Foundations of Economics
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Questions and Answers

The Incentive Principle explains that a rational person will participate in more of an activity if:

  • The opportunity cost of the activity decreases.
  • The marginal benefit of the activity rises. (correct)
  • The activity provides greater social recognition.
  • The activity is more enjoyable.

According to the Incentive Principle, when the marginal cost of an activity increases, a rational person will:

  • Remain indifferent to the change in cost.
  • Decrease the level of the activity. (correct)
  • Seek out alternative activities with lower marginal costs.
  • Increase the level of the activity.

A self-interested individual makes decisions based on:

  • The pressure from their peers.
  • The needs of the community.
  • The advice of experts.
  • Their own personal assessment of costs and benefits. (correct)

Which of the following scenarios is NOT a good example of how a self-interested individual might make a decision?

<p>A person donates a significant amount of money to charity because they believe it will make a positive impact on society. (D)</p> Signup and view all the answers

The Incentive Principle helps to explain why people respond to changes in:

<p>Prices and costs. (D)</p> Signup and view all the answers

A professional athlete who chooses to quit their sport for a less demanding job, despite earning a lower salary, is likely motivated by:

<p>The desire to pursue new personal goals. (D)</p> Signup and view all the answers

If the cost of attending a college increases, we would expect:

<p>Fewer people to attend college. (A)</p> Signup and view all the answers

A self-interested individual is motivated by:

<p>Improving their own personal outcomes. (B)</p> Signup and view all the answers

What is the primary focus of microeconomics?

<p>The study of how individual decision makers behave and interact (D)</p> Signup and view all the answers

What does the Cost-Benefit Principle suggest?

<p>To engage in an activity if additional benefits are greater than or equal to additional costs (D)</p> Signup and view all the answers

Which statement best describes a positive statement?

<p>It describes the current functioning of the economy (D)</p> Signup and view all the answers

What occurs as a result of scarcity?

<p>A necessity for making tradeoffs in decision-making (B)</p> Signup and view all the answers

What does Adam's emotional response suggest about his character?

<p>He is a self-interested individual. (D)</p> Signup and view all the answers

What is the Economic Surplus for Alex after attending the comedy show?

<p>From attending the show was ($120)–($70) = ($50). (A)</p> Signup and view all the answers

Which term describes the total economic surplus?

<p>The net difference between total benefits and total costs (B)</p> Signup and view all the answers

What characterizes normative statements?

<p>They reflect the priorities and value judgments of the person making the statement. (B)</p> Signup and view all the answers

How is marginal cost defined?

<p>The cost associated with producing one more unit (D)</p> Signup and view all the answers

What characterizes a rational decision maker?

<p>One who makes choices to maximize their desired outcome (C)</p> Signup and view all the answers

Under what condition should a rational decision maker take action?

<p>Take an action if the Marginal Benefit is at least equal to the Marginal Cost. (C)</p> Signup and view all the answers

What is a common misconception about normative statements?

<p>They describe how the world functions (A)</p> Signup and view all the answers

What did Milton Friedman believe about Mother Theresa?

<p>She was rational but not self-interested. (C)</p> Signup and view all the answers

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

<p>Elvis Presley died on August 16, 1977. (B)</p> Signup and view all the answers

What action did Armen Alchain and Gordon Tullock advocate in their letter to FDR?

<p>To have the U.S. government assist physicists. (B)</p> Signup and view all the answers

What can be concluded about Paula's decision to see 8 movies based on her Marginal Benefit and Marginal Cost?

<p>Her Economic Surplus was clearly maximized by going to the movies exactly 8 times. (B)</p> Signup and view all the answers

Which branch of economics focuses on individual decision-makers and their interactions?

<p>Microeconomics (B)</p> Signup and view all the answers

What best describes a 'Self-Interested' person?

<p>Acts in ways that benefit himself and potentially others. (C)</p> Signup and view all the answers

When considering government policies, which factor should decision makers recognize?

<p>Policy changes can alter costs and benefits for decision makers. (B)</p> Signup and view all the answers

What kind of marginal benefit appears to characterize Ann's iced coffee consumption?

<p>Diminishing marginal benefit (B)</p> Signup and view all the answers

At a cost of $2.25 per cup, how many cups of iced coffee should Ann consume to maximize her benefit?

<p>7 (B)</p> Signup and view all the answers

Which of the following arguments regarding automobile safety is considered less effective?

<p>Implementing a sharp spike on steering wheels. (A)</p> Signup and view all the answers

Which statement about raising the minimum wage is typically supported?

<p>It would decrease unemployment among unskilled workers. (D)</p> Signup and view all the answers

Flashcards

Economics

The study of how people make choices under limited resources and the consequences of those choices on individuals and society.

