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# Microeconomics Study Set 31

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## Quiz 1 : Economics and Economic Reasoning

Explain how the government might apply economic reasoning in deciding on which of many techniques it should employ to reduce or eliminate terrorist attacks on airlines. What problems can arise when using such an approach?
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If the government believes that the marginal benefits of a particular method of reducing or eliminating terrorist attacks outweigh the marginal costs, then the economic reasoning suggests that the government should do it. One problem with this approach is that, although some of the costs and benefits are clear and measurable, one cannot clearly assign a monetary value to the intangible costs and benefits that arise from the added security measures (e.g. racial profiling or invasion of privacy).

What role does coercion play in an economy?
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Coercion has historically been a part of all economies as they try to solve coordination problems. Specifically coercion involves limiting people's wants and desires and increasing the amount of work individuals are willing to do.

In the late 1970's, the U.S. mandated a maximum highway speed of 55 miles per hour to economize on fuel. Evidence showed that the lower 55-miles-per hour speed limit also significantly reduced traffic fatalities. Nevertheless, when the gas shortage eased, we have returned to the higher speed limits. Provide an economic rationale for not permanently lowering the speed limit to 55 miles per hour when we know that it will save lives.
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Although experience proves that lower speed limits would almost certainly save lives, the opportunity costs of such a policy are considered to be excessive by most policy makers (and voters). If speed limits were set at 55 miles per hour, much more valuable time would be required for everything from commuting, to shipping goods, to leisure travel. Since people's time is scarce, it has a high opportunity cost. We are willing to trade off the costs of higher speed limits-a greater risk of fatalities-in order to avoid the even greater cost of increased time spent traveling from place to place.

What is the invisible hand theory?
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What is scarcity? Why is it so difficult to eliminate it?
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What is economics, and what are the three coordination problems an economy must solve?
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How are the three central economic questions-What, How, and For Whom-related to the concept of scarcity?
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As newly elected President of your school's Economics Club, you must prepare the Club's annual budget of $5,000. Past budgets have included: 1) fees for guest speakers; 2) tours of local businesses; 3) charges for downloading economic statistics; 4) an end-of-semester party; and 5) the Club President's salary. How would the central coordination problems faced by any economic system apply to your task of deciding how to allocate the$5,000?
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What does the term efficiency mean?
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Explain how microeconomics differs from macroeconomics. Explain why the following headlines, taken from various issues of The Wall Street Journal, deal with either microeconomics or macroeconomics. (a) "Microsoft posted a 26% increase in sales" (b) "Housing starts soared 13.3% in September" (c) "Honeywell Plans to Slash More Jobs" (d) "Germany to Breach Key Deficit Target it Helped to Create" (e) "China's Output Grew 8.1%" (f) "Washington Is Urging Canada to Increase Military Spending"
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What is the difference between economic forces and market forces?
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What is the "invisible hand", and how does it work as a market force?
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What is the economic decision rule?
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How did Adam Smith deal with the problem of moving from theorems in positive economics to policy precepts in the art of economics?
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What are the three forces that control economic reality? Give an example of each.
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What is economic reasoning? Give an example.
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