Question 1

Which of the following is a positive statement?

Accepted Answer

A positive statement is a statement that can be proven or disproven through empirical evidence. Option B is a statement that can be analyzed using economic theory and empirical data to determine whether minimum wage laws are Pareto efficient, making it a positive statement. Options A, C, and D are normative statements, which express an opinion or value judgment and cannot be proven true or false through empirical evidence.

Question 2

A policy by which some parties gain and others lose,but for which the gainers fully compensate the losers is

Accepted Answer

This policy is known as Pareto improving because it results in a net gain for society as a whole, even though some individuals may lose out. This is because the gainers fully compensate the losers, so no one is worse off than they were before. Therefore, it leads to a more efficient allocation of resources without causing any inequity.

Question 3

A regression estimates that Q = 35 - 0.1 *X,where Q is the quit rate,X is the number of employees at the firm,and the firm sizes in the data set range from 50 to 100.If the firm has 350 employees then

Accepted Answer

The regression model provided is based on data for firms with 50 to 100 employees. Since the firm in question has 350 employees, it falls outside the range of the data used to create the model. Therefore, predictions made for this firm using the given model may not be accurate or reliable.

Question 4

Which of the following best illustrates an externality?

Accepted Answer

An externality is a cost or benefit that affects a party who did not choose to incur that cost or benefit. In this case, the pollution emitted by the production method affects the nearby community who did not choose to incur that cost. Therefore, D best illustrates an externality. A, B, and C do not necessarily involve an externality.

Question 5

In Job X,the employer gets a gross benefit of $600 a week from employing a worker (this is the highest wage the employer will pay).The worker is willing to work for the employer if paid $400 a week or more.Which of the following is Pareto efficient?

Accepted Answer

A Pareto efficient outcome is one where no individual can be made better off without making someone else worse off. In option C, allowing the employer to pay whatever wage they want enables a range of wages between $400 and $600, where both the employer and worker can negotiate a wage that benefits both without making the other worse off. Options A, B, and D involve mandates that restrict the negotiation range or impose costs, potentially making one party worse off.

Question 6

An economist creates an economic model describing how wages will respond when the government imposes higher taxes on workers.According to positive economics,this model is a good model if the model

Accepted Answer

Positive economics focuses on objective and fact-based analysis, where the success of an economic model is judged by its ability to accurately predict outcomes. In this case, a model that accurately predicts how wages adjust to higher taxes would be considered good under positive economics, regardless of the realism of its assumptions, its flexibility, or its theoretical correctness if its predictions do not align with actual outcomes.

Question 7

Resource Scarcity

Accepted Answer

Resource scarcity refers to the fact that there are limited resources available to meet unlimited wants and needs of individuals and society as a whole. This means that people must make choices about how to use their resources, and often have to prioritize and forego certain wants in order to satisfy more important needs. This concept is not a hoax, as resources are finite and there are limits to their availability.

Question 8

A buyer values a good at $60 while the good costs a seller $50 to make and sell.The good is sold for a price of $55.Making the good results in pollution that harms people not directly involved in the transaction.When will this transaction result in a market failure?

Accepted Answer

The transaction results in a market failure when the external cost (pollution) exceeds the net gain from the transaction, which is $10 ($60 value to buyer - $50 cost to seller).

Question 9

A regression of Y = a + bX yields values of a = 4.0 and b = -2.7.This indicates that the slope of the regression line is

Accepted Answer

The coefficient "b" represents the slope of the regression line. Since b = -2.7, the slope of the regression line is -2.7. Therefore, choice D is the correct answer.

Question 10

Positive economics

Accepted Answer

Positive economics is concerned with describing and predicting economic phenomena, focusing on cause-and-effect relationships and objective analysis, such as how people respond to benefits and costs.

Question 11

Multiple regression analysis uses

Accepted Answer

Multiple regression analysis involves using several independent variables to predict a dependent variable.

Question 12

A regression estimates that Q = 35 - 0.1*X,where Q is the quit rate,X is the number of employees at the firm.Both t-statistics are greater than two,and the firm sizes range from 50 to 100.This indicates that doubling the number of employees from 50 to 100 will reduce the quit rate by

Accepted Answer

Doubling the number of employees from 50 to 100 increases X by 50. The coefficient on X is -0.1, so the change in Q is -0.1*50 = -5, indicating a reduction in the quit rate by 5 percentage points.

Question 13

A regression estimates that a worker's hourly productivity (P),measured in units of output,is related to hourly wage (W)as follows: Pi = 4.5 + 0.2Wi.This indicates that

Accepted Answer

The coefficient for hourly wage (W) is positive (0.2), which means that there is a positive relationship between wage and productivity. Therefore, if a firm raises their wage by $10, the worker's hourly productivity is estimated to increase by 2 units (0.2 x $10 = $2, so Pi = 4.5 + $2 = 6.5 units).

Question 14

A government contractor hires a worker to help build a road for an annual wage of $50,000.The worker's annual output is worth $60,000.If the worker did not have this job,the worker would have produced $40,000 a year in an alternative job and would have been paid $30,000 a year.The real cost of using this worker to build the road is

Accepted Answer

The real cost of using the worker to build the road is the difference between what he could have produced in his alternative job and what he is being paid for the current job. In this case, if the worker did not have this job, he would have produced $40,000, but since he is being paid $50,000, the real cost is only $10,000 ($50,000 - $40,000). Therefore, the best choice is B.

Question 15

Which of the following is NOT a characteristic of a typical positive economic model?

Accepted Answer

Positive economic models often use simplified assumptions that may not be entirely realistic to focus on key relationships and predict outcomes.

Question 16

Government policies affecting the labor market

Accepted Answer

Government policies affecting the labor market are often based on the normative principle that society should try to make the distribution of income more equitable. This is because the labor market is not always perfectly competitive, which can lead to unequal bargaining power between workers and employers, and unequal rewards for different types of labor. Therefore, government intervention is sometimes necessary to ensure that the distribution of income is not excessively skewed towards one group or another.

Question 17

An economic model based in positive economics should be judged

Accepted Answer

Positive economics focuses on objective and fact-based analysis, where the outcomes can be tested against real-world data. Thus, the accuracy of its predictions is the primary criterion for its evaluation, rather than the realism of its assumptions or the complexity and details it captures.

Question 18

In a world without scarcity,

Accepted Answer

In a world without scarcity, resources are unlimited, so there would be no costs associated with obtaining goods or services.

Question 19

Omitted variable bias exists if the omitted variable is

Accepted Answer

Omitted variable bias occurs when the omitted variable is related to both the dependent variable and the independent variable. This can lead to falsely estimating the effect of the independent variable on the dependent variable. A and B are incorrect because if the omitted variable is unrelated to either the independent or dependent variable, it would not be responsible for the bias. C is incorrect because if the omitted variable is related to the independent variable but not the dependent variable, it would not be responsible for the bias in estimating the effect of the independent variable on the dependent variable.

Question 20

A law mandating that unions cut wages in order to create more jobs

Accepted Answer

A Pareto efficient outcome requires that no one can be made better off without making someone else worse off. Forcing wage cuts is not voluntary and would make current workers worse off, thus it is not Pareto efficient.

Quiz 1: Introduction