1 Tutorial Introduction Economic Principles

2 1. Macroeconomics is the study of a. the decision making process of economics. b. the movement and trends in the economy as a whole. c. big corporations. d. none of the above. B. Macroeconomics is focused on the movement and trends in the economy as a whole.

3 2. Macroeconomics a. studies the decision making aspects of economics, for example, what price should a business owner charge to maximize profits. b. studies the economic behavior in particular markets. c. studies how prices and quantity of goods are determined in individual markets. d. studies the economic behavior of entire economies, like the economy of the United States or the world. D. Choices a, b, and c are examples of a branch of economics we call microeconomics. Microeconomics deals with the decision making process of economics, whereas macroeconomics looks at the economy in the large, it considers the overall picture.

4 3. Austrian economists differ from Keynesians in that Austrians tend to favor free market solutions to economic problems and Keynesians economists tend to favor more government intervention to solve economic problems. TRUE The main idea of Keynesian economists is that as long as we can manage demand we can manage the economy. Keynesians believe that when demand is insufficient to maintain full employment, the government should take up the slack. Keynesians tend to favor economic planning, like nationalized health care. Austrians favor free market principles with the government making the rules supporting growth and acting as a referee, they are very suspicious of excessive planning because planned economies have always led to economic stagnation and loss of personal freedom.

5 4. Opportunity cost is a. payments for plants and equipment b. payment for plant and equipment minus taxes and labor. c. consumer costs for running a household, food, utilities, rent, and upkeep. d. that which you give up in the best choice when making a decision. D. Each time you make a decision there is something you have to give up. Opportunity cost is not the total of things you have to give up, but the one best thing that you give up because of the choice you made.

6 5. The measure of the opportunity cost of going to college includes the costs of tuition, books, and a. housing. b. housing and food. c. earnings foregone by working less. C. If you are not working because you are a full time student, a part of the cost of your education is the money foregone by not working at the highest paying job you qualify for and you realistically could have obtained. If you are working part time, or at a job that pays you less because of your school schedule, your opportunity cost is the difference between what you are making and what you could have made if it were not for your school schedule.

7 6. Suppose you have to make a decision of how many sodas to buy. You will keep buying additional sodas as long as a. you are thirsty. b. your marginal benefit is greater than your marginal cost. c. your total benefit exceeds your total cost. d. you have money and your wants exceed your needs. B. Each time you make a decision you use marginal analysis. With each soda you consider purchasing you will make a decision on whether you value the money more or the soda more. If a soda is a dollar and you decide that you value a soda more than a dollar, you will buy the soda. If you decide you value the dollar more than a soda, you will not buy that last soda.

8 7. The net benefit of an activity is the a. value of benefits to others in the economy. b. sum of all the benefits from that activity. c. non-monetary benefits from that activity. d. total benefits minus the total costs of that activity. D. The term net means the difference between costs and benefits. Because there are costs and benefits in every activity you will engage in, you will either experience a net benefit or a net loss.

9 8. Rational choices must be based on a. complete knowledge and correct information. b. the least amount of information possible. c. self-interest. d. expected opportunity cost. D. All decisions are based on expectations of the gains and costs of that decision. For every decision you make you ask yourself (sometimes unconsciously) “what will I have to give up for making this decision and how much will I gain?”

10 9. The opportunity cost of an activity a. depends on the individual’s subjective values and opinions. b. is the same for everyone. c. must be calculated and known before undertaking the activity. A. Opportunity cost is a very personal thing, it differs from person to person. For example, should you paint your house or hire someone to paint it? If you can make $20 an hour and pay someone $8 an hour, you should hire the work out. However, if you can only make $7 an hour, it is better to paint the house yourself.

Your opportunity cost when choosing a particular activity a. can be easily and accurately calculated. b. cannot be estimated. c. does not change over time. d. varies, depending on time and circumstances. D. For example, the opportunity cost of cleaning your bedroom is higher on a sunny day then it would be on a rainy day. There are more things you can do outside when the sun is shining than you can do when it is raining.

