Thinking Like An Economist Part II

SHORT ANSWER 1. Using the outline below, draw a circular-flow diagram representing the interactions between households and firms in a simple economy. Explain briefly the various parts of the diagram. ANS: This diagram should duplicate the essential characteristics of the diagram in the text, with an explanation of the meaning of each flow and each market. It is important that the student understands that the inner loop represents the flow of real goods and services and that the outer loop represents the corresponding flow of payments. 2. The prairie dog has always been considered a problem for American cattle ranchers. They dig holes that cattle and horses can step in, and they eat grass necessary for cattle. Recently, ranchers have discovered that there is a demand for prairie dogs as pets. In some areas, prairie dogs can sell for as high as $150 each. Cattlemen are now fencing off prairie dog towns on their land so these towns will not be disturbed by their cattle. Draw a rancher’s production possibilities frontier showing increasing opportunity cost of cattle production in terms of prairie dog production. Using a separate graph for each situation, show what would happen to the initial production possibilities frontier in each of the following situations: a. The outcome is efficient, with ranchers choosing to produce equal numbers of cattle and prairie dogs. b. As a protest against the government introducing the gray wolf back into the wild in their state, ranchers decide to withhold 25 percent of the available grassland for grazing. c. The price of prairie dogs increases to $200 each, so ranchers decide to allot additional land for prairie dogs. d. The government grants new leases to ranchers, giving them 10,000 new acres of grassland each for grazing. e. A drought destroys most of the available grass for grazing of cattle, but not for prairie dogs since they also eat plant roots. ANS: (a) (b) (c) (d) (e) 3. Draw a production possibilities frontier showing increasing opportunity cost of hammers in terms of horseshoes. a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes. b. On the graph, label a point that is efficient and a point that is inefficient. c. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to make both horseshoes and hammers, on this economy. d. On a second graph, illustrate the effect of a new computerized assembly line in the production of hammers on this economy. ANS: (a-c) 4. (d) Identify each of the following topics as being part of microeconomics or macroeconomics: a. the impact of a change in consumer income on the purchase of luxury automobiles b. the effect of a change in the price of Coke on the purchase of Pepsi c. the impact of a war in the Middle East on the rate of inflation in the United States d. factors influencing the rate of economic growth e. factors influencing the demand for tractors f. the impact of tax policy on national saving g. the effect of pollution taxes on the U.S. copper industry h. the degree of competition in the cable television industry i. the effect of a balanced-budget amendment on economic stability j. the impact of deregulation on the savings and loan industry ANS: a, b, e, g, h, and j are microeconomic topics. c, d, f, and i are macroeconomic topics. 5. Which of the following statements are positive and which are normative? a. The minimum wage creates unemployment among young and unskilled workers. b. The minimum wage ought to be abolished. c. If the price of a product in a market decreases, then, other things equal, quantity demanded will increase. d. A little bit of inflation is worse for society than a little bit of unemployment. e. There is a tradeoff between inflation and unemployment in the short run. f. If consumer income increases, then, other things equal, the demand for automobiles will increase. g. The U.S. income distribution is not fair. h. U.S. workers deserve more liberal unemployment benefits. i. j. If interest rates increase, then investment will decrease. If welfare benefits were reduced, then the country would be better off. ANS: a, c, e, f, and i are positive statements. b, d, g, h, and j are normative statements. Sec00 - Thinking Like an Economist MULTIPLE CHOICE 1. Which of the following is not correct? a. Economists use some familiar words in specialized ways. b. Economics has its own language and its own way of thinking, but few other fields of study do. c. Supply, demand, elasticity, comparative advantage, consumer surplus, and deadweight loss are all terms that are part of the economist’s language. d. The value of the economist’s language lies in its ability to provide you with a new and useful way of thinking about the world in which you live. Sec01 - Thinking Like an Economist - The Economist as Scientist MULTIPLE CHOICE 1. Economists, like mathematicians, physicists, and biologists, a. make use of the scientific method. b. try to address their subject with a scientist’s objectivity. c. devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. d. All