Principles of Microeconomics, OpenStax - Exam Preparation
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Principles of Microeconomics 2,OpenStax
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Principles Of Microeconomics 2,OpenStax
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,openstax college priciples of microeconomics
OpenStax College Principles of Microeconomics
CHAPTER 1: WELCOME TO ECONOMICS!
Self-Check Questions
1. What is scarcity? Can you think of two causes of scarcity?
Solution: Scarcity means human wants for goods and services exceed the available
supply. Supply is limited because resources are limited. Demand, however, is
virtually unlimited. Whatever the supply, it seems human nature to want
more.
2. Residents of the town of Smithfield like to consume hams, but each
ham requires 10 people to produce it and takes a month. If the town
has a total of 100 people, what is the maximum amount of ham the
residents can consume in a month?
Solution : 100 people / 10 people per ham = a maximum of 10 hams per month
if all residents produce ham. Since consumption is limited by production, the
maximum number of hams residents could consume per month is 10.
3. A consultant works for $200 per hour. She likes to eat vegetables, but
is not very good at it. Why does it make more economic sense for her
to spend her time at the consulting job and shop for her vegetables?
Solution : She is very productive at her consulting job, but not very productive
growing vegetables. Time spent consulting would produce far more income
than it what she could save growing her vegetables using the same amount
of time. So on purely economic grounds, it makes more sense for her to
maximize her income by applying her labor to what she does best (i.e.
specialization of labor).
4. A computer systems engineer could paint his house, but it makes
more sense for him to hire a painter to do it. Explain why.
Solution : The engineer is better at computer science than at painting. Thus,
his time is better spent working for pay at his job and paying a painter to
paint his house. Of course, this assumes he does not paint his house for fun!
5. What would be another example of a “system” in the real world that
could serve as a metaphor for micro and macroeconomics?
Solution : There are many physical systems that would work, for example, the
study of planets (micro) in the solar system (macro), or solar systems (micro)
in the galaxy (macro).
6. Suppose we extend the circular flow model to add imports and
exports. Copy the circular flow diagram onto a sheet of paper and
then add a foreign country as a third agent. Draw the flows of
imports, exports, and the payments for each on your diagram.
,OpenStax College Principles of Economics
Solution: Draw a box outside the original circular flow to represent the foreign
country. Draw an arrow from the foreign country to firms, to represents
imports. Draw an arrow in the reverse direction representing payments for
imports. Draw an arrow from firms to the foreign country to represent
exports. Draw an arrow in the reverse direction to represent payments for
imports.
7. What is an example of a problem in the world today, not mentioned in
the chapter, that has an economic dimension?
Solution : There are many such problems. Consider the AIDS epidemic. Why
are so few AIDS patients in Africa and Southeast Asia treated with the same
drugs that are effective in the United States and Europe? It is because
neither those patients nor the countries in which they live have the
resources to purchase the same drugs.
8. The chapter defines private enterprise as a characteristic of market-
oriented economies. What would public enterprise be? Hint: It is a
characteristic of command economies.
Solution : Public enterprise means the factors of production (resources and
businesses) are owned and operated by the government.
9. Why might Belgium, France, Italy, and Sweden have a higher export
to GDP ratio than the United States?
Solution: The United States is a large country economically speaking, so it has less
need to trade internationally than the other countries mentioned. (This is the
same reason that France and Italy have lower ratios than Belgium or
Sweden.) One additional reason is that each of the other countries is a
member of the European Union, where trade between members occurs
without barriers to trade, like tariffs and quotas.
Review Questions
10. Give the three reasons that explain why the division of labor
increases an economy’s level of production.
Solution : First, division of labor allows for specialization, in which workers do
what they do best, second, workers learn to be more efficient, and third,
businesses can take advantage of economies of scale.
11. What are three reasons to study economics?
Solution: Economics factors into every major policy decision, economics
encourages good citizenship, and economics makes for a well-rounded
education.
12. What is the difference between microeconomics and
macroeconomics?
, OpenStax College Principles of Microeconomics
Solution: Microeconomics focuses of individual actors within an economy, whereas
macroeconomics focuses on the economy as a whole, or the sum of all
individual actions.
13. What are examples of individual economic agents?
Solution : Individuals, households and businesses are all economic agents.
14. What are the three main goals of macroeconomics?
Solution : Growth in the standard of living, low unemployment and low
inflation.
15. How did John Maynard Keynes define economics?
Solution : As a method of thinking that help people draw correct conclusions.
16. Are households primarily buyers or sellers in the goods and services
market? In the labor market?
Solution : Households are primarily buyers in the goods and services market,
as they use their income to purchase food, housing, education,
transportation and many other items. Households are typically sellers in the
labor market, offering their labor for a salary or hourly wage in order to
earn a living.
17. Are firms primarily buyers or sellers in the goods and services
market? In the labor market?
Solution : Firms are primarily sellers in the goods and services market, offering
their wares to consumers. They are primarily buyers in the labor market,
hiring employees to produce for them.
18. What are the three ways that societies can organize themselves
economically?
Solution : As a command economy, a market economy, or a mixture of the two.
19. What is globalization? How do you think it might have affected the
economy over the past decade?
Solution : Globalization is an increase in connections and economic activity
across international lines. Globalization allows small economies to take
fuller advantage of the division of labor.
Critical Thinking Questions
20. Suppose you have a team of two workers: one is a baker and one is a
chef. Explain why the kitchen can produce more meals in a given
period of time if each worker specializes in what they do best than if
each worker tries to do everything from appetizer to dessert.
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