TESTBANK for MICROECONOMICS 7th Edition by Michael Parkin / Updated 2022
CHAPTER 1 WHAT IS ECONOMICS?
Essay Questions
Topic: Scarcity
Skill:
... [Show More] Recognition
1) What do economists mean when they discuss “scarcity”?
Answer
(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
Topic: Scarcity Skill: Conceptual
5) What is the difference between scarcity and poverty?
Answer: Scarcity exists when availability is less than
Topic: Definition of Economics Skill: Recognition
6) Define economics and describe its branches of study.
Answer
: Scarcity occurs whenever 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
: 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.
: 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
1
people want. Poverty exists when availability is less
than people need. Everyone suffers scarcity; only
an unfortunate minority suffers poverty.
: 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
her wants exceed what he or she can obtain
using his or her resources. Even very rich
the choices made by individuals and businesses,
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
2
CHAPTER 1
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:
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.
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: Microeconomics and Macroeconomics Skill: Recognition
7) What is the difference between microeconomics and macroeconomics?
Answer
Topic: Microeconomics and Macroeconomics Skill: Conceptual
8) What is the difference between microeconomics and macroeconomics? Give an example of an issue each studies.
Answer
Topic: Microeconomics and Macroeconomics Skill: Conceptual
.
Topic: Entrepreneurship Skill: Recognition
11) Explain what entrepreneurship is and why it is considered a factor of production.
Answer
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
: 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.
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.”
: Essentially microeconomics studies individual units
: Entrepreneurship is the resource (the
people) that runs businesses.
Entrepreneurs organize the other
resources, land, labor, and capital. It is a
within the economy, such as the choices made by
factor of production because people with
individual consumers or individual firms. Macroeconomics
the desire and talent to successfully
organize a business are needed to run
studies the overall or aggregate economy. Microeconomics
examines the factors that affect employment at an
businesses.
individual firm. Macroeconomics examines the factors
that affect economy-wide unemployment.
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 peo-
Answer
Topic: Human Capital Skill: Conceptual
10) China’s population is about 1.2 billion, while the population of the United States is
: 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 econ-
omy is the subject of macroeconomics, not
microeconomics.
15)
Answer
Topic: Opportunity Cost Skill: Conceptual
.
WHA T IS ECONOMICS?
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
Topic: Opportunity Cost Skill: Recognition
14) What is
opportunity cost?
Answer
Topic: Opportunity Cost
Skill: Conceptual
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
3 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.
: A tradeoff occurs when one thing
must be given up to get another.
Tradeoffs are pervasive; at the personal
: Opportunity cost is the highest-
selecting an action. For instance, the
Answer
Topic: Opportunity Cost Skill: Conceptual
.
whichever she would have done had she not studied
17) Ratherthangoouttoeatbyyourself,youdecidetostayat 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?
valued alternative given up when
opportunity cost of studying an hour is
whatever the highest-valued alternative
would have been for the hour spent
studying.
: 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
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
Topic: Marginal Benefit and Marginal Cost Skill: Recognition
: 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
: 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
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.
she would have watched Buffy, then watching Buffy is the
Topic: Opportunity Cost Skill: Conceptual
.
19) Define marginal cost and marginal benefit.
: Your friend’s analysis is incorrect. The opportunity
level, students tradeoff time spent
cost of an action is the highest-valued alternative forgone,
studying for time they otherwise could
not all alternatives forgone. Kiki’s opportunity cost of
have spent socializing.
studying for her exam is either the tennis or the movie,
4
Answer
Topic: Marginal Benefit Skill: Recognition
.
CHAPTER 1
government spent its funds purchasing pharmaceutical drugs for poor older Americans rather than poor children, then poor older Americans would use more drugs and poor children would use fewer. But they might disagree on the normative conclusion of whether the government should pursue this policy. One economist might argue “It is not fair to have senior citizens suffer because they cannot afford medicine” and the other economist might argue “It is not fair to have children suffer because their parents cannot afford medicine.”
Topic: Positive and Normative Skill: Recognition
24) “Thedifferencebetweenpositiveand normative statements is that a positive statement is always true while a normative statement might or might not be true.” True or false? Explain.
Answer
Topic: Positive and Normative Skill: Conceptual
25) Two economists can agree that raising the minimum wage creates unemployment yet one might argue that raising the minimum wage is a good policy and the other that it is a bad policy. Why can this difference exist? Be sure to use the terms positive and normative in your answer.
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
20) What is the difference between a total benefit and a marginal benefit?
Answer
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
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
Topic: Positive and Normative Skill: Recognition
23) Whatisthedifferencebetweenpositiveand normative statements?
Answer
determine if they are correct or not,
: 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.
: 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
: False. The difference between
positive and normative statements is that
of people’s decision making by increasing the marginal
a positive statement is about what is,
benefit of returning bottles in order to reduce litter and
while a normative statement is about
clean the environment.
what ought to be. A positive statement can
be tested against the facts and may be
proved to be right or wrong, whereas a
normative statement depends on values
and cannot be tested.
: 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.
: Positive statements are statements
that describe how the world is. Positive
statements can be tested and so,
: Positive statements tell what is and
ultimately, any disagreements about
normative statements tell what ought to
positive statements should be resolved.
be. Positive statements can be tested to
The statement that “Raising the
WHAT IS ECONOMICS? 5
minimum wage cre-
ates unemployment” is a positive
statement and, on the basis of repeated
testing, most economists agree that it is
a correct positive statement. Normative [Show Less]