Chapter1—TheRoleandMethodofEconomics
TRUE/FALSE
1. Whenourlimitedwantsexceedourunlimitedresources,wefacescarcity.
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2. Choicesarecostlybecausewemustgiveupotheropportunitiesthatwevalue.
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3. Livinginaworldofscarcityinvolvestrade-offs.
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4. Self-interestcannotincludebenevolence.
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5. Tosaythatpeoplearerationalistoassumethattheynevermakemistakes.
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6. AdamSmithdescribedhowself-interestcanbeaforceforthecommongood.
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7. AccordingtotheNationalCouncilofEconomicEducation,mostadultstestedintheUnitedStatesperformedwelloneconomicliteracy.
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8. Rationalityimpliesthatsomeonewithasuspendeddriver’slicensewouldnotdrive.
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9. Economictheoriesdonotabstractfromtheparticulardetailsofsituationssotheycanbetterfocusoneveryaspectofthebehaviortobeexplained.
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10. Determiningwhetheraneconomichypothesisisacceptableismoredifficultthaninthenaturalorphysicalsciencesbecause,unlikeachemistinachemistrylab,aneconomistcannotcontrolalltheothervariablesthatmightinfluencehumanbehavior.
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11. Microeconomicswoulddealwiththeanalysisofasmallindividualfirm,whilemacroeconomicswoulddealwithlargeglobalfirms.
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12. Apositivestatementmustbebothtestableandtrue.
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13. Normativeanalysisinvolvessubjective,nontestablestatements.
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14. Themajorityofdisagreementsineconomicsstemfromnormativeissues.
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15. Ahypothesisisanormativestatement.
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MULTIPLECHOICE
1. Ifagoodisscarce,
a. itonlyneedstobelimited. b. itisnotpossibletoproduceanymoreofthegood. c. ourunlimitedwantsexceedourlimitedresources. d. ourlimitedwantsexceedourunlimitedresources.
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2. Whichofthefollowingistrueofresources?
a. Theiravailabilityisunlimited. b. Theyaretheinputsusedtoproducegoodsandservices. c. Increasingtheamountofresourcesavailablecouldeliminatescarcity. d. Bothbandc.
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3. Ifscarcitywerenotafact,
a. peoplecouldhaveallthegoodsandservicestheywantedforfree. b. itwouldnolongerbenecessarytomakechoices. c. poverty,definedasthelackofaminimumlevelofconsumption,wouldalsobeeliminated. d. alloftheabovewouldbetrue.
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4. Economicsisconcernedwith
a. thechoicespeoplemustmakebecauseresourcesarescarce. b. humandecisionmakersandthefactorsthatinfluencetheirchoices. c. theallocationoflimitedresourcestosatisfyunlimitedwants. d. alloftheabove.
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5. Whichofthefollowingwouldreflectself-interestedbehaviortoaneconomist?
a. workerpursuingahigher-payingjobandbetterworkingconditions b. consumerseekingahigherlevelofsatisfactionwithhercurrentincome c. MotherTeresausingherNobelPrizemoneytocareforthepoor d. alloftheabove
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6. Wheneconomistsassumethatpeopleactrationally,itmeansthey
a. alwaysmakedecisionsbasedoncompleteandaccurateinformation. b. makedecisionsthatwillnotberegrettedlater. c. dothebesttheycanbasedontheirvaluesandinformationundercurrentandfuturecircumstances. d. makedecisionsbasedsolelyonwhatisbestforsociety. e. commitnoerrorsinjudgment.
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7. Whenwelookataparticularsegmentoftheeconomy,suchasagivenindustry,wearestudying.
a. macroeconomics. b. microeconomics. c. normativeeconomics. d. positiveeconomics.
