Exam 1: Ten Principles of Economics

In each of the following situations,identify the relevant economic principle and explain how it applies. a)Peter has lived in his own apartment for many years.However,rents have recently increased so much that Peter considers moving into a smaller apartment and renting out his own. b)Alfonso is a talented singer and he strongly wants to pursue an artist's career.However,he is two years short of graduating from law school.He is certain he will never be a lawyer because he does not like it and has no gift to be a lawyer.However,his family insists he finish his studies,since he has already spent so much time and money on law studies.What should he 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?

Under what conditions might government intervention in an economy improve the market outcome?

What is an externality?

In a market economy,what do prices reflect?

According to economists,what do people respond to?

Which policy target will NOT affect the combination of inflation and unemployment the economy experiences?

What concept is illustrated by the adage,"There is no such thing as a free lunch"?

What is a primary function of prices in a market economy?

What is an economy experiencing when a society cannot produce all the goods and services people wish to have?

What can hinder the invisible hand's ability to coordinate the decisions of the firms and households in the economy?

If Canada decides to trade with Mexico,what do we know about the probable outcome?

In the nation of Dictatorland,farmers traditionally feed grain to their livestock.Central planners,however,decided to increase the price of grain to make grain farmers happy and to reduce the price of bread made from that grain to make city dwellers happy.Now the price of bread is lower than the price of grain.What might we now expect?

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

What do economists study?

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.

Economics is the study of how fairly goods and services are distributed within society.

In most societies,who allocates resources?

Stan buys a 1966 Mustang,which he plans to restore and sell.He anticipates that the cost of the car and the repairs will be $15,000 and that he can sell it for $19,000.When he has spent $14,000,he discovers he needs to replace the engine,which will cost $5000.He can sell the car without the new engine for $16,000.What should Stan do?

What is one necessary role of government in a market economy?

Why do taxes adversely affect the allocation of resources in society?