Limited Resources & Lower Production – Macroeconomics

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Chapter 1 Limited Resources & Lower Production – Macroeconomics

This chapter is about Limited Resources and Lower Production – Principles of Macroeconomics.


A friend of yours has an interview with an economics consulting firm and has been asked to discuss a microeconomics topic. Which of the following topics would you recommend that your friend discuss?

what the Federal Reserve will do with interest rates

the study of how prices are determined in the baseball card industry – correct

how unemployment is falling in the national economy

what the next President will do to stimulate the national economy

Explanation: Microeconomics is the study of the individual units that make up the economy, such as households and businesses. The baseball card industry is a specific industry, so this is microeconomics. The other three topics involve the broader workings of the economy, and are macroeconomics.

A physician who hires a plumber to fix a broken toilet is an example of

laziness.

marginal thinking.

scarcity.

Comparative advantage. – correct
Explanation: Comparative advantage refers to a situation in which an individual can produce a good or service at a lower opportunity cost than another individual. The physician is specialized in dispensing medical advice. He or she would have to give up more time spent dispensing medical advice in order to fix a broken toilet than the plumber, who specializes in fixing toilets and has a lower opportunity cost (in terms of medical advice dispensed) for this task.

Alison goes to an all-you-can-eat restaurant. She has eaten three slices of pizza and is considering having another, but she is quite full from the first three slices. Alison’s consideration is an example of

incentives.

marginal thinking. – correct

barter.

scarcity.

Explanation: Marginal thinking requires a decision-maker to weigh the benefits and costs of an additional unit of action, rather than the action as a whole. Workers employing marginal thinking make the decision to work another hour, for example. Using marginal thinking, Alison weighs the benefit of the extra slice of pizza (how much enjoyment she gets) against its cost (feeling bloated and sick).

Judy spent 8 hours studying for an exam. Normally, she would have spent that time watching TV instead of studying. She figures she could have made a “B” after only studying 4 hours, but she really wanted an “A.” What is Judy’s marginal cost in terms of TV viewing to improve her grade from a “B” to an “A”?

$8

1 hour

8 hours

4 Hours – correct

Explanation: If Judy feels that 4 hours of study would allow her to receive a B, and she studies 8 hours to get an A, then the marginal cost of the A is (8 hours – 4 hours) or 4 hours of additional study time. Marginal cost is the additional cost of consuming one more unit. In this case, one more unit refers to increasing a grade by one letter.


Suppose a student has 3 hours of time to spend at her apartment before afternoon classes. She has the option of doing laundry, studying for a test, or watching television. If she decides to do laundry, then her opportunity cost is

watching television.

either watching television or studying for the test, whichever would have been her second choice to doing laundry. – correct

studying for the test.

watching television and studying for the test.

Explanation: Opportunity cost is the highest-valued alternative that must be sacrificed in order to get something else. In this case, we can't say which activity will be her opportunity cost since we don't know which activity the student prefers between watching television and studying for the test.

A physician who hires a plumber to fix a broken toilet is an example of

laziness.

marginal thinking.

scarcity.

Comparative advantage. – correct
Explanation: Comparative advantage refers to a situation in which an individual can produce a good or service at a lower opportunity cost than another individual. The physician is specialized in dispensing medical advice. He or she would have to give up more time spent dispensing medical advice in order to fix a broken toilet than the plumber, who specializes in fixing toilets and has a lower opportunity cost (in terms of medical advice dispensed) for this task.

Alison goes to an all-you-can-eat restaurant. She has eaten three slices of pizza and is considering having another, but she is quite full from the first three slices. Alison’s consideration is an example of

incentives.

marginal thinking. – correct

barter.

scarcity.

Explanation: Marginal thinking requires a decision-maker to weigh the benefits and costs of an additional unit of action, rather than the action as a whole. Workers employing marginal thinking make the decision to work another hour, for example. Using marginal thinking, Alison weighs the benefit of the extra slice of pizza (how much enjoyment she gets) against its cost (feeling bloated and sick).

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