consist of millions of individuals interacting in many different ways, and no model can include every detail of a system as complex as an economy. To make sense of all of the different aspects of an economy, economists must make simplifying assumptions and generalizations in order to focus on only the most important economic ideas. By grouping all individuals into households and firms and all markets into markets for goods and services and markets for factors of production, economists can model how dollars and resources flow back and forth among agents in the economy. The simplicity of the model allows those without formal 14/20 backgrounds in economics to understand, at a high level, the economic activities that take place in an economy. 13. The circular-flow model The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Based on this model, households earn income when firms purchase factors in factor markets. Points: 1/1 Close Explanation Explanation: In the circular-flow model of an economy, households own all the factors of production. Households earn their income when firms purchase or rent these factors of production to use them to produce goods and services. Firms, in turn, earn revenue when households buy goods and services. Suppose Beth earns $675 per week working as a doctor for the Medical Clinic. She uses $8 to have breakfast at Dinah's Diner. Dinah's Diner pays Andrew $475 per week to work as a short-order cook. Andrew uses $250 to purchase medical services from the Medical Clinic. Identify whether each of the following events in this scenario occurs in the factor market or the product market. Event Factor Market Product Market Andrew earns $475 per week working for Dinah's Diner. 15/20 Event Factor Market Product Market Beth spends $8 to have breakfast. Andrew spends $250 to purchase medical services from the Medical Clinic. Points: 1/1 Close Explanation Explanation: In this scenario, households sell factors of production in factor markets when Beth supplies her labor to the Medical Clinic and when Andrew supplies his labor to Dinah's Diner. Moreover, a firm sells goods and services to a household in product markets when Dinah's Diner provides the breakfast to Beth and the Medical Clinic provides the medical services to Andrew. Which of the elements of this scenario represent a flow from a household to a firm? This could be a flow of dollars, inputs, or outputs. Check all that apply. The $250 Andrew spends to purchase medical services from the Medical Clinic Beth's labor The $475 per week Andrew earns working for Dinah's Diner The breakfast Beth receives Points: 1/1 Close Explanation Explanation: When Beth (a household) supplies her labor to any firm, labor is an input (a factor of production) that flows from a household to a firm. When the breakfast is provided to Beth (a household), the breakfast is an output that flows from a firm to a household. 16/20 Dinah's Diner (a firm) pays Andrew (a household) $475 for his labor. Therefore, the $475 is a payment that flows from a firm to a household. Andrew (a household) pays the Medical Clinic (a firm) $250 for medical services. Therefore, the $250 is a payment that flows from a household to a firm. 14. Sources of data In the following table, indicate whether the researcher in the scenario is collecting experimental data or observational data. Scenario Experimental Data Observational Data An oncologist randomly assigns rats into two groups, giving one group a new drug intended to fight cancer and giving the other group a placebo, in order to study the effects of the new drug. A pediatrician randomly assigns babies to two different groups, giving one group a new type of infant formula and the other group conventional formula, in order to study the effects of the new formula. A sociologist conducts interviews with former protestors and activists in order to study the struggles of the civil rights movement. Points: 1/1 Close Explanation Explanation: 17/20 Randomized controlled trials are experiments in which subjects are randomly assigned to different groups in order to study the effect of a certain treatment. After assigning subjects randomly to different groups, researchers can vary the treatment among the different groups and observe the resulting differences. Experimental data are data that are gathered from randomized controlled trials. In contrast, nonexperimental data are not gathered through randomized controlled experiments and are commonly used in the social sciences, including economics. These data are sometimes called observational data to highlight that the data are collected passively by a researcher via surveys, historical records, and other such sources. Since the pediatrician is conducting a randomized controlled experiment, randomly assigning subjects into treatment and placebo groups, she will be collecting experimental data. The sociologist will be using data that were not gathered from a controlled experiment; therefore, she will be collecting observational data. Lastly, the oncologist is using data that were gathered from a controlled experiment, so she will be collecting experimental data. The issue of reverse causality is more likely to be present in observational data sets than in experimental data sets. Points: 1/1 Close Explanation Explanation: While economists must frequently rely on observational data to test economic theories, there are challenges with conducting statistical analysis on this type of data. One such challenge is that of reverse causality. This issue arises when a researcher incorrectly believes one variable (say, X) influences another variable (say, Y), when in fact it is Y that influences X. For example, suppose you are interested in studying the determinants of height. You might observe that individuals who are on an organized basketball team are taller, on average, than individuals who do not play on a basketball team are. Reverse causality would likely arise if you concluded that playing on a basketball team increased height, and then you conducted your statistical analysis with this assumption. 18/20 15. The different types of data Suppose you have the following data set, which shows information about the GPA (grade point average), class level, SAT score, and major field of study for several college students in a particular year. The following is an example of such a data set. Class Grade Point Average SAT Score 1230 Major 2.6 Junior Sociology 3.9 Senior 1180 Economics ... ... ... ... 1.5 Freshma 1420 Computer Science n The previous data set can best be classified as a cross-sectional data set. A data set that captures information for multiple subjects, at a single point in time, is known as a cross-sectional data set. A data set that captures information about a single subject over time is known as a time-series data set. A data set that captures information about multiple subjects, tracking their information across time, is known as a panel data set. Such a data set combines aspects of both cross-sectional and time-series data. In this case, a data set that captures GPA, class, SAT scores and major field of study for multiple individuals in a given year is best classified as a cross-sectional data set. 16. Goals of data analysis Consider the following scenario. An economist uses historical stock prices of a company to forecast future stock prices and determine optimal equity trading strategies. This scenario most closely aligns with which of the following goals of data analysis? 19/20 Describing the economy Predicting the future Quantifying relationships Testing hypotheses Points: 1/1 Close Explanation Explanation: One important goal of data analysis by economists is forecasting, or the use of data in predicting future events. In practice, economists use historical data to create mathematical models that represent how certain variables are related. Once they have these relationships, they can use hypothetical or projected data to make predictions about the future. For example, if an economist uses data to create a model that posits that stock prices are influenced by GDP, inflation, and company profit, the economist can use hypothetical (or projected) values for these factors to predict what the stock prices will be under various scenarios. 20/20