Essay Questions
Topic: Scarcity
Skill: Recognition
1) What do economists mean when they discuss
“scarcity”?
Answer: Scarcity occurs whenever
... [Show More] people’s wants
exceed the ability of the available resources to
meet these wants. Because people’s wants are effectively
infinite—it is always possible to imagine
more good things to want to have—wants will
always exceed what can be produced with the
available resources, and so scarcity will always be
present.
Topic: Scarcity
Skill: Conceptual
2) What is the relationship between wants, factors of
production, scarcity, and choices? Discuss the relationship
for an individual and for a society.
Answer: A person faces scarcity whenever his or her
wants exceed what he or she can obtain using his
or her resources. Because the person cannot fulfill
all of his or her wants, the person is forced to
choose which wants will be satisfied and which
wants will remain unsatisfied. The same results
hold true for a society. All societies face scarcity
because people’s wants are essentially infinite, so
that the factors of production available are not
sufficient to fulfill everyone’s wants. Because of
this fact, societies must make choices about which
(and whose) wants will be satisfied and which
(and whose) wants will remain unsatisfied.
Topic: Scarcity
Skill: Conceptual
3) Why do economists say that even very rich people
face scarcity?
Answer: A person faces scarcity whenever his or her
wants exceed what he or she can obtain using his
or her resources. Even very rich people want
things that they cannot have. An older rich person,
for instance, might want to have all of his or
her youthful energy, but medical science cannot
(yet) provide this service. Alternatively, another
rich person might enjoy life so much that he or
she wants 25 hours in a day in order to have more
time for more enjoyment. But, such a want is impossible.
By way of another, perhaps more realistic
example, Malcom Forbes was the founder of
Forbes magazine and was very rich. However, he
did not win every piece of art that he bid upon at
auctions. Even though Mr. Forbes was very rich,
he still passed on some art when the price got so
high that he thought given his resources, the price
exceeded what he was willing to pay. Mr. Forbes
wanted the art, but he was not willing to bid
higher in order to win it. Mr. Forbes faced scarcity.
Topic: Scarcity
Skill: Conceptual
4) Explain why both rich and poor people experience
scarcity.
Answer: Scarcity exists when people’s wants exceed
their ability to satisfy the wants. People’s wants
are literally infinite, so just as a poor person can
want more, so too can a richer person. Therefore
both rich and poor experience scarcity.
Topic: Scarcity
Skill: Conceptual
5) What is the difference between scarcity and poverty?
Answer: Scarcity exists when availability is less than
people want. Poverty exists when availability is
less than people need. Everyone suffers scarcity;
only an unfortunate minority suffers poverty.
Topic: Definition of Economics
Skill: Recognition
6) Define economics and describe its branches of
study.
Answer: Economics is the social science that studies
the choices made by individuals, businesses, government,
and entire societies as they cope with
scarcity. It has two branches, microeconomics and
macroeconomics. Microeconomics is the study of
the choices made by individuals and businesses,
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the way they interact, and the influence that governments
exert on these choices. Macroeconomics
is the study of the aggregate (total) effects on the
national economy and the global economy of the
choices that individuals, businesses, and governments
make.
Topic: Microeconomics and Macroeconomics
Skill: Recognition
7) What is the difference between microeconomics
and macroeconomics?
Answer: Microeconomics studies the decisions of
smaller economic actors, such as individual consumers
or individual firms, and how the government
can affect these decisions, say through how
it regulates an industry. Macroeconomics studies
the aggregate, or economy-wide, consequences of
the decisions made by individuals and firms. Macroeconomics
also studies the aggregate effects of
government policies, such as the Federal Reserve’s
decisions to raise or lower interest rates.
Topic: Microeconomics and Macroeconomics
Skill: Conceptual
8) What is the difference between microeconomics
and macroeconomics? Give an example of an issue
each studies.
Answer: Essentially microeconomics studies individual
units within the economy, such as the choices
made by individual consumers or individual
firms. Macroeconomics studies the overall or aggregate
economy. Microeconomics examines the
factors that affect employment at an individual
firm. Macroeconomics examines the factors that
affect economy-wide unemployment.
Topic: Microeconomics and Macroeconomics
Skill: Conceptual
9) Below is a student’s answer to the question “What
is microeconomics?” If you were the instructor,
how would you correct the student’s answer?
“Microeconomics is the study of how government
influences the choices made by individuals and
businesses and of the performance of the whole
national economy.”
Answer: The answer is partially correct. Microeconomics
is the study of the choices that individuals
and businesses make, the way these choices interact
in markets, and the influence of the government.
But the performance of the national economy
is the subject of macroeconomics, not
microeconomics.
Topic: Human Capital
Skill: Conceptual
10) China’s population is about 1.2 billion, while the
population of the United States is about 280 million.
This fact means that China has much more
human capital than the U.S. does. True or false?
Explain your answer.
Answer: False. Population can measure the quantity
of a nation’s labor resource, but the population
numbers don’t tell us anything about skills that
this labor force obtained from education, on-thejob
training, and work experience, which are
called human capital. Thus, the population numbers
in the statement only tell us that China is
likely to have more labor than the United States,
but it does not necessarily mean that it also has
more human capital.
Topic: Entrepreneurship
Skill: Recognition
11) Explain what entrepreneurship is and why it is
considered a factor of production.
Answer: Entrepreneurship is the resource (the people)
that runs businesses. Entrepreneurs organize the
other resources, land, labor, and capital. It is a factor
of production because people with the desire
and talent to successfully organize a business are
needed to run businesses.
