ECON 160 EXAM 1 QUESTIONS AND CORRECT
VERIFIED ANSWERS) ALREADY GRADED A
10 Basic Principles - correct answer- ...
1st Principle - correct answer- People face tradeoffs -
trade-off between efficiency and equality
2nd Principle - correct answer- The cost of something is
what you give up to get it - OPPORTUNITY COST - best
alternative - money is a "numeraire"
- two costs: monetary cost and time cost
- OPPORTUNITY COSTS ARE *RECIPROCALS*
3rd Principle - correct answer- Rational people think at
the margin - focus on where we are right now - ignore sunk costs
(cannot get all of it back - ex: paid tuition), ignore irrelevant
alternatives
4th Principle - correct answer- people respond to
incentives - in a market, primary incentive is PRICE
,5th Principle - correct answer- Trade can make everyone
better off (by improving productivity) - Robinson Crusoe
Economy 1719 - Daniel Defoe - limited standard of living
6th Principle - correct answer- Markets are a good way
of organizing economic activity
7th Principle - correct answer- Governments can
sometimes improve economic outcomes
- Laissez-faire policies - unhindered by government - free-market
Absolute advantage - correct answer- less inputs to
make a good
Absolute advantage - correct answer- the ability to
produce a good using fewer inputs than another producer -
static concept (at a point in time rearrange inputs to effect
outputs)
Adam Smith - Pin Factory - correct answer- - Wealth of
Nations 1776
- Specialization among workers - Economies of Scale, Innovation
(efficient)
, -- higher output per worker
- Each worker might be able to specialize in the skill he is BEST at
- absolute advantage - static concept
- Each worker specializing in an activity, improves - dynamic
concept
- Specialization > knowledge > innovation
- The extent of specialization is limited by the size of the market
(large markets can specialize)
- if you can specialize you can achieve economies of scale (static
concept)
- productivity increases by size of market
Advantage of free trade - correct answer- Normative v.
Positive Policy Prescriptions
- Normative - value judgement - politically feasible (efficient)
- Positive - efficient - no value judgment
Basic assumptions - correct answer- Agents choose what
is in their best interest
1. Rational
2. Greedy
3. Informed
VERIFIED ANSWERS) ALREADY GRADED A
10 Basic Principles - correct answer- ...
1st Principle - correct answer- People face tradeoffs -
trade-off between efficiency and equality
2nd Principle - correct answer- The cost of something is
what you give up to get it - OPPORTUNITY COST - best
alternative - money is a "numeraire"
- two costs: monetary cost and time cost
- OPPORTUNITY COSTS ARE *RECIPROCALS*
3rd Principle - correct answer- Rational people think at
the margin - focus on where we are right now - ignore sunk costs
(cannot get all of it back - ex: paid tuition), ignore irrelevant
alternatives
4th Principle - correct answer- people respond to
incentives - in a market, primary incentive is PRICE
,5th Principle - correct answer- Trade can make everyone
better off (by improving productivity) - Robinson Crusoe
Economy 1719 - Daniel Defoe - limited standard of living
6th Principle - correct answer- Markets are a good way
of organizing economic activity
7th Principle - correct answer- Governments can
sometimes improve economic outcomes
- Laissez-faire policies - unhindered by government - free-market
Absolute advantage - correct answer- less inputs to
make a good
Absolute advantage - correct answer- the ability to
produce a good using fewer inputs than another producer -
static concept (at a point in time rearrange inputs to effect
outputs)
Adam Smith - Pin Factory - correct answer- - Wealth of
Nations 1776
- Specialization among workers - Economies of Scale, Innovation
(efficient)
, -- higher output per worker
- Each worker might be able to specialize in the skill he is BEST at
- absolute advantage - static concept
- Each worker specializing in an activity, improves - dynamic
concept
- Specialization > knowledge > innovation
- The extent of specialization is limited by the size of the market
(large markets can specialize)
- if you can specialize you can achieve economies of scale (static
concept)
- productivity increases by size of market
Advantage of free trade - correct answer- Normative v.
Positive Policy Prescriptions
- Normative - value judgement - politically feasible (efficient)
- Positive - efficient - no value judgment
Basic assumptions - correct answer- Agents choose what
is in their best interest
1. Rational
2. Greedy
3. Informed
