A n s w e r s t o t h e R e v i e w Q u i z
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1. List some examples of the scarcity that you face.
Examples of scarcity common to students include not enough income to aord
2. Find examples of scarcity in today’s headlines.
A headline in The Sacramento Bee on May 6, 2014 was “Sleep Train Kicks O
Annual ‘Clothing Drive for Foster Kids’.” The story points out that these children
3. Find an example of the distinction between microeconomics and
macroeconomics in today’s headlines.
Microeconomics: On May 6, 2014 a headline in The New York Times was “Bayer
Buys Merck’s Consumer Business for $14.2 Billion.” This story covers a
microeconomic topic because it discusses how two pharmaceutical 6rms have
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1. Describe the broad facts about what, how, and for whom goods and
services are produced.
What gets produced is signi6cantly dierent today than in the past. Today the U.S.
economy produces more services, such as medical operations, teaching, and hair
styling, than goods, such as pizza, automobiles, and computers. How goods and
services are produced is by businesses determining how the factors of production,
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1WHAT IS
ECONOMICS?
2C H A P T E R 1
2. Use headlines from the recent news to illustrate the potential for conEict
between self-interest and the social interest.
One example of an issue concerns the income necessary to live in an apartment
building in San Francisco. A May 5, 2014 headline from The San Francisco
Chronicle was “S.F. Landlord: Make $100K or Get Out.” This story discusses an
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1. Explain the idea of a tradeo and think of three tradeos that you have made
today.
A tradeo reEects the point that when someone gets one thing, something else
must be given up. What is given up is the opportunity cost of whatever is obtained.
Three examples of tradeos that are common to students include: a) When a
student sleeps in rather than going to his or her early morning economics class,
the student trades o additional sleep for study time. The opportunity cost of the
2. Explain what economists mean by rational choice and think of three choices
that you’ve made today that are rational.
A rational choice is one that compares the costs and bene6ts of the dierent
actions and then chooses the action that has the greatest bene6t over cost for the
person making the choice. Three rational choices made by students include: a) The
choice to skip breakfast to go to class. In this case the bene6t is the higher grade
3. Explain why opportunity cost is the best forgone alternative and provide
examples of some opportunity costs that you have faced today.
When a decision to undertake one activity is made, often many alternative
activities are no longer possible. Often these activities are mutually exclusive so
only the highest valued alternative is actually forgone. For instance, the decision to
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W H AT I S E C O N O M I C S ? 3
4. Explain what it means to choose at the margin and illustrate with three
choices at the margin that you have made today.
Choosing at the margin means choosing to do a little more or a little less of some
activity. Three common examples students encounter are: a) When a student faces
a chemistry and an economics 6nal exam in one day, the student must determine
whether spending the last hour studying a little more chemistry or a little more
economics will yield a better contribution (marginal bene6t) to his or her overall
5. Explain why choices respond to incentives and think of three incentives to
which you have responded today.
People making rational decisions compare the marginal bene6ts of dierent
actions to their marginal costs. Therefore people’s choices change when their
incentives, that is the marginal bene6t and/or marginal cost, of the choice
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1. Distinguish between a positive statement and a normative statement and
provide examples.
A positive statement is a description of how the world is. It is testable. A normative
statement is a description of how the world ought to be. It is, by its very nature,
not testable because there is no universally approved criterion by which the
statement can be judged. “I will receive an A for this course,” is a positive
2. What is a model? Can you think of a model that you might use in your
everyday life?
A model is a description of some aspect of the economic world. It includes only
those features that are necessary to understand the issue under study. An
economic model is designed to reEect those aspects of the world that are relevant
3. How do economists try to disentangle cause and eect?
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4C H A P T E R 1
Economists use models to understand some aspect of the economic world. Testing
the predictions of models makes it necessary to disentangle cause and eect. To
overcome this problem, economists have three methods of testing their models:
4. How is economics used as a policy tool?
Individuals, businesses, and governments use economics as a policy tool.
Individuals use the economic ideas of marginal bene6t and marginal cost when
making decisions for such topics as attending college, paying cash or credit for a
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A n s w e r s t o t he S t u d y P la n P r ob l e m s a n d
A p p l i c a t i o n s
1. Apple Inc. decides to make iTunes freely available in unlimited quantities.
a. Does Apple’s decision change the incentives that people face?
Apple’s decision changes people’s incentives. For example, it increases people’s
b. Is Apple’s decision an example of a microeconomic or a macroeconomic
issue?
