Name: ____________________________________________

Economics Dr. Sauer

Homework #1 (40 points) For questions 1 30 (30 points), please indicate your answers on a scantron sheet. It is okay to work on your homework in groups, but each person must submit answers individually. For questions 31-33 (10 points), you may tear off that sheet to hand in. 1. Which of the following is the most accurate description of what economics in general is all about? a. Economics is the study of money. b. Economics is the study of the use of scarce resources. c. Economics is the study of the stock market. d. Economics is the study of firms and profits. 2. Markets align incentives in such a way that individuals working in their own self-interest a. leads to a better standard of living for society as a whole. b. leads to a worse standard of living for society as a whole. c. causes perverse incentives and unintended consequences instead of social harmony. d. causes an immoral society. 3. What does it mean when we say that the market is amoral? a. The market allocates resources in an unethical or non-moral way. b. The market allocates resources in a biased way. c. The market allocates resources according to price and scarcity, not morality or ethics. d. The market allocates resources according to government decisions. 4. True or False. If we assume that people behave rationally, then we say that market transactions make involved parties better off. 5. True or False. A centrally planned economy uses prices to ration scarce resources. 6. When individuals are acting in a way to maximize their utility, which of the following is NOT accurate? a. Individuals have different preferences, which lead them to choose different activities that maximize utility. b. If an individual is behaving altruistically, they cannot also be maximizing utility. c. Because of the uncertainty in life, individuals frequently adjust their behavior to maximize their utility. d. Individuals try to maximize their utility, given the resources they have to spend and the tradeoffs they must make in doing so. 7. True or False. Every action has a tradeoff and opportunity cost associated with it. 8. In the past decade, consumers have increasingly developed a taste for sashimi tuna. As a result, more and more tuna have been caught and sold. Which of the following correctly describes the role prices play in this situation? a. When customers order tuna at restaurants more often, restaurants place larger orders with their wholesalers, due to the increase in demand for wholesale tuna, the price rises. Fishermen see the higher wholesale price and decide to spend more time catching tuna. b. Because tuna are getting easier to catch, fishermen catch more of them. Since the supply of tuna is higher, the price falls. Since tuna is cheaper, people order it more often at restaurants. c. The wholesale price of tuna reflects production costs. As the price falls, people order tuna more often at restaurants. d. Because the price of tuna is higher, the government steps in to regulate the price to be lower so people can afford to buy it. 9. True or False. The field of behavioral economics offers insight into why we choose to behave rationally. 10. The reason that firms engage in price discrimination is they are a. required to by law. b. attempting to maximize profits. c. attempting to reduce production costs. d. being racist.

11. Once the market price has settled, a. the quantity people want to buy will exceed the quantity offered for sale. b. the quantity offered for sale will exceed the quantity people want to buy. c. the quantity people want to buy will equal the quantity offered for sale. d. the quantity offered for sale may be greater than or less than the quantity people want to buy. 12. In general, what do economists think about incentives? a. Incentives are somewhat useful to think about when designing public policy. b. Paying attention to incentives is important for economists and policy makers but not for firms or individuals. c. Incentives matter for any type of policy whether it is a parents rules for a childs behavior or a nations policy on drug use. d. Incentives are important in the other social sciences, but not economics. 13. Which of the following is NOT an example of perverse incentives created from government regulation? a. When infants are required to be restrained in car seats when on airplanes (thus requiring an additional ticket), many families choose to drive to their destination even though driving is by far more dangerous than flying. b. When Mexico City set up a system to limit the days when each car could be on the road, it actually resulted in more older cars staying on the roads, producing more emissions. c. Prior to reforming the Welfare Program in 1996, only unemployed single women with kids were eligible for cash payments so they did not have an incentive to get even a part-time job. d. When London introduced higher fees for driving at peak times, traffic congestion decreased. 14. When one party performs an action on behalf of another party but the parties have different incentives, it is called the a. employer-employee problem. b. principal-agent problem. c. incentive-misalignment problem. d. two-party problem. 15. True or False. In non-market economic systems, incentives are usually closely related to productivity. 16. A good policy is one that a. increases the benefits associated with an activity. b. increases the costs associated with an activity. c. changes the benefits or costs associated with an activity, after considering the incentives associated with the activity. d. does not alter the benefits or costs associated with an activity. 17. Communal resources (like the black rhino) suffer from problems like a. the Tragedy of the Commons. b. not having an commercial value. c. the Principal-Agent problem when it comes to using the resource. d. too many government regulations. 18. True or False. The outcome of a policy or regulation may be much different than the intent. Economists call this the law of unintended consequences. 19. True or False. Economically speaking, a good policy is one where everyone gets a benefit. 20. Many of the government benefit programs create an incentive for people to change their behaviors. Which of the following is NOT an example of such? a. Unemployment benefits reduce the incentive to look for work immediately. b. Increasing the income tax so people work harder. c. The Earned Income Tax Credit rewarding low income people who choose to work. d. The existence of Social Security causing people to save less for retirement than they otherwise would.

