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essentials of economics

Questions and Answers of Essentials of Economics

6. Suppose that a politician tells you about a plan to create two expensive but necessary programs to build more production facilities for solar power and wind power. At the same time, the politician
Suppose that an amazing new fertilizer doubles the production of potatoes. How would this discovery affect the production possibilities frontier between potatoes and carrots? Would it now be possible
10. What function does money play in an economy?
9. Which two markets make up the circular flow model? Who are the actors in the circular flow model?
8. What factors are most important for economic growth?
7. Why does comparative advantage matter more than absolute advantage for trade?
6. What criteria would you use to determine which of two workers has a comparative advantage in performing a task?
5. Does having an absolute advantage mean that you should undertake everything on your own? Why or why not?
4. Why does the production possibilities frontier bow outward? Give an example of two goods for which this would be the case.
3. Draw a production possibilities frontier curve.Illustrate the set of points that is feasible, the set of points that is efficient, and the set of points that is not feasible.
2. Is it important to build completely realistic economic models? Explain your response.
1. What is a positive economic statement? What is a normative economic statement? Provide an example of each.
What are the benefi ts of specialization and trade?
What is a production possibilities frontier?
how do economists study the economy?
7. You should eat fi ve servings of fruit or vegetables each day.
6. The average temperature in Fargo, North Dakota, in January is 56 degrees Fahrenheit.
5. University of Virginia graduates earn more than Duke University graduates.
4. Everyone ought to have a life insurance policy.
3. On average, people save 15% on their car insurance when they switch to Geico.
2. Everyone should work at a bank to learn the true value of money.
1. Winters in Arkansas are too cold.
✷ how does the economy work?
✷ What is a production possibilities frontier?•✷ What are the benefi ts of specialization and trade?
✷ how do economists study the economy?
a positive incentive.This incentive provides extra motivation to study hard and achieve an A, since it pays cash, as opposed to earning a B or lower.
6. The contest is using the power of incentives to motivate learning. Earning a letter grade is a positive motivation to do well, or a penalty—or negative incentive—when you do poorly.This
4. If Colombia decided to specialize in the production of coffee, it could trade coffee to Canada in exchange for computer software.This process illustrates gains from specialization and trade. Both
b. The “sales tax holiday” is a direct positive incentive to buy more clothes during the back-to-school period. An unintended consequence of this policy is that people are likely to make fewer
5. Give a personal example of how pursuing your self-interest has made society better off.CONCEPTS YOU SHOUL D KNOW comparative advantage (p. 17)economics (p. 6)economic thinking (p. 11)incentives
4. Evaluate the following statement: “Trade is like football: one team wins and the other loses.”
3. What is the opportunity cost of reading this textbook?
2. Explain why many seniors often earn lower grades in their last semester before graduation.Hint: this is an incentive problem.
1. How would you respond if your instructor gave daily quizzes on the course readings?Would this be a positive or a negative incentive?
6. Suppose that 20 students from your economics class each pay $20 to enter a grades-based contest. This would create a $400 prize pool.An equal share of the $400 pot is awarded at the end of the
a rational choice? Explain your response.
5. After some consideration, you decide to hire someone to help you move. Wouldn’t it be cheaper to move yourself? Do you think this is
4. Suppose that Colombia is good at growing coffee but not very good at making computer software, and that Canada is good at making computer software but not very good at growing coffee. The two
3. By referencing events in the news or something from your personal experiences, describe one example of each of the four key principles involved in thinking like an economist.
2. Compare your standard of living with that of your parents when they were the same age as you are now. Ask them or somebody you know around their age to recall where they were living and what they
b. A state government announces a “sales tax holiday” for back-to-school shopping during one week each August.
a. You learn that you can resell a ticket to next week’s homecoming game for twice what you paid.
1. What role do incentives play in each of the following situations?
5. Give a personal example of how pursuing y
4. Evaluate the following statement: “Trade is like football: one team wins and the other loses.”
3. What is the opportunity cost of reading this textbook?
2. Explain why many seniors often earn lower grades in their last semester before graduation.Hint: this is an incentive problem.
1. How would you respond if your instructor gave daily quizzes on the course readings?Would this be a positive or a negative incentive?
Trade creates value because participants in markets are able to specialize in the production of goods and services in which they have a comparative advantage.
Incentives matter because they help explain how decisions are made.
Marginal thinking requires you to weigh the extra benefi ts against the extra costs of a decision.
Each time you make a choice, you make a trade- off and experience an opportunity cost, or a lost chance to do something else.
You can think like an economist by remembering these four key principles:(1) all choices entail opportunity costs; (2) decisions are made at the margin; (3) incentives matter; and (4) trade creates
Economics is the study of how people allocate their limited resources to satisfy their nearly unlimited wants. Because of the limited nature of society’s resources, even the most abundant resources
What are four ways to think like an economist?
What is economics?
18. In each of the following scenarios, suppose that the two nations are the only trading nations in the world. Given inflation and the change in the nominal exchange rate, which nation’s goods
17. Before the North American Free Trade Agreement (NAFTA)gradually eliminated import tariffs on goods, the autarky price of tomatoes in Mexico was below the world price and in the United States was
16. The accompanying table shows the U.S. domestic demand schedule and domestic supply schedule for oranges. Suppose that the world price of oranges is $0.30 per orange.
15. Suppose the United States and Japan are the only two trading countries in the world. What will happen to the value of the U.S. dollar if the following occur, other things equal?a. Japan relaxes
14. Go to http://fx.sauder.ubc.ca. Using the table labeled “The Most Recent Cross-Rates of Major Currencies,” determine whether the British pound (GBP), the Canadian dollar(CAD), the Japanese yen
13. Based on the exchange rates for the first trading days of 2007 and 2008 shown in the accompanying table, did the U.S. dollar appreciate or depreciate during 2007? Did the movement in the value of
12. In the economy of Popania in 2008, total Popanian purchases of assets in the rest of the world equaled $300 billion, purchases of Popanian assets by the rest of the world equaled$400 billion, and
11. In the economy of Scottopia in 2008, exports equaled $400 billion of goods and $300 billion of services, imports equaled$500 billion of goods and $350 billion of services, and the rest of the
10. The accompanying diagram shows the assets of the rest of the world that are in the United States and U.S. assets abroad, both as a percentage of rest-of-the-world GDP. As you can see from the
9. How would the following transactions be categorized in the U.S. balance of payments accounts? Would they be entered in the current account (as a payment to or from a foreigner) or the financial
8. The accompanying table indicates the U.S. domestic demand schedule and domestic supply schedule for commercial jet airplanes. Suppose that the world price of a commercial jet airplane is $100
7. Shoes are labor-intensive and satellites are capital-intensive to produce. The United States has abundant capital. China has abundant labor. According to the Heckscher–Ohlin model, which good
5, but in step (viii) select “December” and “2000.”a. What has happened to the value of U.S. imports of hats and caps from China between 2000 and 2006?b. What prediction does the
6. Compare the data for U.S. imports of hats and caps from China in 2006 that you found in Problem 5, with the same data for the year 2000. Repeat the steps outlined in Problem
5. The U.S. Census Bureau keeps statistics on U.S. imports and exports on its website. The following steps will take you to the foreign trade statistics. Use them to answer the questions below.(i) Go
4. For each of the following trade relationships, explain the likely source of the comparative advantage of each of the exporting countries.a. The United States exports software to Venezuela, and
3. Both Canada and the United States produce lumber and music CDs with constant opportunity costs. The United States can produce either 10 tons of lumber and no CDs, or 1,000 CDs and no lumber, or
How many cars does the United States export? Suppose a car costs $10,000 on the world market. How much, then, does a barrel of oil cost on the world market?
How many barrels of oil does the United States import?
c. Suppose that, in fact, Saudi Arabia consumes 300 million barrels of oil and 4 million cars and the United States consumes 500 million barrels of oil and 6 million cars.
b. Is it possible for Saudi Arabia to consume 400 million barrels of oil and 5 million cars and for the United States to consume 400 million barrels of oil and 5 million cars?
a. What is the total quantity of oil produced? What is the total quantity of cars produced?
2. The production possibilities for the United States and Saudi Arabia are given in Problem 1. Suppose now that each country specializes in the good in which it has the comparative advantage, and the
b. Which country has the comparative advantage in producing oil? In producing cars?
a. What is the opportunity cost of producing a car in Saudi Arabia? In the United States? What is the opportunity cost of producing a barrel of oil in Saudi Arabia? In the United States?
1. Assume Saudi Arabia and the United States face the production possibilities for oil and cars shown in the accompanying table.
12. To correct for international differences in inflation rates, economists calculate real exchange rates,
11. Currencies are traded in the foreign exchange market; the prices at which they are traded are exchange rates. When a currency rises against another currency, it appreciates; when it falls, it
10. The underlying determinants of capital flows are international differences in savings and opportunities for investment spending.
9. A country’s balance of payments accounts summarize its transactions with the rest of the world. The balance of payments on current account, or current account, includes the balance of payments
8. A tariff is a tax levied on imports. It raises the domestic price above the world price, hurting consumers, benefiting domestic producers, and generating government revenue. As a result, total
7. Most economists advocate free trade, but in practice many governments engage in trade protection. The two most common forms of protection are tariffs and quotas. In rare occasions, export
6. International trade leads to expansion in exporting industries and contraction in import -competing industries. This raises the domestic demand for abundant factors of production, reduces the
5. If the world price is below the autarky price, a good is imported. This leads to an increase in consumer surplus, a fall in producer surplus, and a gain in total surplus. If the world price is
4. The domestic demand curve and the domestic supply curve determine the price of a good in autarky. When international trade occurs, the domestic price is driven to equality with the world price,
3. In practice, comparative advantage reflects differences between countries in climate, factor endowments, and technology. The Heckscher–Ohlin model shows how differences in factor endowments
2. The Ricardian model of international trade assumes that opportunity costs are constant. It shows that there are gains from trade: two countries are better off with trade than in autarky.
1. International trade is of growing importance to the United States and of even greater importance to most other countries. International trade, like trade among individuals, arises from comparative
2. A basket of goods and services that costs $100 in the United States costs 800 pesos in Mexico, and the current nominal exchange rate is 10 pesos per U.S. dollar. Over the next five years, the cost
1. Mexico discovers huge reserves of oil and starts exporting oil to the United States. Describe how this would affect the following:a. The nominal peso–U.S. dollar exchange rateb. Mexican exports
2. Suppose China decides that it needs a huge program of infrastructure spending, which it will finance by borrowing. How would this program affect the U.S. balance of payments?
1. Which of the balance of payments accounts do the following events affect?a. Boeing, a U.S.-based company, sells a newly built airplane to China.b. Chinese investors buy stock in Boeing from
2. Suppose the government imposes an import quota rather than a tariff on butter. What quota limit would generate the same quantity of imports as a tariff of $0.50 per pound?
b. What happens if a tariff greater than $0.50 per pound is imposed?

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