Exam 1: Economics and Economic Reasoning

What is an economic institution? Why is it important? Describe three economic institutions that regularly impact our daily lives.

What does the term efficiency mean?

How are the three central economic questions-What, How, and For Whom-related to the concept of scarcity?

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"

Explain the differences between positive economics, normative economics, and the art of economics. Explain why you would categorize each of the following three statements as belonging to positive economics, normative economics, or the art of economics. (a) The unemployment rate is 6.5 percent. (b) The unemployment rate is unacceptably high. (c) If the government wants to reduce the unemployment rate, it should try cutting taxes.

How does microeconomics differ from macroeconomics?

State the economic decision rule and apply it to the following situations: (a) A personal computer costs about 2 cent per hour to operate. Every time it is turned on and off, there is a .00005 probability that the computer will fail, costing $700 to repair. Is it worthwhile to turn off your computer? (b) Should you try out for the soccer or the baseball team? (c) The date to withdraw from a course and get the $300 refund has passed. With 30 more classes left in the semester, should you drop the course? (d) Your employer has offered you a 20% raise. Do you work more hours?

What is the "invisible hand", and how does it work as a market force?

Explain how microeconomics differs from macroeconomics and then categorize the following questions as either microeconomic or macroeconomic questions: (a) How will interest rates change when the Federal Reserve Bank increases money supply? (b) How will Nike's market share change when Reebok increases their marketing expenditures? (c) How does a tariff on imported steel affect the U.S. steel industry? (d) Should Wal-Mart renovate its stores nationwide? (e) Should the government lower income taxes to stimulate consumption?

Explain how each of the following scenarios illustrates the interaction of economic forces, social and cultural forces, and political and legal forces. (a) State officials are trying to move welfare recipients into jobs during a period of economic weakness, rising unemployment, and declining federal funding. (b) The European Union is funding a massive program to explore ways of using hydrogen to replace fossil fuels both to increase energy availability and to protect the environment. (c) In some states, many types of retail stores are prohibited from opening before noon on Sunday. (d) In North Dakota, most colleges and universities are located in small towns. Despite shrinking student populations, state law mandates that all of these schools remain open.

What is economics, and what are the three coordination problems an economy must solve?

Comment on the following statement that appeared in a local newspaper: "Our junior high school serves a splendid hot meal for one dollar without costing the taxpayer anything, thanks in part to a government subsidy."

What is the difference between economic forces and market forces?

What role does coercion play in an economy?

What is the invisible hand theory?

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.

What is the economic decision rule?