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| The Latin expression meaning other variables are held fixed. |
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| The study of choices when there is scarcity. |
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| A simplified representation of an economic environment, often employing a graph. |
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| The effort used to coordinate the factors of production—natural resources, labor, physical capital, and human capital—to produce and sell products. |
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| The resources used to produce goods and services; also known as production inputs or resources. |
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| The knowledge and skills acquired by a worker through education and experience and used to produce goods and services. |
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| Human effort, including both physical and mental effort, used to produce goods and services. |
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| The study of the nation’s economy as a whole; focuses on the issues of inflation, unemployment, and economic growth. |
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| A small, one-unit change in value. |
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| The study of the choices made by households, firms, and government and how these choices affect the markets for goods and services. |
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| Resources provided by nature and used to produce goods and services. |
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| Answers the question “What ought to be?” |
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| The stock of equipment, machines, structures, and infrastructure that is used to produce goods and services. |
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| Answers the question “What is?” or “What will be?” |
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| The resources we use to produce goods and services are limited. |
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| A measure of something that can take on different values. |
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| Finding the slope of a line |
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| Calculating percentage changes |
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| A relationship in which two variables move in opposite directions. |
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| A relationship in which two variables move in the same direction. |
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| The vertical difference between two points (the rise) divided by the horizontal difference (the run). |
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1. Economics is the study of choice under conditions of
a. supply.
b. scarcity.
c. opportunity.
d. abundance of resources. |
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| 1. b. Scarcity is a situation in which resources are limited in quantity and can be used in different ways. Economics is the study of choice under conditions of scarcity. |
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2. Which of the following terms would best describe the consequence of scarcity?
a. limited resources
b. trade-offs
c. unlimited wants
d. poverty and possibly starvation |
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| 2. b. Economists are always reminding us that there is scarcity—that there are trade-offs in everything we do. |
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3. The resources provided by nature and used to produce goods and services are also known as
a. factors of production.
b. natural resources.
c. physical capital.
d. productive input |
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| 3. b. Natural resources are provided by nature. Factors of production refers to all of the resources, not only natural resources but also labor, physical capital, human capital, and entrepreneurship, used to produce goods and services; they are also known as production inputs. Physical capital is the stock of equipment, machines, structures, and infrastructure that is used to produce goods and services. Productive inputs are all of the resources, not only natural resources but also labor, physical capital, human capital, and entrepreneurship, used to produce goods and services; they are also known as factors of production. |
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4. Select the best answer. Which questions usually lie at the heart of policy debates?
a. positive questions
b. normative questions
c. all economic questions, both positive and normative
d. questions about the choices made by individuals |
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| 4. b. Correct. Normative economics answers the question: What ought to be? Normative questions lie at the heart of policy debates. Positive economics only lays out the possibilities and their likely consequences; it does not suggest decisions among these alternatives that are based on values and priorities. Policies often do influence how individuals make choices, but policy debates are centered around the choices made by policymakers based on their judgments on which policy will be best for society. |
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5. If the president of Colombia commented that “we should do something to reduce inflation in Colombia,” this would be an example of
a. a normative statement.
b. a positive statement.
c. a statement that has both positive and normative components.
d. neither positive analysis nor normative analysis. |
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| 5. a. The word “should” implies a value judgment. Only normative statements involve value judgments. |
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6. Economic decisions are made at every level in society. When we try to decide which production method to use among several alternatives, which of the key economic questions are we trying to answer?
a. What products do we produce?
b. How do we produce the products?
c. Who consumes the products?
d. Which government agency should supervise the production of goods? |
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| 6. b. When we try to decide which production method to use among several alternatives, we ask questions such as: Should power companies use coal, natural gas, or wind power to produce electricity? Should professors teach in large lecture halls or small classrooms? |
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7. Economic models are
a. precise representations of reality that include as many details as possible in order to accurately predict behavior.
b. simplifications of reality that focus only on key relationships and ignore less relevant details.
c. presentations of all the possible outcomes under all real world circumstances.