Topic: Self-Interest and Social Interest
Skill: Conceptual
12) An analyst on a local news channel argues that the
recent corporate scandals “demonstrated very
clearly that self interest always contradicts social
interest.” Do you agree or disagree? Substantiate
your answer.
Answer: You should disagree. The recent corporate
scandals only show that self interest might contradict
social interest. But they don’t prove that this
is necessarily the case as we can find many realworld
examples of how people guided by selfinterest
promote society’s well-being. In fact, under
the market system the whole economy operates
through the decisions made by self-interested
individuals. And countries such as the United
States have proven to be more successful in promoting
social interest than were centrally
planned, or communist, economies where peoWHAT
I S E C O N O M I C S ?
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ple’s self interest was suppressed and all important
economic decisions were made by government.
Topic: Tradeoffs
Skill: Conceptual
13) What is a tradeoff? Give an example.
Answer: A tradeoff occurs when one thing must be
given up to get another. Tradeoffs are pervasive;
at the personal level, students tradeoff time spent
studying for time they otherwise could have spent
socializing.
Topic: Opportunity Cost
Skill: Recognition
14) What is opportunity cost?
Answer: Opportunity cost is the highest-valued alternative
given up when selecting an action. For instance,
the opportunity cost of studying an hour
is whatever the highest-valued alternative would
have been for the hour spent studying.
Topic: Opportunity Cost
Skill: Conceptual
15) What is an opportunity cost? Give an example of
an opportunity cost that is paid in money and an
opportunity cost that is not explicitly paid. For
each example, explain why you think this is an
opportunity cost.
Answer: An opportunity cost of something is the
highest-valued alternative you give up to get it.
An example of an opportunity cost paid in money
is the cost of tuition that a student pays to get his
or her college degree. This expenditure is an opportunity
cost because to get a college degree, the
student gives up goods and services that he or she
would have bought for the money spent on tuition.
If this student quits a job to go to college,
the student also gives up the money he or she
could have earned working. This opportunity cost
is an example of an opportunity cost that is not
explicitly paid in money.
Topic: Opportunity Cost
Skill: Conceptual
16) Your friend is preparing for this exam and in your
practice session makes the following statement:
“Instead of attending microeconomics class for
two hours, Kiki could have played tennis or
watched a movie. Therefore, the opportunity cost
of attending class is the tennis and the movie she
had to give up.” Is your friend’s analysis correct or
not? Explain your answer.
Answer: Your friend’s analysis is incorrect. The opportunity
cost of an action is the highest-valued
alternative forgone, not all alternatives forgone.
Kiki’s opportunity cost of studying for her exam
is either the tennis or the movie, whichever she
would have done had she not studied.
Topic: Opportunity Cost
Skill: Conceptual
17) Rather than go out to eat by yourself, you decide
to stay at home and fix dinner for yourself and
your two roommates. Your roommates applaud
your decision. Your first roommate tells you that
your decision to eat at home has no opportunity
cost because you already have all the dinner ingredients
in your pantry. Is this roommate’s comment
correct?
Answer: Your first roommate’s comment is incorrect.
The opportunity cost of preparing dinner at home
is whatever is the highest-valued alternative forgone,
which, given your choice boiled down to
staying home or going out, is going out to eat.
Hence the opportunity cost of fixing dinner at
home is going out to eat.
Topic: Opportunity Cost
Skill: Conceptual
18) A student can spend the next hour studying for a
finance test, hiking along the Oregon coast,
watching a rerun of Buffy the Vampire Slayer on
television, or napping. If the student decides to
study, what is the opportunity cost of her choice:
hiking, watching television, or napping?
Answer: With the information given, it is impossible
to determine the opportunity cost. The opportunity
cost is the highest-valued alternative forgone
and the problem does not give the student’s ranking
of the options. For instance, if the student
thinks that if she had not studied she would have
watched Buffy, then watching Buffy is the opportunity
cost. However, if the student thinks that if
she were not studying, she would be strolling
along the beach, then the beach walk is the opportunity
cost.
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Topic: Marginal Benefit and Marginal Cost
Skill: Recognition
19) Define marginal cost and marginal benefit.
Answer: Marginal cost is the opportunity cost of a
small (one-unit) increase in an activity. Marginal
benefit is the benefit of a small (one-unit) increase
in an activity.
Topic: Marginal Benefit
Skill: Recognition
20) What is the difference between a total benefit and
a marginal benefit?
Answer: The total benefit is all the benefit from all of
an activity. The marginal benefit is the additional
benefit from an additional amount of an activity.
Topic: Incentives, Marginal Cost and Marginal
Benefit
Skill: Conceptual
21) In New State, the bottling law requires that people
get a refund of five cents when they return an
empty bottle or can. Why does the state pay people
to return bottles? In your answer, be sure to
mention the role played by incentives.
Answer: Policy makers know that people making
choices respond to incentives. Instead of throwing
away bottles and cans, people will now bring the
used bottles and cans to the designated areas for
recycling in order to receive their payment. Thus
policy makers have taken advantage of people’s
decision making by increasing the marginal benefit
of returning bottles in order to reduce litter
and clean the environment.
Topic: Incentives, Marginal Cost and Marginal
Benefit
Skill: Conceptual
22) If the government raises the tax on cigarettes,
what is the effect on people’s incentives and
choices?
Answer: The government raises the tax on cigarettes
to discourage smoking. With a higher tax the
price of cigarettes rises. The opportunity cost of
smoking increases, which gives people incentive to
cut their consumption of cigarettes.
Topic: Positive and Normative
Skill: Recognition
23) What is the difference between positive and normative
statements?
Answer: Positive statements tell what is and normative
statements tell what ought to be. Positive
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