DeVry University, Chicago

ECON ECON312

Micro-Answers to Review Questions

Essays, and Problems, chapter 1

1)What do economists mean when they say that “there is no free lunch”? Give another example to which this statement applies.

2.  Explain the importance of the ceteris paribus or “other-things-equal” assumption.

3. What is policy economics? What are the three basic steps on policymaking?

4.  List eight widely accepted economic goals of the United States.

5. Below are six statements. Indicate whether each one pertains to microeconomics (MIC) or macroeconomics (MAC).

1. 1. “The inflation rate in the United States hit its lowest level in the last twenty years.”
   2. “The profits of Microsoft rose 20 percent during the past quarter.”
   3. “Rains from El Nino again hit the California region causing severe flooding in farms. The prices for citrus and produce are expected to rise sharply.”
   4. “The nation’s economy grew at an annual rate of 3.7 percent in the final quarter of the year.”
   5. “The trade deficit in the United States was $20 billion last month.”
   6. “General Motors plans to spend $800 million on a new automobile plant.”

6. Below are six statements. Identify whether each is a positive or normative statement.

1. 1. The minimum wage would be increased so low-income workers can earn a living wage.
   2. The unemployment rate is too high and should be reduced through government actions.
   3. The rate of inflation was about 2 percent last year, an all time low for the past decade.
   4. The government should take action to break up the monopoly power of Microsoft.
   5. Interest rates should be lower in the United States so that people can afford to build a home.
   6. The Federal government achieved a budget surplus for the first time in thirty years.

7. Below are four statements. Each of them is an example of one of the pitfalls often encountered in the study of economics. Indicate following each statement the type of pitfall involved.

1. 1. “July is the month with the most ice cream sales and also the month with the most drownings. Therefore, the more ice cream people eat, the more likely they are to drown.”
   2. “Dry weather in the county where Farmer Brown lives decreased his income because his crop was so poor. Therefore, when there is dry weather in the nation as a whole all farm incomes will suffer.”
   3. “I have to live within my income. Therefore, governments should not be allowed to borrow money.”
   4. “National health insurance plans are socialistic.”

8.  What is the fallacy of composition? Give an economic and a non-economic example.

9.  Explain what the post hoc fallacy is. Give an example.

10.  Explain the difference between correlation and causation and give an example.