d. analytical interpretations of economic behavior involving a good deal of the surrounding social and political structure of society. |
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| 7. b. Abstraction and simplification, as opposed to concrete and complex information, are the preferred characteristics of economic models. Models ignore all nonessential elements of real world complexity. They also ignore a good deal of the social and political reality in order to study the underlying economic concepts. |
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8. Economists develop analytical tools to deal with specific problems. Which of the problems below is an economist prepared to discuss?
a. the economic view of Japan’s economic problems
b. the economic view of poverty in Africa
c. the economic view of traffic congestion
d. all of the above |
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| 8. d. Economic analysis provides important insights into real-world problems. Economists attempt to diagnose and provide solutions to problems such as traffic congestion, pollution, taxation, or the problems of an entire economy. |
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9. A roadmap is a good example of which of the four elements of economic thinking?
a. using assumptions to simplify
b. isolating variables—ceteris paribus
c. thinking at the margin
d. acting rationally and responding to incentives |
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| 9. a. Economists use assumptions to make things simpler and focus attention on what really matters. If you use a road map to plan a car trip from Seattle to San Francisco, you make two unrealistic assumptions to simplify your planning: The earth is flat: The flat road map doesn’t show the curvature of the earth. The roads are flat: The standard road map doesn’t show hills and valleys. Instead of a map, you could use a globe that shows all the topographical features between Seattle and San Francisco, but you don’t need those details to plan your trip. A map, with its unrealistic assumptions, will suffice because the curvature of the earth and the topography of the highways are irrelevant to your trip. |
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10. Macroeconomics can be used to understand all EXCEPT which of the topics below?
a. how the national economy works
b. how consumers decide which car to buy based on their preferences versus prices
c. what causes economic booms and downturns
d. how to make informed business decisions |
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| 10. b. The decision between two types of cars is an individual choice. This is a topic of microeconomics. |
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11. In which of the following situations can we use economic analysis?
a. to determine how well the government performs its roles in the market economy and to examine the trade-offs associated with various public policies
b. to answer many practical questions about markets and how they operate
c. to explain why some resources increase over time and how an increase in resources translates into a higher standard of living
d. all of the above |
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| 11. d. Economic analysis includes all of the above. |
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12. If Y = 800 – 4X, what is the slope of this line?
a. –1/4
b. 1/4
c. 4
d. –4 e. 800 |
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| 12. d. The slope of this line is –4. You can calculate this by finding any two points on the line and remembering that the slope is the change in Y divided by the change in X. Alternatively, for any linear function of the form Y = a + bX, b is the slope. |
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| 13. a. The value of a represents the Y-intercept. An increase in the value of the intercept causes the upward, parallel shift of the line. The value of b represents the value of the slope of the line. A change in the value of the slope makes the solid line steeper or flatter, but it does not shift the line. A change in the value of X causes a move along the solid line, not a shift to the dashed line. Only a change in A would result in a parallel shift of the line. |
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| 14. a. As income increases, we move to the right along a fixed income/consumption line. |
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| 15. c. The relationship is first positive and decreasing, then positive and increasing. |
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| 16. c. The value of the slope is the same between any two points along a line. |
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| 17. c. As the value of X increases, the value of Y decreases at an increasing rate. |
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| 18. a. The difference between Y2 and Y1 is the vertical distance, or the change in Y. The difference between X2 and X1 is the horizontal distance, or the change in X. The ratio of the changes is commonly called “rise over run.” |
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19. The sale price of a shirt is $8. There is a sign on the clothing rack that states “price marked is 20% off original price.” What was the original price of the shirt?
a. $49.60
b. $50
c. $65
d. $60 |
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| 19. d. A reduction of 20 percent means that the new price is 80 percent of the old price. If $40 equals 80 percent, then how many dollars are equivalent to 100 percent? The answer is (48 × 100)/80 = 60. |
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| 20. Define “economics” and explain the most fundamental economic problem. |
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| 20. Economics studies the choices that can be made when there is scarcity. Scarcity is a situation in which resources are limited in quantity and can be used in different ways. Because our resources are limited, we must sacrifice one thing for another. Economists are always reminding us that there is scarcity—that there are trade-offs in everything we do. |
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