of the above are correct. ANS: D 2. The essence of science is a. the laboratory experiment. b. the scientific method. c. the study of nature, but not the study of society. d. All of the above are correct. ANS: B 3. The scientific method is a. the use of modern technology to understand the way the world works. b. the use of controlled laboratory experiments to understand the way the world works. c. the dispassionate development and testing of theories about how the world works. d. the search for evidence to support preconceived theories about how the world works. ANS: C 4. The scientific method is applicable to studying a. natural sciences, but not social sciences. b. social sciences, but not natural sciences. c. both natural sciences and social sciences. d. None of the above is correct. ANS: C 5. Who said, "The whole of science is nothing more than the refinement of everyday thinking"? a. Isaac Newton b. Albert Einstein c. Adam Smith d. Benjamin Franklin ANS: B 6. Albert Einstein once made the following observation about science: a. "The whole of science is nothing more than the refinement of everyday thinking." b. "The whole of science is nothing more than an interesting intellectual exercise." c. "In order to understand science, one must rely solely on abstraction." d. "In order to understand science, one must transcend everyday thinking." ANS: A 7. Sir Isaac Newton's development of the theory of gravity after observing an apple fall from a tree is an example of a. a controlled experiment that lead to the formulation of a scientific theory. b. being in the right place at the right time. c. an idea whose time had come. d. the interplay between observation and theory in science. ANS: D 8. The goal of an economist who formulates new theories is to a. provide an interesting framework of analysis, whether or not the framework turns out to be of much use in understanding how the world works. b. provoke stimulating debate in scientific journals. c. contribute to an understanding of how the world works. d. demonstrate that economists, like other scientists, can formulate testable theories. ANS: C 9. Which of the following statements applies to economics, as well as to other sciences such as physics? a. Experiments are considered valid only when they are conducted in a laboratory. b. Good theories do not need to be tested. c. Real-world observations often lead to theories. d. Economics, as well as other sciences, is concerned primarily with abstract concepts. ANS: C 10. With respect to how economists study the economy, which of the following statements is most accurate? a. Economists study the past, but they do not try to predict the future. b. Economists use < rules of thumb= to predict the future. c. Economists devise theories, collect data, and analyze the data to test the theories. d. Economists use controlled experiments in much the same way that biologists and physicists do. ANS: C 11. Economists face an obstacle that many other scientists do not face. What is that obstacle? a. It is often difficult to formulate theories in economics. b. It is often difficult and sometimes impossible to perform experiments in economics. c. Economics cannot be addressed objectively; it must be addressed subjectively. d. The scientific method cannot be applied to the study of economics. ANS: B 12. In conducting their research, economists face an obstacle that not all scientists face; specifically, in economics, it is often difficult and sometimes impossible to a. make use of theory and observation. b. rely upon the scientific method. c. conduct laboratory experiments. d. find articles or books that were written before 1900. ANS: C 13. The use of theory and observation is more difficult in economics than in sciences such as physics due to the difficulty in a. performing an experiment in an economic system. b. applying mathematical methods to economic analysis. c. analyzing available data. d. formulating theories about economic events. ANS: A 14. Which of the following statements is (are) correct? a. Relative to other scientists, economists find it more difficult to generate useful data. b. Theory and observation are important in economics as well as in other sciences. c. To obtain data, economists often rely upon the natural experiments offered by history. d. All of the above are correct. ANS: D 15. Because it is difficult for economists to use experiments to generate data, they generally must a. do without data. b. substitute assumptions for data when data are unavailable. c. rely upon hypothetical data that were previously concocted by other economists. d. use whatever data the world gives them. ANS: D 16. Which of the following statements is correct? a. Economists almost always find it easy to conduct experiments in order to test their theories. b. Economics is not a true science because economists are not usually allowed to conduct experiments to test their theories. c. Economics is a social science rather than a true