There is an old saying that "The proof of the pudding is in the eating," which means that by definition good decisions work out well and poor decisions work out badly. This question asks you to consider this the wisdom of this saying
a. Your friends live in a city where it often rains in May. Nonetheless, they plan a May outdoor wedding and have no backup plan if it does rain. The weather turns out to be lovely on their wedding day. Do you think your friends were being rational when they made their wedding plans? Explain.
b. You usually have to see a doctor several times each year. You decided to buy health insurance at the start of last year. It turns out you were never sick last year and never had to go the doctor. Do you think you were being rational when you decided to buy health insurance? Explain.
c. Given your answers to the first two parts of this question, do you agree or disagree that "The proof of the pudding is in the eating?" Explain.
a. Your friends probably have not optimized, i.e. they were not rational. There was a good chance of rain on their wedding day and they had no backup plan if it did rain. Given the information available when they made their plans, they made a poor decision.
b. You probably were being rational when you bought health insurance. You usually have to see a doctor several times each year and without insurance you would have to pay for those visits to the doctor. Given the information available when you made your plan, you made a good decision.
c. Sometimes the proof is not in the pudding. Sometimes poor decisions work out well (your friends live in a rainy city but planned an outdoor wedding); sometimes good decisions work out poorly (you bought health insurance that you never used.
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The study of how one business firm sets its prices would fall under the study of:
a. Economic growth b. Microeconomics c. Income distribution d. Macroeconomics
When price is greater than both marginal cost and average variable cost, the perfectly competitive firm
A. should increase its level of output. B. is maximizing economic profit. C. should reduce its level of output. D. should stop production.
When the U.S. dollar appreciates,
A. U.S. exports rise. B. U.S. imports decline. C. aggregate demand shifts inward. D. aggregate demand shifts outward.
Which formula can be used for approximating the real interest rate when the inflation rate is low?
a. Nominal Interest Rate + Expected Inflation. b. Nominal Interest Rate + Expected Deflation. c. Nominal Interest Rate – Expected Inflation. d. None of the above is suitable.