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8. Whichofthefollowingismostlikelyatopicofdiscussioninmacroeconomics?
a. anincreaseinthepriceofapizza b. adecreaseintheproductionofVCRsbyaconsumerelectronicscompany c. anincreaseinthewageratepaidtoautomobileworkers d. adecreaseintheunemploymentrate e. theentryofnewfirmsintothesoftwareindustry
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9. Economistsusetheoriesto
a. abstractfromthecomplexitiesoftheworld. b. understandeconomicbehavior. c. explainandhelppredicthumanbehavior. d. doalloftheabove. e. dononeoftheabove.
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10. Theimportanceoftheceterisparibusassumptionisthatit
a. allowsonetoseparatenormativeeconomicissuesfrompositiveeconomicones. b. allowsonetogeneralizefromthewholetotheindividual. c. allowsonetoanalyzetherelationshipbetweentwovariablesapartfromtheinfluenceofothervariables. d. allowsonetoholdallvariablesconstantsotheeconomycanbecarefullyobservedinasuspendedstate.
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11. WhichofthefollowingstatementscanexplainwhycorrelationbetweenEventAandEventBmaynotimplycausalityfromAtoB?
a. Theobservedcorrelationmaybecoincidental. b. Athirdvariablemayberesponsibleforcausingbothevents. c. CausalitymayrunfromEventBtoEventAinsteadofintheoppositedirection. d. Alloftheabovecanexplainwhythecorrelationmaynotimplycausality.
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12. Ten-year-oldTommyobservesthatpeoplewhoplayfootballarelargerthanaverageandtellshismomthathe’sgoingtoplayfootballbecauseitwillmakehimbigandstrong.Tommyis
a. committingthefallacyofcomposition. b. violatingtheceterisparibusassumption. c. mistakingcorrelationforcausation. d. committingthefallacyofdecomposition.
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13. Whichofthefollowingcorrelationsislikelytoinvolveprimarilyonevariablecausingtheother,ratherthanathirdvariablecausingthemboth?
a. Theamountoftimeateam’sthirdstringplaysinthegametendstobegreater,thelargertheteam’smarginofvictory. b. Highericecreamsalesandhighercrimeratesbothtendtoincreaseatthesametime. c. Alowerpriceofaparticulargoodandahigherquantitypurchasedtendtooccuratthesametime. d. Thelikelihoodofraintendstobegreaterafteryouhavewashedyourcar.
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14. Whichofthefollowingisastatementofpositiveanalysis?
a. Newtaxlawsareneededtohelpthepoor. b. Teenageunemploymentshouldbereduced. c. WeshouldincreaseSocialSecuritypaymentstotheelderly. d. Anincreaseintaxrateswillreduceunemployment. e. Itisonlyfairthatfirmsprotectedfromcompetitionbygovernment-grantedmonopoliespayhighercorporatetaxes.
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PROBLEM
1. Arethefollowingtopicsonesthatwouldbecoveredinmicroeconomicsormacroeconomics?
a.theeffectsofanincreaseinthesupplyoflumberonthehome-buildingindustry
b.changesinthenationalunemploymentrate
c.changesintheinflationrate
d.changesinthecountry’seconomicgrowthrate
e.thepriceofconcerttickets
ANS:
a.microeconomics
b.macroeconomics
c.macroeconomics
d.macroeconomics
e.microeconomics
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2. Doanyofthefollowingstatementsinvolvefallacies?Ifso,whichonesdotheyinvolve?
a. Becausesittinginthebackofclassroomsiscorrelatedwithgettinglowergradesintheclass,studentsshouldalwayssitclosertothefrontoftheclassroom. b. Historically,thestockmarketrisesinyearstheNFCteamwinstheSuperBowlandfallswhentheAFCwinstheSuperBowl;IamrootingfortheNFCteamtowinforthesakeofmyinvestmentportfolio. c. Whenabasketballteamspendsmoretogetbetterplayers,itismoresuccessful,whichprovesthatalltheteamsshouldspendmoretogetbetterplayers. d. Gasolinepriceswerehigherlastyearthanin1970,yetpeoplepurchasedmoregas,whichcontradictsthelawofdemand. e. AnincreaseintheamountofmoneyIhavewillmakemebetteroff,butanincreaseinthesupplyofmoneyintheeconomywillnotmakeAmericansasagroupbetteroff.