science because it cannot employ the scientific method. d. Economists are usually not allowed to conduct experiments, so they must rely on natural experiments offered by history. ANS: D 17. Instead of conducting laboratory experiments to generate data to test their theories, economists often a. ask winners of the Nobel Prize in Economics to evaluate their theories. b. argue that data is impossible to collect in economics. c. gather data from historical episodes of economic change. d. assume that data would support their theories. ANS: C 18. The most common data for testing economic theories come from a. carefully controlled and conducted laboratory experiments. b. computer models of economies. c. historical episodes of economic change. d. centrally planned economies. ANS: C 19. In conducting their research, economists often substitute historical events and historical episodes for a. theories and observations. b. laboratory experiments. c. models. d. assumptions. ANS: B 20. For economists, substitutes for laboratory experiments often come in the form of a. natural experiments offered by history. b. untested theories. c. < rules of thumb= and other such conveniences. d. reliance upon the wisdom of elders in the economics profession. ANS: A 21. Economists regard events from the past as a. irrelevant, since history is unlikely to repeat itself. b. of limited interest, since those events seldom provide any useful economic data. c. interesting but not particularly valuable, since those events cannot be used to evaluate present-day economic theories. d. interesting and valuable, since those events are capable of helping us to understand the past, the present, and the future. ANS: D 22. For economists, historical episodes a. are not worthy of study because they offer few insights into current economic events and problems. b. are not worthy of study because laboratory experiments provide more reliable data. c. are worthy of study because economists rely entirely on observation, rather than on theory. d. are worthy of study because they serve as valuable substitutes for laboratory experiments. ANS: D 23. Historical episodes are a. valuable to economists because they allow economists to see how the science of economics has evolved. b. valuable to economists because they allow economists to evaluate economic theories of the present. c. not of concern to economists because economics is about predicting the future, not dwelling on the past. d. not of concern to economists because the exact circumstances of historical episodes are unlikely to be observed again. ANS: B 24. One thing economists do to help them understand how the real world works is a. make assumptions. b. ignore the past. c. they try to capture every aspect of the real world in the models they construct. d. All of the above are correct. ANS: A 25. Economists make assumptions in order to a. mimic the methodologies employed by other scientists. b. minimize the number of experiments that yield no useful data. c. minimize the likelihood that some aspect of the problem at hand is being overlooked. d. focus their thinking on the essence of the problem at hand. ANS: D 26. Economists make use of assumptions, some of which are unrealistic, for the purpose of a. teaching economics to people who have never before studied economics. b. advancing their political agendas. c. developing models when the scientific method cannot be used. d. focusing their thinking. ANS: D 27. For an economist, the idea of making assumptions is regarded generally as a a. bad idea, since doing so leads to the omission of important ideas and variables from economic models. b. bad idea, since doing so invariably leads to data-collection problems. c. good idea, since doing so helps to simplify the complex world and make it easier to understand. d. good idea, since economic analysis without assumptions leads to complicated results that the general public finds hard to understand. ANS: C 28. An economic theory about international trade that is based on the assumption that there are only two countries trading two goods a. is useless, since the real world has many countries trading many goods. b. can be useful only in situations involving two countries and two goods. c. can be useful in the classroom, but is useless in the real world. d. can be useful in helping economists understand the complex world of international trade involving many countries and many goods. ANS: D 29. The art in scientific thinking -- whether in chemistry, economics, or biology -- is a. the design and implementation of laboratory experiments. b. knowing when to stop collecting data and when to start analyzing the data. c. deciding which assumptions to make. d. being able to mathematically model natural phenomena. ANS: C 30. The art in scientific thinking is a. finding the right problem to study. b. deciding which assumptions to make. c. the ability to make an abstract subject easy to understand. d. not something in which economists have to be skilled. ANS: B