Economics Study Set 20

Business

Quiz 38 :

The Economic Approach

Quiz 38 :

The Economic Approach

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Indicate how each of the following changes would influence the incentive of a decision-maker to undertake the action described. a. A reduction in the temperature from 80° to 50° on one's decision to go swimming b. A change in the meeting time of the introductory economics course from 11:00 A.M. to 7:30 A.M. on one's decision to attend the lectures c. A reduction in the number of exam questions that relate directly to the text on the student's decision to read the text d. An increase in the price of beef on one's decision to buy steak e. An increase in the rental rates of apartments on one's decision to build additional rental housing units
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It is believed that any rational human being essentially makes a personal cost and benefit comparison before choosing an option and the reason behind such behavior is that human beings respond positively to incentives. In light of this theory we need to analyze how the decisions are influenced under each of the following cases:
(a) When there is a fall in temperature from 80 0 to 50 0 ones decision to go to swimming would be affected adversely. A fall in temperature would reduce the pleasure of swimming.
(b) A change in the meeting time to introductory economics course to early hour of 7.30 A.M will impacts one's decision to attend lectures in a negative way. The reason for such decision would be the outcome of the fact that attending an introductory class in early morning is more costly in terms of the time and the benefit is less, hence the incentive is negative.
(c) A student would decide not to read the text more keenly knowing that the number of exam questions that relate directly to that text has reduced. There would be no reward to the extra effort in terms of questions in exams to the effort of reading the text and hence any incentive.
(d) An increase in the price of beef would lead to increase in the cost of steak and hence demand to buy steak would fall. One would prefer to buy less steak as the price rises.
(e) An increase in the rental rates of apartments would result in the increase in the demand for additional rental housing units. As the income of rental apartment increases the incentive to build rental apartment increases.

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"The government should provide such goods as health care, education, and highways because it can provide them for free." Is this statement true or false? Explain your answer.
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The statement is false.
In reality there is no such thing called free as resources are scarce and human demands are unlimited. A scarce resource has various uses and hence have opportunity cost. Construction of infrastructure like healthcare, education and highways needs the employment of scarce resources like land, labor, capital, entrepreneur which otherwise would have been used for the construction of other productive goods for satisfying other demands. A land used for construction of school can also be used for construction of shopping mall, parking plaza or simply for farming agricultural produce. Construction of school means sacrificing other all other uses of the available scarce land.

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a. What method is used to ration goods in a market economy? How does this rationing method influence the incentive of individuals to supply goods, services, and resources to others? b. How are grades rationed in your economics class? How does this rationing method influence student behavior? Suppose the highest grades were rationed to those whom the teacher liked best. How would this method of rationing influence student behavior?
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a)In a market economy where the free interaction of market demand and supply determines the market clearing output and price, price is used to ration scarce resources.
Price acts as a signal for the supplier. The greater is the price of a commodity greater is the demand of the good and greater is hence the incentive to produce the commodity. The producer gets the incentive to produce more if price is more since it signals a potential source of economic profit. Commodities are rationed in a market economy in such a way that whoever is able and willing to pay the market clearing price would be able to purchase the good.
b)Grades are rationed in economics class in such a way that whoever performs well in the test is able to achieve a higher grade. Grades are hence rationed basis performance in test. This rationing method influences the students in such a way that they are influenced to study more to attain higher grade. Thus grade acts as an incentive to the students who put more effort to attain higher grade.
If grades were rationed in such a way that highest grades are given to those whom the teacher like the best then the incentive structure of marks and effort would be destroyed. Students instead of putting efforts in studying would put more effort in lobbying and favor seeking for the teacher.

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In recent years, the child tax credit has been increased in the United States. According to the basic principles of economics, how will the birthrate be affected by policies that reduce the taxes imposed on those with children?
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"The economic way of thinking stresses that good intentions lead to sound policy." Is this statement true or false? Explain your answer.
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Self-interest is a powerful motivator. Does this necessarily imply that people are selfish and greedy? Do self-interest and selfishness mean the same thing?
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A restaurant offers an "all you can eat" lunch buffet for $10. Shawn has already eaten three servings, and is trying to decide whether to go back for a fourth. Describe how Shawn can use marginal analysis to make his decision.
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"Individuals who economize are missing the point of life. Money is not so important that it should rule the way we live." Evaluate this statement.
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"Positive economics cannot tell us which agricultural policy is better, so it is useless to policy makers." Evaluate this statement.
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"I examined the statistics for our basketball team's wins last year and found that, when the third team played more, the winning margin increased. If the coach played the third team more, we would win by a bigger margin." Evaluate this statement.
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Which of the following are positive economic statements and which are normative? a. The speed limit should be lowered to 55 miles per hour on interstate highways. b. Higher gasoline prices cause the quantity of gasoline that consumers buy to decrease. c. A comparison of costs and benefits should not be used to assess environmental regulations. d. Higher taxes on alcohol result in less drinking and driving.
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Why can't we consume as much of each good or service as we would like? If we become richer in the future, do you think we will eventually be able to consume as much of everything as we would like? Why or why not?
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Suppose that in an effort to help low-skill workers the government raises the permissible minimum wage to $15 per hour. Can you think of any unintended secondary effects that will result from this action? Will all low-skill workers be helped by the minimum wage law?
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Should the United States attempt to reduce air and water pollution to zero? Why or why not?
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