21. Ross knows his boss is always in a meeting from 11:30 to 12:30 every day. If Ross doesnt have to punch out when he goes to lunch, he leaves for his half hour lunch break at 11:45 and returns just before 12:30. If Ross does have to punch out when he goes to lunch, he leaves for his half our lunch break at 11:45 and returns promptly at 12:15. To solve this problem an economist would advise Rosss boss to a. cancel the meeting and personally make sure Ross took only a half hour break. b. require all employees to punch in and punch out for lunch and other breaks. c. increase lunch breaks to 45 minutes. d. fire Ross. 22. When taxes get too high, which of the following is NOT likely to happen? a. economic activity might move into the black market or underground economy. b. business investment increases. c. people might move money around to avoid paying the tax. d. people or firms might physically move to a city/state/country that has lower tax rates. 23. True or False. By definition, externalities are negative impacts. 24. One of the ways that governments help make markets possible is governments a. deal with externalities. b. set rules and define property rights. c. provide public goods. d. redistribute the wealth. 25. True or False. On philosophical questions like should a government protect people from their own individual bad decisions, economics gives us a clear cut answer. 26. Public goods a. often suffer from the free-rider problem. b. have a high cost for additional users. c. are easy to exclude people from. d. should be provided no matter what the cost. 27. True or False. Because there are many roles for a good government to fulfill, it is necessary for the government to levy taxes. 28. From an economic standpoint, which of the following is NOT a good role for a government? a. dealing with externalities. b. providing public goods. c. redistributing wealth equally among individuals. d. making markets possible. 29. Which of the following is NOT an insight from Ronald Coase? a. The private parties involved in the externality have an incentive to come to an agreement on their own. b. The private solution will be the same, regardless of who starts with the property right. c. In order for a private solution to be reached, transaction costs have to be low. d. A private solution can rarely be reached. 30. True or False. Two common options for dealing with negative externalities are taxing the activity or regulating the activity. Economists would favor regulating the activity because it incentivizes the good behavior.

Name: ____________________________________________

Economics Dr. Sauer

31. Think of a time when you faced tradeoffs and had to make a decision about what course of action to take. a. List the tradeoffs you were deciding between.

b. Which option did you end up choosing? Why?

c. What was your opportunity cost of the action that you chose to take?

____________________________________________________________________________________ 32. Suppose we are analyzing the market for lift tickets at ski resorts in Colorado. Suppose the weather is quite warm and not very snowy. Graphically illustrate the impact on demand or supply. Also explain in words how market price and quantity would change.

____________________________________________________________________________________ 33. Find an example of an externality in your daily life, either positive or negative. You may be creating the externality or you may be experiencing the result of an externality. Answer the following from the perspective of the party creating the externality. The action/ Who is taking the action: Their private cost and private benefit:

If the externality is negative: the extra costs to society or a third party: If the externality is positive: the extra benefits to society or a third party: