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Unformatted text preview: 1 The Sco pe and Me thod of Econ omi cs Why Study Economics 1. Define the term economics . Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided. Difficulty: E Type: D 2. List four reasons to study economics. (1.) Learn a way of thinking. (2.) Understand society. (3.) Understand global affairs. (4.) Be an informed voter. Difficulty: E Type: F 3. Explain what is meant by the term opportunity cost . The opportunity cost of something is measured by the next best alternative that we forgo, or give up, when we make a choice or a decision. Difficulty: E Type: D 1 2 Test Item File 3: Principles of Macroeconomics 4. Why would an economist argue that tuition is not the largest cost of attending a state university? The largest cost of attending a university is the opportunity cost of the student's time. This could be measured by the foregone income that could have been earned if the student worked instead of attending classes. Difficulty: E Type: C Situation #1 Assume that you have hired three executives to run your company each with a different job. All are equally productive and each can do the other persons job if necessary. Assume that the first executives contribution to the company is worth $1,000,000; the second one is worth $800,000 and the third one is worth $500,000. 5. Referring to Situation #1 suppose that for the time being you can only afford to hire the first executive. What is the opportunity cost of the first executives work from the viewpoint of the company? Explain. The opportunity cost of the first executive is $800,000. That is the value of the next best available alternative which is currently forgone. Difficulty: E Type: C 6. Referring to Situation #1 suppose that you can now hire two workers. What is the opportunity cost of the second executives work from the viewpoint of the company? Explain. The second executives work is simply the value of the next best opportunity which is the work that could have been done by the third executive which is $500,000 Difficulty: E Type: C 7. Referring to Situation #1 suppose that you decide that you have to fire the first and the third executive without hiring any replacements. What would be the opportunity cost of the second executives work? Explain why your answer is not the same as in the question above. The opportunity cost of second executives work is $800,000. The reason is that since each executive can perform any work that they other can then it makes sense to change the second executives job so that he is now doing the most highly valued work that with the $1,000,000 value. That leaves the $800,000 job undone which means that becomes the opportunity cost of the second executives work....
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- Spring '11