2. Which of the following pairs does not match?
a. Labor and wages
b. Land and rent
c. Entrepreneurship and pro6t
d. Capital and pro6t
3. Explain how the following news headlines concern self-interest and the social
interest.
a. Starbucks Expands in China
Starbucks’ expansion is a decision made by Starbucks to further Starbucks’
interest. Thus the decision is directly in Srarbucks’ self interest. The social interest
b. McDonald’s Moves into Gourmet Coee
McDonald’s decision to serve gourmet coee is a decision made by McDonald’s to
further McDonald’s interest. Thus the decision is directly in McDonald’s self
c. Food Must Be Labeled with Nutrition Data
The decision to require that food must be labeled with nutrition information is
4. The night before an economics test, you decide to go to the movies instead of
staying home and working your MyEconLab Study Plan. You get 50 percent on
your test compared with the 70 percent that you normally score.
a. Did you face a tradeo?
b. What was the opportunity cost of your evening at the movies?
5. Cost of Sochi Winter Olympics
The Russian government spent $6.7 billion on Olympic facilities and $16.7
billion upgrading Sochi area infrastructure. Sponsors spent $27.6 billion on
hotels and facilities hoping to turn Sochi into a year–round tourist magnet.
Source: The Washington Post, February 11, 2014
Was the opportunity cost of the Sochi Olympics $6.7, $23.4, or $51 billion?
Explain your answer.
The $6.7 billion spent on Olympic facilities is de6nitely an opportunity cost of the
Sochi Olympics. The $16.7 billion spent upgrading the Sochi area infrastructure
6. Which of the following statements is positive, which is normative, and which
can be tested?
a. The United States should cut its imports.
b. China is the largest trading partner of the United States.
c. If the price of antiretroviral drugs increases, HIV/AIDS suerers will decrease
their consumption of the drugs.
Answers to Additional Problems and Applications
7. Rapper O-ers Free Tickets for Concert
Eminem will hit the road with Rihanna oering an awesome deal—buy one
and get one free!
Source: Mstars News, February 24, 2014
When Eminem gave away tickets, what was free and what was scarce?
Explain your answer.
The seats in the arenas are scarce—there are only a limited number. Also scarce is
the time the enthusiastic fans spend in line to acquire the tickets. In addition, if the
8. How does the creation of a successful movie inEuence what, how, and for
whom goods and services are produced?
The “what” question is aected in two ways. First, one good or service that is
produced is the successful movie. Second, spinos (Iron Man II) and/or similar 6lms
likely will be created in the future. The “how” question is aected to the extent that
9. How does a successful movie illustrate self-interested choices that are also in
the social interest?
The a successful movie increases the income of the people involved with the
movie. Hence these people’s choices are driven largely by self interest. However
10. Before starring in Iron Man, Robert Downey Jr. had appeared in 45 movies that
grossed an average of $5 million on the opening weekend. In contrast, Iron
Man grossed $102 million.
a. How will the success of Iron Man inEuence the opportunity cost of hiring
Robert Downey Jr.?
The salary that must be paid to Robert Downey Jr. to appear in future movies
b. How have the incentives for a movie producer to hire Robert Downey Jr.
changed?
There are two eects on the incentives of producers to hire Mr. Downey. First,
because the opportunity cost of hiring Mr. Downey increased, the incentive to hire
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W H AT I S E C O N O M I C S ? 3
11. What might be an incentive for you to take a class in summer school? List
some of the bene6ts and costs involved in your decision. Would your choice
be rational?
Early graduation, smaller class sizes, and/or retaining eligibility for a scholarship
are examples of incentives that encourage taking summer classes. The bene6ts of
taking summer classes might include early graduation, more personal attention
from the instructor, retained eligibility for a scholarship, and increased knowledge
12. Look at today’s Wall Street Journal. What is the leading economic news story?
With which of the big economic questions does it deal and what tradeos
does it discuss or imply?
On May 6, 2014, the top economic news story discussed a report claiming that
climate change is already harming the economy. The report asserted that climate
change is already bringing extreme weather such as Eoods, drought, and other
weather–related disasters, all of which harm the nation’s economy.
13. Provide two microeconomic statements and two macroeconomic statements.
Classify your statements as positive or normative, and explain your
classi6cations.
Microeconomic statements are: Fewer deep water oil wells should be drilled in the
Gulf of Mexico. If less oil is produced, the price of oil will rise. The 6rst statement is
normative because it relies on what the person thinks “should” be done. The
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W H AT I S E C O N O M I C S ? 5