ANS:
a.Thisinvolvesconfusingcorrelationwithcausation
b.Thisinvolvesconfusingcorrelationwithcausation
c.Thisinvolvesthefallacyofcomposition
d.Thisisaviolationoftheceterisparibusconditions
e.Thereisnofallacyinthisstatement
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3. Arethefollowingstatementsnormativeorpositive,ordotheycontainbothnormativeandpositivestatements?
a. Ahigherincome-taxratewouldgenerateincreasedtaxrevenues.Thoseextrarevenuesshouldbeusedtogivemoregovernmentaidtothepoor. b. Thestudyofphysicsismorevaluablethanthestudyofsociology,butbothshouldbestudiedbyallcollegestudents. c. Anincreaseinthepriceofcornwilldecreasetheamountofcornpurchased.However,itwillincreasetheamountofwheatpurchased. d. Adecreaseinthepriceofbutterwillincreasetheamountofbutterpurchased,butthatwouldbebadbecauseitwouldincreaseAmericans’cholesterollevels. e. Thebirthrateisreducedaseconomiesurbanize,butitalsoleadstoadecreasedaverageageofdevelopingcountries’populations.
ANS:
a.Bothnormativeandpositivestatements.
b.Normativestatements.
c.Positivestatements.
d.Bothnormativeandpositivestatements.
e.Positivestatements.
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4. Answerthefollowingquestions:
a.Whatisthedifferencebetweenself-interestandselfishness?
b.Whydoesinactionhaveconsequences?
c.Whyareobservationandpredictionmoredifficultineconomicsthaninchemistry?
d.Whydoeconomistslookatgroupbehaviorratherthanindividualbehavior?
ANS:
a. Self-interestisthedesiretoimproveone’slife.Itincludesthedesiretoadvanceanygoalonecaresabout,includingmany“altruistic”goals,suchashelpingthepoor.Selfishnessisthe“excessive”concernforoneselfandone’sownadvantagewithoutregardforothers. b. Inactionsarechoicesnottodosomething.Inactions,likeactions,haveconsequences.Forexample,ifyouchoosenottostudy,youmayfailanexam. c. Observationandpredictionaremoredifficultineconomicsthaninchemistrybecause,unlikechemists,economistsgenerallycannotobservebehaviorinalaboratorysettingwhereallrelevantenvironmentalvariablescanbecarefullycontrolled.Economistsstudyeconomicbehaviorintherealworld,wheremanyvariablesinfluencebehaviorsimultaneously.Itisdifficultinacomplexglobaleconomytoobserveandpredictrelationshipsbetweenvariables,isolatedfromothereffects. d. Economicsisconcernedwithreachinggeneralizationsabouthumanbehavior.Ifonegeneralizesonthebasisofobservedindividualbehavior,oneriskscommittingthefallacyofcomposition.Generalizationsbaseduponobservedgroupbehaviorarelikelytobebothmorerealisticanduseful(reliable).
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5. Usingthemapanalogyfromthechapter,talkabouttheimportanceofabstraction.Howdoyouabstractwhentakingnotesinclass?
ANS:
Abstractionenablesanobservertohighlightwhatareconsideredsignificantdetailsforherpurposes.Ifmapsattemptedtocaptureeventhemostminuteofdetails,theywouldbefartoocomplicatedanddifficulttoreadfortheirintendedpurposes.Instead,goodmapsprovideusefulinformationbyhighlightingimportantfeatures.Likewise,studentsabstractwhentakingnotes.Ratherthanattempttowritedowneverywordspokenbyaninstructor,astudentislikelytooutlinethemainideasthatareexpressed.Byabstractinginthisway,astudentcanmastertheinformationthatismostessentialtounderstandingthetopicathand.
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