Positive vs. Normative Economics

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Questions and Answers

An economic model predicts that raising the minimum wage will decrease employment among low-skilled workers. If this prediction is tested and confirmed by empirical evidence, which type of economics is being employed?

Positive economics, due to this approach predicting and describing actual economic phenomena. (correct)
Normative economics, as it involves a value judgment about the desirability of employment levels.
Welfare economics, since the model aims to maximize overall social welfare.
Behavioral economics, because it seeks to understand the psychological biases affecting worker behavior.

A city council is debating whether to implement rent control. Which statement represents a normative economic statement that might be used in this debate?

Rent control will likely benefit current tenants at the expense of future renters, leading to inequitable outcomes. (correct)
Studies show rent control leads to a black market for apartments.
Economists predict that rent control would cause a decrease in the supply of available rental units.
Data indicates that rent control has historically led to decreased property values in similar cities.

A researcher is analyzing the impact of a nationwide carbon tax on various industries. Which aspect of this analysis falls under the scope of macroeconomics?

How the carbon tax affects the production costs of individual firms in the manufacturing sector.
The effect of the carbon tax on the price elasticity of demand for gasoline.
The overall effect of the carbon tax on the country's GDP and employment rates. (correct)
How the carbon tax changes the consumption patterns of individual households.

An economic agent is deciding how to allocate their limited budget between housing, food, and transportation. According to the principle of optimization. What would be considered when making this decision?

The possible options available to them and all available information, in order to make the best feasible choice. (B) Signup and view all the answers

What is the key difference between microeconomics and macroeconomics that distinguishes their respective areas of focus?

Microeconomics studies individual decision-making, while macroeconomics examines the economy as a whole. (B) Signup and view all the answers

A firm is trying to decide whether to invest in new technology that will increase productivity but also require significant upfront costs in training. Using the principle of optimization, what steps should the company take?

Assess all available options and use all available information to compare the costs and benefits of each choice and select the best option. (A) Signup and view all the answers

How does the concept of scarcity fundamentally influence the field of economics?

It necessitates the study of how agents make choices among limited resources. (B) Signup and view all the answers

Consider a government facing a decision on increasing taxes to fund either education or infrastructure projects, but not both. Which approach aligns with normative economics when making this decision?

Determining which investment aligns best with the government's ideological priorities and societal values. (B) Signup and view all the answers

A city is considering building a new park. Which method would MOST comprehensively assess whether the project enhances social welfare?

Conducting a cost-benefit analysis that includes both tangible costs (construction, maintenance) and intangible benefits (recreation, environmental impact), all expressed in a common unit. (D) Signup and view all the answers

In a market where multiple firms are competing, what condition signifies that the market has achieved an equilibrium, according to economic principles?

No firm can improve its position without negatively affecting another firm or its customers. (D) Signup and view all the answers

How might the presence of 'free-riders' affect the provision of public goods or services?

It leads to under-provision of the good or service because individuals benefit without contributing to the cost. (B) Signup and view all the answers

What is the MOST critical difference between correlation and causation in the context of economic analysis?

Correlation implies a statistical relationship, while causation requires a proven direct effect of one variable on another. (C) Signup and view all the answers

In the scientific method, what is the role of a 'model' and why is simplification a necessary aspect of it?

A model is a simplified representation of reality used to make predictions; simplification makes it manageable and understandable. (D) Signup and view all the answers

Consider a study showing a strong positive correlation between ice cream sales and crime rates. What is the MOST likely explanation for this correlation, and what type of bias does it represent?

A third variable, such as warmer weather, influences both ice cream sales and crime rates; represents an omitted variable bias. (A) Signup and view all the answers

In the context of economic experiments, what differentiates a 'natural' experiment from a 'controlled' experiment, and how does this distinction affect the validity of conclusions?

Natural experiments involve subjects being assigned to groups by external events, reducing researcher bias but potentially increasing confounding variables, while controlled experiments allow direct manipulation by researchers. (A) Signup and view all the answers

What characteristics define a 'good' economic question, making it worthy of investigation and capable of advancing social welfare?

It addresses issues with immediate, practical implications and can be empirically tested using available data. (B) Signup and view all the answers

When optimizing 'in differences,' also known as marginal analysis, how should you MOST effectively adjust your choices to achieve the best outcome?

Evaluate how costs and benefits change as you shift from one option to another, and choose the one that makes you better off. (B) Signup and view all the answers

What is the primary economic significance of understanding budget constraints in decision-making?

Budget constraints force individuals to make trade-offs due to limited resources, impacting their choices. (D) Signup and view all the answers

How does the concept of 'opportunity cost' MOST directly influence decision-making in both personal and business contexts?

It necessitates the evaluation of potential foregone benefits from alternative uses of resources, guiding more informed choices. (A) Signup and view all the answers

Which scenario demonstrates the MOST effective application of cost-benefit analysis in making a complex decision?

A government evaluates a proposed healthcare policy by quantifying both the direct expenses and the projected improvements in public health outcomes, all in monetary terms. (E) Signup and view all the answers

What is the most significant implication of the economic principle that 'decisions are optimally made given available information'?

Improved technology will likely lead to increased levels of information which could alter decisions that rely on older ways of thinking. (D) Signup and view all the answers

What is the correct formula that can be used to optimize costs and benefits in a given scenario?

$Marginal\ Benefit \geq Marginal \ Cost$ (D) Signup and view all the answers

In what way do graphs and charts help drive effective financial results?

Summarization of data and models with visual aids (A) Signup and view all the answers

Flashcards

Economics

The study of how agents make choices with scarce resources and the impact of those choices on society.

Economic Agent

Any individual or group that makes choices, such as consumers, firms, or governments.