Chapter 2

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Chapter 2

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

Economists make assumptions

a.	to diminish the chance of wrong answers.
b.	to make the world easier to understand.
c.	because all scientists make assumptions.
d.	to make certain that all necessary variables are included.

The art of scientific thinking includes

a.	knowing how the major organs of the human body work.
b.	understanding every scientific field-physics, biology and economics.
c.	deciding which assumptions to make.
d.	being able to mathematically express natural forces.

The art of scientific thinking is

a.	easier with a solid mathematical background.
b.	the ability to make an abstract subject easy to understand.
c.	deciding which assumptions to make.
d.	not necessary to be an economist.

Economists begin building an economic model by

a.	writing grants for government funding.
b.	conducting controlled experiments in a lab.
c.	making assumptions.
d.	reviewing statistical forecasts.

Factors of production are

a.	the mathematical calculations firms make to determine production.
b.	weather and social and political conditions that affect production.
c.	the physical relationships between economic inputs and outputs.
d.	inputs into the production process.

In the simple circular-flow diagram, the decisionmakers consist of

a.	firms and government.
b.	households and firms.
c.	households and government.
d.	households, firms, and government.

Figure 2-2

Refer to Figure 2-2. Money spent by households

a.	is earned from the sale of factors of production.
b.	becomes profit to firms.
c.	cannot be tracked in the diagram.
d.	is used to purchase factors of production.

When a production possibilities frontier is linear it shows

a.	a truer picture of real life than a bowed out production possibilities frontier.
b.	that resources are perfectly shiftable from the production of one good to another.
c.	an example of increasing opportunity cost.
d.	All of the above are correct.

Figure 2-8

Refer to Figure 2-8. An efficient combination of bathtubs and barrels would be

a.	30 barrels and 6 bathtubs.
b.	20 barrels and 8 bathtubs.
c.	25 barrels and 12 bathtubs.
d.	15 barrels and 12 bathtubs.

10.

A macroeconomist would study each of the following EXCEPT the

a.	impact of minimum-wage laws on employment in the fast food industry.
b.	effect of changes in saving rates on GDP.
c.	impact of monetary policy on the rate of inflation.
d.	effect of tax policy on the rate of economic growth.

11.

Which of the following is an example of a normative statement?

a.	If the price of a product decreases, quantity demanded increases.
b.	Reducing tax rates on the wealthy would be good for the country.
c.	If the national saving rate were to increase, so would the rate of economic growth.
d.	All of the above are correct.

12.

"Prices rise when the government prints too much money" is an example of a

a.	positive economic statement.
b.	statement made by the Carter administration.
c.	normative economic statement.
d.	welfare statement.

13.

Suppose that someone makes the argument that because empty alcohol containers are found at many accidents, the containers cause accidents. This would be an example of

a.	sound logic.
b.	reverse causality.
c.	omitted variables.
d.	slope.

14.

The 2 basic reasons why economists often appear to give conflicting advice to policymakers are differences in

a.	opinions and education.
b.	scientific judgments and values.
c.	scientific judgments and education.
d.	opinions and values.

15.

A survey which asked the opinion of academic, business, and government economists on ten propositions about economic policy found that

a.	the respondents were almost equally divided on the propositions.
b.	the respondents favored the propositions by a slight margin.
c.	the respondents disagreed with the propositions by a slight margin.
d.	there was overwhelming endorsement of the propositions among the respondents.

16.

Economist use graphs to

a.	find how variables are related in the real world.
b.	express economic ideas that cannot be expressed with equations or words.
c.	visually express ideas more clearly than might be the case if they are expressed with equations or words.
d.	Both a and c are correct.
e.	All of the above are correct.

Figure 2-9

17.

Refer to Figure 2-9. The graph shown is known as a

a.	time series.
b.	bar graph.
c.	scatterplot.
d.	pie chart.

Figure 2-10

18.

Refer to Figure 2-10. The movement from point A to point B is a

a.	shift of the curve.
b.	change in preferences.
c.	movement along the curve.
d.	All of the above are correct.

19.

When 2 variables have a negative correlation,

a.	they tend to move in opposite directions.
b.	they tend to move in the same direction.
c.	one variable will move while the other remains constant.
d.	the movement of the two variables is unpredictable.

20.

A relatively steep demand curve means that

a.	quantity demand will adjust slightly to a price change.
b.	quantity demand will adjust greatly to a price change.
c.	quantity demand will not adjust to a price change.
d.	the change in quantity demand will exactly equal a change in price.

True/False

Indicate whether the sentence or statement is true or false.

21.

In a simple circular-flow diagram, firms own the factors of production and use them to produce goods and services.

Figure 2-11

22.

Refer to Figure 2-11. The opportunity cost of more doghouses increases as more doghouses are produced.

Short Answer

23.

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. Cattlemen are now fencing off prairie dog towns on their land so these towns will not be disturbed by their cattle.

Draw a production possibilities frontier showing a rancher's production option between cattle production and prairie dog production showing increasing opportunity cost and show what would happen in each of the following situations. (Use a separate graph for each situation.)

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 not to use 25% 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 prairie dogs since they also eat plant roots.

24.

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

25.

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, 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, other things equal, the demand for automobiles will increase.
g.	The U.S. income distribution is not equitable.
h.	U.S. workers deserve more liberal unemployment benefits.
i.	If interest rates increase, investment will decrease.
j.	If welfare benefits were reduced, the country would be better off.