Scarcity

The situation where there are limited resources to satisfy unlimited wants and needs.

Tradeoffs

The idea that acquiring more of something often means getting less of something else.

Microeconomics

The study of individual decision making and interactions, focusing on how households and firms behave in markets.

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Macroeconomics

The study of the economy as a whole, looking at aggregate measures like inflation, unemployment and GDP growth.

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Positive statement

A statement describing how the world is or functions.

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Normative statement

A statement evaluating the desirability of how the world is or functions, often with suggestions for improvement.

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Cost-Benefit Principle

A principle suggesting individuals should undertake an activity if the additional benefit outweighs the additional cost.

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Incentive Principle

The Incentive Principle states that people will do more of something if the benefits increase and less of something if the costs increase.

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Self-interested individual

A self-interested individual makes decisions based on their own personal assessment of benefits and costs.

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What is Economics?

Economics is the study of how people make choices under limited resources and the consequences of those choices on individuals and society.

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How is the Incentive Principle used in Economics?

The Incentive Principle is used in economics to explain why individuals will engage in more of an activity if its marginal benefit increases, and less if its marginal cost increases.

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Why might fewer people graduate high school if the earnings difference decreased?

If the difference in earnings between high school graduates and non-graduates decreased, fewer people might see the value in graduating high school.

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What happens when the benefits of an activity decrease?

It's likely that more people would drop out of high school if the financial benefit of graduating decreased.

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How does economics analyze decisions?

Economics often focuses on analyzing the impact of decisions on individuals and society as a whole.

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How does economics analyze events and actions?

In economics, we often analyze events and actions to understand their causes and effects.

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Marginal Benefit

The additional benefit gained from taking one more unit of action.

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Marginal Cost

The additional cost incurred from taking one more unit of action.

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Rational Decision Making

A decision-making process that involves weighing the costs and benefits of every action, and selecting the action that maximizes the difference between benefits and costs

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Economic Surplus

The difference between the total benefits and total costs associated with a particular activity.

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Irrational Individual

A person who makes decisions based on emotional impulses and subjective opinions rather than logical reasoning and objective facts.

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Self-Interested

A person who prioritizes their own well-being over the well-being of others, making decisions based on personal gain.

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Policy Changes Influence Behavior

The idea that changes in costs or benefits can result in changes in a decision-maker's behavior. Policies can influence these changes.

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Diminishing Marginal Benefit

A pattern of decreasing additional satisfaction or value with each additional unit consumed. The more you have, the less extra value each unit brings.

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Optimal Consumption

When the additional benefit from consuming one more unit is less than the additional cost, a decision-maker should stop consuming.

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Study Notes

Foundations of Economics

  • Economics is the social science that studies how people make decisions when resources are limited. It considers both individual and societal impacts of these decisions.
  • Scarcity is a fundamental economic concept where limited resources force tradeoffs.
  • Tradeoffs occur because obtaining more of one thing often means foregoing some amount of another.
  • Microeconomics focuses on individual decision makers (like households and firms) and their interactions.
  • Macroeconomics looks at the overall economy, including measures like inflation, unemployment, and GDP growth.
  • Positive statements describe the world as it is, focusing on facts and data.
  • Normative statements express opinions about how the world should be, often incorporating values and judgments.
  • A rational decision maker acts to achieve a well-defined goal by making choices that maximize benefits and minimize costs.
  • Total Benefits are the overall gains from an action.
  • Total Costs are the overall burdens associated with an action.
  • Total Economic Surplus represents the difference between total benefits and total costs.
  • The Cost-Benefit Principle suggests an activity should be pursued if the additional benefits outweigh the additional costs.
  • Marginal Benefit is the change in total benefits from undertaking one additional unit of an activity.
  • Marginal Cost is the change in total costs from undertaking one more unit of the activity.
  • The Incentive Principle highlights that a rational decision maker will adjust their behavior if the associated costs or benefits change.

Multiple Choice Questions (Examples)

  • Incentive Principle: An action should be taken if its additional benefits are at least as great as its additional costs.
  • Economic Surplus: The difference between the total benefits and total costs of an action.
  • Rational Decision-Maker: A person always strives to maximize benefits and minimize costs from a decision.

Additional Concepts (Examples)

  • Self-Interested Individual: A person who considers their own benefits and costs when making decisions.
  • Normative Statements: Statements that express opinions or judgments about how the world should be. They often incorporate values.

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Econ 1000 Study Guide - Contemporary Economic Issues - Foundations of Economics PDF

Description

Explore the fundamental concepts of economics, including scarcity, tradeoffs, and the distinction between microeconomics and macroeconomics. This quiz will test your understanding of key economic principles and the different types of statements in economics, such as positive and normative statements.

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