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essentials of economics

Questions and Answers of Essentials of Economics

9 Positive economics cannot tell us whether an action should be conducted in the public or in the market sector. However, analysis of how both sectors operate does help build the case for conducting
8 The economic incentive for operational efficiency is small for public sector action.No individual or relatively small group of individuals can capture the gains derived from improved operational
7 The shortsightedness effect is another potential source of conflict between good politics and sound economics. Both voters and politicians tend to support projects that promise substantial current
6 Because of imperfect voter information, proposals whose benefits are elusive and whose costs are clear-cut tend to be rejected, even though they might promote the community's welfare.
5 There is a strong incentive for political entrepreneurs to support special interest issues and to make the issues difficult for the unorganized, largely uninformed majority to understand. Special
4 A growing portion of public sector activity involves income redistribution. Economic analysis indicates two potential sources of pressure for income redistribution: (a) the public-good nature of
3 Market failure presents government with an opportunity to undertake action that will result in greater benefits/costs. Other things constant, the greater the social loss resulting from the market
2 Voters cast ballots, make political contributions, lobby, and adopt other political strategies to demand public sector action. Other things constant, voters have a strong incentive to support the
I It is fruitful to analyze the public sector in the same way in which we analyze the private sector. Collective action, through government, has the potential for correcting market failures and
7 What's Wrong with This Way of Thinking?"Corporations are the major beneficiaries of our lax pollution control policy. Their costs are reduced because we permit them free use of valuable resources-
6 Are people more likely to take better care of an item they own jointly (communally)or one they own privately? Why? Does the presence of private property rights affect the behavior of persons in
5 What are public goods? Why does a decentralized pricing system have trouble producing an adequate amount of public goods?
4 Which of the following goods are most likely to result in a large number of dissatisfied customers: (a) light bulbs, (b) food at a local restaurant, (c) food at a restaurant along an interstate
3 "When goods generate external benefits, the market is unable to produce an adequate supply. This is why the government must provide such goods as police and fire protection, education, parks, and
2 Devise a tax plan that would (a) reduce the extent of automobile pollution, (b)provide an incentive for entrepreneurs to develop new products that would limit pollution, and (c) permit continued
1 Why may external cost be a cause of economic inefficiency? Why is it important to define property rights clearly? Explain.
11 The market provides an incentive for consumers to acquire information. When a business is dependent on repeat customers, it has a strong incentive to promote customer satisfaction. However, when
10 When it is costly or impossible to withhold a public good from persons who do not or will not help pay for it, the market system breaks down because everyone has an incentive to become a free
9 In evaluating the case for government intervention in situations involving externalities, one must consider the following factors: (a) the magnitude of the external effects relative to the cost of
8 When the control costs of firms vary, the emission charge (pollution tax) approach will permit society to reduce pollution by a given amount at a lower cost than will the maximum emission standard
7 When the marginal benefits (for example, cleaner air) derived from pollution control are less than the social gains associated with a pollution-generating activity, prohibition of the activity that
6 The efficient use of air and water resources is particularly troublesome for the market because it is often impossible to apportion these resources and determine ownership rights.A system of
5 When external benefits are present, the market demand curve will understate the social gains of conducting the activity. The consumption and production of goods that generate external benefits will
4 External costs result from the failure or inability of a society to establish private property rights. Clearly established private property rights enable owners to prohibit others from using or
3 When external costs originate from the activities of a business firm, the firm's cost curve will understate the social cost of producing the good. If production of the good generates external
2 When externalities are present, the market may fail to confront decision-makers with the proper incentives. Since decision-makers are not forced to consider external cost, they may find it
1 The sources of market failure can be grouped into four major categories: (a) externalities,(b) public goods, (c) poor information, and (d) monopoly.
5 What's Wrong with This Way of Thinking?"Jobs arc the key to'economic progress. Unless we can figure out how to produce more jobs, economic progress will be stifled."
4 What's Wrong with This Way of Thinking?"Higher wages help everybody. Workers arc helped because they can now purchase more of the things they need. Business is helped because the increase in the
3 What are the major factors that would normally explain earnings differences between(a) a lawyer and a minister, lb) an accountant and an dt!mentary-schuul teacher, (c) a business executive and a
2 Why are real wages in the United States higher than in other countries? Is the labor force itself responsible for the higher wages of American workers? Explain.
1 What are the major reasons for the differences in earnings among individuals? Why are wages in some occupations higher than in others? How do wage differentials influence the allocation of
6 Minimum wage legislation increases the earnings of some low-skill workers, but others are forced to accept inferior employment opportunities, join the ranks of the unemployed, or drop out of the
5 Automated methods of production will be adopted only if they reduce cost. Although automation might reduce revenues and employment in a specific industry, the lower cost of production will increase
4 Approximately 80 percent of national income in the United States is allocated to human capital (labor) and 20 percent to owners of physical (nonhuman) capital.
