Exam 1: Ten Principles of Economics

What is NOT a characteristic of markets?

In each of the following situations, identify the relevant economic principle and explain how it applies. a) Larissa has lived in her own house for many years. However, rents have recently increased so much that Larissa considers moving into a smaller house and renting out her own. b) Tashonna is a talented singer and she strongly wants to pursue an artist's career. However, she is two years short of graduating from law school. She is certain she will never be a lawyer because she does not like it and has no gift to be a lawyer. However, her family insists she finish her studies, since she has already spent so much time and money on law studies. What should she do? c) There are a few industrial sites in town, producing essential goods and services for the residents and providing the citizens with vital jobs. However, the businesses, including an airport in the very downtown, also produce pollution, congestion, and noise. People understand the blessings of economic and civil freedoms and are pleased and proud to have productive activities in their town. They started, though, to crave for a more pleasant place to live in. What economic principle can give these people some guidance about what to do?

What is the effect of an increase in the money supply in the economy?

Which of the following is most likely to generate an externality?

What does the word "margin" mean?

How are goods and services allocated in a market economy?

A worker in Bangladesh can earn $1 per day making cotton cloth on a handloom. A worker in Canada can earn $100 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages?

Market failure refers to a situation in which the market does not allocate resources efficiently.

An economic principle is that people respond to incentives. Identify the incentives and discuss the possible outcomes in each of the following situations. a) A Liberal government decides to increase the level of required health benefits that firms pay on behalf of their employees. b) The City of Winnipeg decides to set a rather high regulated parking fee in downtown in order to reduce traffic congestion. c) A very popular hip-hop singer asks his managers to set concert prices very low such that everybody can afford them. d) The government of Canada subsidizes the purchases of new electric cars. e) A provincial government subsidizes tuition fees for all students who get admitted to college for the whole period of studies. f) A father gives his daughter $50 when she gets a grade of D at school, $100 for a C, $500 for a B, and $1000 for an A.

According to an economic principle, what is the effect of government intervention in the presence of a market failure?

A rational decision maker takes an action if and only if the marginal cost exceeds the marginal benefit.

In Canada, incomes have historically grown about 2% per year. At this rate, how long will it take for incomes to double?

According to Adam Smith, what is the success of decentralized market economies primarily due to?

What is the best example of a marginal change?

The government can potentially improve market outcomes if market inequalities or market failure exist.

In the short run, what does the tenth principle of economics illustrate?

Which situation best illustrates a marginal change?

How good are markets at organizing economic activity?

Suppose your accounting professor has been offered a corporate job with a 20 percent pay increase. Why has he decided NOT to take the job?

Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short run.