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    Ten important ideas of economics

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    Microeconomics Worksheet - Chapter One - Baumol & Blinder

    Each statement below illustrates one of the 10 important Ideas. Which statement goes with which idea?
    1. Opportunity cost is the correct measure of cost.
    2. Attempts to fight market forces often backfire or have unintended consequences.
    3. Nations can gain from trade by exploiting their comparative advantage.
    4. Both parties gain in a voluntary exchange.
    5. Good decisions typically require marginal analysis.
    6. The adverse impact of externalities can often be repaired by market methods.
    7. There is a trade-off between efficiency and equality. Many policies that promote one damage the other.
    8. The government's tools to even out booms and busts are imperfect.
    9. In the short run, policymakers face a trade-off between inflation and unemployment.
    10. In the long run, productivity is almost the only thing that matters for a society's material well-being.
    A. In June 2008, Northwest Airlines offered a last-minute roundtrip cyber saver fare between Los Angeles and New York City for $274. This fare required travelers to fly on Saturday and return the following Monday or Tuesday. At the same time, a regular unrestricted fare was more than $1,422, and the ten-day, advance purchase Saturday stay-over was around $315. Economists would argue that, properly counted, Northwest was more than covering costs on the $274 passengers.
    B. "We trade because we can get more of the goods and services we value by devoting our energies to what we can do well and using the proceeds to purchase what others are good at making (or doing)." I.M. Destler, "Trade Policy at a Crossroads," Brookings Review, Winter 1999.
    C. In New York, individuals who need a passport at the last minute have to pay a #35 fee for rush service and often spend most of a day waiting in line. Others pay up to $150 extra for someone else to stand in line for them. "If six hours of your time is worth more than $150, you're going to be prepared to use one of these services," said George Brokaw, a New York investment banker. "Speeding Up a Passport," The New York Times, June 6, 1999.
    D. Commenting on the economy in July 1998, Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System, said, "...the extent to which strong growth and high labor force utilization have been joined with low inflation over an extended period is...exceptional...With labor markets very tight and domestic final demand retaining considerable momentum, the risks of a pickup in inflation remain significant...[T]he impending constraint from domestic labor markets could bind more abruptly than it has to date, intensifying inflation pressures." Testimony of Alan Greenspan, Chairman of the Federal Reserve Board of Governors Before the Committee on Banking, Housing, and Urban Affairs, U.S .Senate, July 21, 1998.
    E. Third-graders Jennifer and Jolene trade sandwiches at lunch because each prefers what the other's mother fixed.
    F. Robert Arnold and Robert Dennis argue that the impact of the growth in labor productivity since the beginning of this century has been astounding. Not only has output per worker increased more than sevenfold, but "the typical workday and typical workweek shrank...the share of family income required to meet the bare necessities was cut in half...and goods that were once considered luxuries came within reach of the middle class." "Perspectives on productivity growth," Business Economics, April 1, 1999.
    G. A study of 16 American cities found that advertised rents for vacant units were higher in cities with rent control than cities without rent control. In cities without rent control, advertised rents are distributed almost evenly above and below median rents as measured by the U. S. Bureau of the Census. In cities with rent control, "most available units are priced well above the median. In other words, inhabitants in cities without rent control have a far easier time finding moderately priced rental units that do inhabitants in rent-controlled cities." William Tucker, "Rent control drives out affordable housing," USA Today, (Magazine), July 1998.
    H. There is great comprehension today that ambitious redistribution policies will reduce either economic efficiency or economic growth, or both, because of undesired behavioral adjustment of work, savings, investment, and entrepreneurship." Assar Lindbeck, "How Can Economic Policy Strike a Balance Between Economic Efficiency and Income Equality," in Income Inequality: Issues and Policy Options, a symposium sponsored by the Federal Reserve Bank of Kansas City, August 27-28, 1998.
    I. Under the EPA's Acid Rain Program, fossil fuel fired power plants are allotted SO2 emission allowances that allow them to emit one ton of SO2. Utilities with surplus allowances may sell them to utilities whose emissions levels exceed their allowances.
    J. "If we knew precisely where we were, understood precisely the relationship between our instruments and macroeconomic performance, had a single objective, and could instantly affect the variable or variables associated with our target (s), implementing [monetary] policy would be easy...It is precisely because none of these preconditions hold that monetary policy is so difficult and principles are needed to guide its implementation." Remarks by former Federal Reserve Governor Laurence H. Moyer. The Alan R. Holmes Lecture, Middlebury College, Middlebury, Vermont, March 16, 1998.

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    Solution Preview

    A.Good decisions typically require marginal analysis.
    B.Nations can gain from trade by exploiting their comparative advantage.
    C.Opportunity cost is the correct measure of cost.
    D. In ...

    Solution Summary

    Matching scenarios with the ten important ideas of economics