3 The share of GNP allocated to the formation of physical capital is less for the United States than for most other countries. Many economists believe that this low rate of investment is largely
2 Productivity is the ultimate source of high wages. High wages in the United States are the result of large amounts of both human and physical capital.
1 There are three major sources of wage differentials among individuals: differences in workers, differences in jobs, and degree oflabor mobility. Individual workers differ with respect to
6 What's Wrong with This Way of Thinking?"The downward-sloping marginal revenue product curve of labor shows that better workers are hired first. The workers hired later are less productive."
5 "However desirable they might be from an equity viewpoint, programs designed to reduce wage differentials will necessarily reduce the incentive of people to act efficiently and use their productive
4 Are productivity gains the major source of higher wages? If so, how does one account for the rising real wages of barbers, who by and large have used the same technique for half a century? (Hint:
3 Use the information of Exhibit 2 to answer the following:(a) How many skilled laborers would SunKissed hire at a monthly wage of $1 200 if it were attempting to maximize profits in its pool
2 (a) "Firms will hire a resource only if they can make money by doing so." (b) "In a market economy, each resource will tend to be paid according to its marginal product.Highly productive resources
1 What is the meaning of the expression "invest in human capital"? In what sense is the decision to invest in human capital like the decision to invest in physical capital?Is human capital investment
10 Changing resource prices will influence the decisions of both users and suppliers.Higher resource prices give users a greater incentive to turn to substitutes and stimulate suppliers to provide
9 The prices of resources will be determined by both supply and demand. The demand for a resource will reflect the demand for products that it helps to make. The supply of resources will reflect the
8 In the long run, investment and depreciation will alter resource supply. Resource owners will shift factors of production toward areas in which resource prices have risen and away from areas where
7 Resource owners will use their factors of production in the manner that they consider most advantageous to themselves. Many resources will be relatively immobile in the short run. The less mobile a
6 When a firm is minimizing its costs, it will employ each factor of production up to the point at which the marginal product per last dollar spent on the factor is equal for all factors. This
5 Profit-maximizing firms will hire additional units of a resource as long as the marginal revenue product of the resource exceeds its hiring cost, usually the price of the resource. If resources are
4 The demand curve for a resource, like the demand for a product, may shift. The major factors that can increase the demand for a resource are (a) an increase in demand for products that use the
3 The short-run market demand curve will be more inelastic than the long-run curve.It will take time for producers to adjust their production process in o!'d????r to use more of the less expensive
2 The demand for resources is derived from the demand for the products that the resources help to produce. The quantity of a resource demanded is inversely related to its price. If the price of a
1 Factor markets, where productive goods and services are bought and sold, help to determine what is produced, how it is produced, and the distribution of income (output).There are two broad classes
8 Some economists argue that if the government lowered the trade barriers that limit the sale of foreign-produced goods in our domestic market, the need for antitrust action would be reduced. Do you
7 Will social legislation mandating work places and products to be safer reduce the profitability of the regulated firms? Who bears the cost of such legislation? Who receives the primary benefits of
6 Is there any reason to believe that consumer choice and free markets would provide less than the amount of safety desired by purchasers of a product-lawn mowers, for example? Why or why not?
5 Legislation mandating automobiles to be installed with stronger bumpers has presumably made cars both safer and more expensive. Do you think this social regulation has been beneficial? Why or why
4 "Efficiency requires large-scale production. Yet big businesses mean monopoly power, high prices, and market inefficiency. We must choose between production efficiency and monopoly." Evaluate.
3 Currently, antimerger policy does not restrict conglomerate mergers between large firms if such mergers do not reduce competition in a specific market. Do you think such mergers should be
2 Do you think that competition can be counted on to discipline the industrial business firms of a modem economy? Explain.
1 "Big business dominates the U.S. economy. Big business uses its power to decide what products we purchase, what jobs we hold, what kind of homes we live in, and even what political candidates we
9 In recent years, economic regulation has been relaxed, and social regulatory activities have expanded rapidly. Social regulation seeks to provide a cleaner, safer, healthier environment for workers
8 Traditional economic regulation has generally sought to fix prices and/or influence industrial structure. During the 1970s, changing market conditions and recent empirical studies generated
7 To date, economists have been unable to develop a complete theory of regulation.However, economic analysis does suggest that: (a) the demand for regulation often stems from special interest and
6 Most economists believe that antitrust policy in the United States has promoted competition and reduced industrial concentration, but not to any dramatic extent.
5 The Sherman, Clayton, and Federal Trade Commission Acts form the foundation of antitrust policy in the United States. The Sherman Act prohibits conspiracies to restrain trade and/or monopolize an
4 Antitrust legislation seeks to (a) maintain a competitive structure in the unregulated private sector and (b) prohibit business practices that are thought to stifle competition.
3 The 1000 largest corporations employ approximately 18 percent of the U.S. work force. The size of the largest firms, as measured by value added, has grown relative to total manufacturing since 1
2 It is not easy to categorize each industry as competitive or noncompetitive. Nonetheless, empirical research on industrial structure suggests that roughly 40 percent of our economy is highly
I During the first 50 years of this century, the relative size of the manufacturing sector consistently increased, whereas that of the agricultural sector declined. Since 1 950, a new trend has
6 Does economic theory indicate that a monopoly forced by an ideal regulatory agency to set prices according to either marginal or average cost would be more efficient than an unregulated monopoly?
5 Do monopolists charge the highest prices for which they can sell their products? Do they maximize their average profit per sale? Is a monopolistic firm always profitable? Why or why not?
4 Is a monopolist subject to any competitive pressure? Explain. Would an unregulated monopolist have an incentive to operate and produce efficiently? If so, why?
3 "It's wrong to profit from someone else's needs?" Do you agree? (a) Should phy- sicians profit from the illness of their patients? Teachers from the ignorance of their students? Newscasters from
2 What do economists mean when they say that resource allocation is ideal or effi- cient? Why is it sometimes argued that a purely competitive economy will allocate goods ideally? Explain.
1 If the firms in a competitive industry are making short-run profits, what will happen to the market price in the long run? Explain.
13 Even a monopolist is not completely free of competitive pressures. All products have some type of substitute. Some monopolists may charge less than the short-run, profitmaximizing price in order
12 Monopoly will result in higher prices and less output than would be ideal. Regulation will often fail to meet our ideal efficiency criteria because (a) the regulators will not have knowledge of
1 1 Natural monopoly exists when long-run average total costs continue to decline as firm size increases. Thus, a larger firm always has lower costs. Cost of production is lowest in cases in which a
10 Economists are critical of a monopoly because (a) it limits the ability of consumers to "control" the behavior of the producer, (b) the unregulated monopolist produces too little output and
9 A monopolist might make either profits or losses. If profit results, high barriers to entry will shield the monopolist from competitive pressures. Therefore, long-run economic profits are sometimes
8 Legal restrictions, economies of scale, and control of an essential resource are the most common sources of barriers to entry.
7 Monopoly exists when there are high barriers to entry and a single producer of a product for which there are no satisfactory substitutes. A monopolist maximizes profits by expanding output as long
6 Economists often argue that pure competition leads to ideal economic efficiency because (a) costs of production are minimized and (b) profit-maximizing producers produce the goods consumers desire
5 When price exceeds average total costs, a firm will make economic profits. Under pure competition, profits will attract new firms into the industry and stimulate the existing firms to expand. The
4 If a firm is (a) covering its average variable cost and (b) anticipates that the "below average total cost" price will be temporary, it may operate in the short run even though it is experiencing a
3 The firm's short-run marginal cost (above its average variable cost) is its supply curve.
2 Under pure competition, firms are price takers- they face a perfectly elastic demand curve. Profit-maximizing (or loss minimizing) firms will expand output as long as the additional output adds
large number of small (relative to the total market) firms, each producing a homogeneous product in a market for which there is complete freedom of entry and exit. Market prices will be determined by
7 What's Wrong with This Way of Thinking? "The American steel industry cannot compete with German and Japanese steel pro- ducers. After World War II, these countries rebuilt modern, efficient mills
6 Economics students often confuse (a) diminishing returns to the variable factor and (b) diseconomies of scale. Explain the difference between the two and give one example of each.
5 Which of the following are relevant to a firm's decision to increase output: (a) short- run average total cost; (b) short-runmarginal cost; (c) long-run average total cost? Justify your answer.
4 Explain in your own words why a firm's short-run average total cost will decline initially but eventually increase as the rate of output is expanded.
3 Suppose that a firm produces bicycles. Will the firm's accounting statement reflect the opportunity cost of producing bicycles? Why or why not? What costs would an accounting statement reveal?
2 Which of the following do you think reflect sound economic thinking? Explain your answer. (a) "I paid $200 for this economics course. Therefore, I'm going to attend the lectures even if they are
1 What is economic profit? How might it differ from accounting profit? Explain why firms that are making zero economic profit are likely to continue in business.
12 Sunk costs are costs that have already been incurred. They should not exert a direct influence on current business choices. However, they may provide a source of information that will be useful in
1 1 In any analysis of business decision-making, it is important to keep the opportunity cost principle in mind. Economists are interested in costs primarily because costs affect the decisions of
10 In analyzing the general shapes of a firm's cost curves, we assumed that the following factors remained constant: (a) resource prices, (b) technology, and (c) taxes.Changes in any of these factors

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