Ann and Bob are business partners. Ann can type one page every 5 minutes, and she can complete one page of accounting every 15 minutes. Bob can type one page or complete one page of accounting every 10 minutes. Which statements are true? a. Bob has a comparative advantage in both activities. b. Bob has an absolute advantage in both activities. c. Ann should type and Bob should do the accounting. C. Ann has higher opportunity costs of doing the accounting than Bob, and Bob has higher opportunity costs of doing the typing.

Buying stock on the margin means a. buy shares of stock just before the price falls. b. buying stock using the rule of 78s. c. Buy shares of stock at the very bottom so that the price has to increase. d. Borrowing money from your stock broker to buy shares of stock. D. Buying stock on the margin is an example of using leverage. If you borrow half the money to purchase shares of a stock and the price increases, your gain is doubled because you own twice as many shares.

When a company has more debt than equity, economist say that it is a. underwater. b. bankrupt. c. leveraged. d. insolvent. C. Leverage is the practice of using debt to make an investment. Leverage can multiply gains, but it can also multiply losses.

Price elasticity of demand is a. solely measured. b. A way for economists to calculate the point of profit maximization. c. At the point where marginal revenue equals marginal cost. d. Used to show responsiveness, or elasticity, of the quantity demanded of a good or service to a change in price. D. Much of economics involves the process of making decisions. If you own a business and you consider raising your prices, will your total revenue go up or down? Revenue will increase if a product faces an inelastic demand curve and will decrease if it is price elastic.

What is rent seeking? a. Happens when people are looking for a place to rent. b. Businesses financially support politicians to gain favor. c. Happens when landlords advertise for renters. d. the direct exchange of goods, without the use of money. B Big business can often get more bang for their buck by giving money to politicians to influence legislation that would favor them in the market place rather than spending the money on a better product.

If a product faces an price inelastic demand curve, total revenue will decrease when the price increases. FALSE Total revenue will increase because the amount of money gained from the higher prices will more than offset the money lost due to a decline in sales.

What is moral hazard? a. Occurs when businesses are insulated from risk and therefore are encouraged to take big risks. b. Happens when there is a break down of morals in society. c. Is a term which signifies the difficulty of staying moral in a modern society. d. Can only occur when people have the freedom of choice. A. This term goes along with the concept of rent seeking. When business are always bailed out and do not incur losses when investments go bad, they will be encouraged to make high risk investments.

Marginal analysis is an economic principle. TRUE Each time you make a decision you use marginal analysis. Each time you have a choice between alternatives, will you choose this, or will you chose that? You will make the choice whereby your total level of satisfaction elevates the most. Your decision is based on the margin, or the last unit.

Which of the following is an economic principle? a. Marginal analysis. b. Leverage c. Opportunity cost d. Elasticity of demand e. All of the above E. The principles of economics are concepts, a way of thinking, which enables us to better understand cause and effect in a changing economy. These principles form the foundation of economic analysis.

Which of the following is an example of rent seeking? a. When a business operates where marginal revenue equals marginal cost it is practicing the concept of rent seeking. b. When a business borrows money and makes a profit it has demonstrated the advantages of rent seeking. c. A corporation lobbies Congress for special favors. C. As a business owner, suppose you had a million dollars to invest. Do you invest in a better product or put the money influencing decisions in Congress that would benefit your business? Money spent influencing political decisions is what we call rent seeking.

A stock is a time-dimensional variable, a flow is not. FALSE Each time a change takes place there is a short run (stock) and a long run (flow) effect. The short run does not consider changes that can occur over time, the long run considers consequential changes over time. If taxes increase, government revenues may increase in the short run, but if personal incomes decrease over the long run, government revenue will decline instead.

Economies of scale recognizes that as a business grows, its costs can decrease up to a certain point. TRUE As a business grows there are many reasons why costs can decrease. A large business can better utilizes a division of labor, buying in bulk, and more efficient machines. This is one reason a large business may favor minimum wage laws and a small business will appose such laws. A large business can better afford higher wages because they can take advantage of economies of scale.

Gross Domestic Product (GDP) is the monetary value of all new and final goods and services produced within a country’s borders in a specific time period, usually a year. TRUE A big part of macroeconomics is to know where we have come from and to where we are going. Are things getting better or getting worse? Are we growing more or less than we did last year? GDP is one way for economists to gauge the extent of growth, or the lack of growth.

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