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CHAPTER 1: ECONOMICS AND ECONOMIC
REASONING
Questions and Exercises
1. Coordination refers to how the three central problems facing any economy are
solved. Those three problems are what and how much to produce, how to
The concept of scarcity has two elements: our wants and our means of fulfilling
those wants. Those two elements are interrelated since wants are changeable and
Therefore, the author of the textbook focused on coordination instead of scarcity
to emphasize the subsidiary nature of scarcity to the overall concept of
2. a. Macroeconomic
b. Microeconomic
d. Microeconomic
f. Microeconomic
Microeconomics studies how economic forces influence individual choices such
as the pricing policies of firms, households’ decisions on what to buy, and how
3. Answers will differ. Two microeconomic problems are the pricing policies of
firms (price-fixing in particular) and the way wages are determined in labor
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
4. a. The opportunity cost of attending college is the sacrifice one must make to attend
college. It can be estimated by figuring out the benefit of the next-best alternative.
b. The opportunity cost of taking a course could be estimated by using the same
c. The opportunity cost of attending yesterday’s lecture would depend on what you
5. Answers will vary. A correct answer will indicate that the student compared the
6. The marginal costs are the additional costs of the additional activity. In this case,
the additional activity is driving (200 - 150) miles.The marginal cost is $0.15 per
7. No, since the marginal cost of drug control exceeds the marginal benefit;
8. The opportunity cost of buying a $20,000 car is the benefit we would have gained
9. Only the marginal costs and benefits of taking the job are relevant. That means
that the sunk cost of the bachelor’s degree is irrelevant. Therefore, the relevant
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
10. You should spend the $5 million on projects that provide the highest marginal
11. Answers will differ. Two examples of social forces are our unwillingness to
12. Answers will differ. Two examples of political or legal forces are rent control
laws and restrictions on immigration. Both prevent the invisible hand from
13. a. Both parties benefit. The person who gains the kidney benefits if it works when
transplanted into his or her body and will no longer have the emotional and
b. Both parties must undergo surgery and face all the attendant risks and costs. The
seller also faces the potential cost of a future illness or injury harming his or her
c. Whether a society should allow this transaction is a question of value judgments
and cultural norms. Our society has chosen not to allow such transactions because
14. An economic model is a framework that places the generalized insights of a
15. No. Economic theory proves nothing about what system is best. It simply
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16. A theorem is a proposition that is logically true based on the assumptions of the
17. A normative statement reflects ethical judgments about what should be. It reflects
values. A positive statement refers to a fact or a logical relationship. It is in
principle testable or is the result of logic analysis. Positive statements of fact are
18. a. Positive statement, since it is a statement of fact.
b. Normative economics, since it deals with what the goals of the economy should
be.
c. Since this is relating a normative goal to a decision, this could be a statement in
d. Positive statement, since it is a statement of fact.
Questions from Alternative Perspectives
1. Austrian
Most economists would answer “yes” because they see economic variables such
as unemployment as objective measures, which makes them available as measures
2. Religious
a. The rational choice model assumes that individuals are one-dimensional, that they
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
b. The conflict suggests that we have to be careful not to apply the economic model
3. Feminist
a. Patriarchy is a social institution in which men exercise a disproportionate amount
of social power and are in a position to define the roles of women and children as
b. Some economists might argue that men and women are merely expressing their
preferences in job choices, whereas feminist economists might argue that these
4. Institutinalist
a. A free market outcome would provide flu vaccine to those willing and able to pay
b. The determination of which option is “just” requires delving into theories of
5. Post-Keynesian
a. This answer will differ among students.
b. Most students probably will answer this question “no.” The standard theory
presented in the book is based on the assumption that decision makers have full
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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c. Recognizing that you have limited time, knowledge, and ability to compute all the
possible outcomes of each economic decision, you probably rely on social norms
d. The implication of this behavior is that individuals do not follow the economic
decision rule of gaining complete information to optimize their choices but rely
6. Radical
a. It implies that there is no clear-cut distinction between positive and normative
b. Economics is value-laden. The relevant question about whether the distinction is
Issues to Ponder
1. Regretting a decision doesn’t necessarily mean that we did not use the economic
decision rule when making that decision. At the time the decision was made, we
weighed the marginal costs and marginal benefits, undertaking the activity if the
2. a. It depends on the perspectives used to answer the question. From a purely
economic perspective, we would conclude that it is reasonable to execute hackers
b. Cost/benefit analysis can be extended to many areas, such as social welfare
programs and almost all the policy discussions. (Source: “Feed the Worms Who
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
3. The Theory of Moral Sentiments emphasizes the importance of morality. The
invisible hand directs people’s selfish desires (tempered by the social and political
4. a, b. Parts a and b have no “right” answers. Most people would say “no” to a and
“yes” to b. If one were answering this question from the perspective of the
c. People tend to believe that children should be afforded greater protection than is
afforded to adults and are therefore repelled by the idea of sacrificing a child even
d. Brain imaging suggests that the moral sense behind one’s answers does not come
from rational thought, but instead from emotion—gut responses. This suggests
5. a. It depends. On the basis of cost/benefit analysis, one could figure out cases in
which most people would say that they should be dishonest, but cost/benefit
b. You can make yourself more believable by developing a reputation for honesty.
6. a. Yes, I would expect such a market to develop unless it is prevented by legal or
social forces. The person wanting out of the current marriage will likely offer
a U.S. citizen allows the foreigner to become a U. S. citizen. I would expect
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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b. Which would have the higher price depends on the supply and demand. It depends
7. a. Answers will vary.
b. Economic theory says that prices are determined by supply and demand, but
businesses often use rules of thumb such as cost-plus-markup rules to set their
c. Again, answers will vary, but the reasoning is the same as in part b.
8. It depends on the perspective one takes. It is economically reasonable to legalize
9. Answers will vary. Here is an example: Banks are economic institutions. They
take a cost/benefit approach to deciding to whom to give loans, and they influence
10. a. This is a matter of personal views; there are arguments for and against it. An
argument against the practice is that wealthy songwriters would have too much
b. The royalty payment gave Freed a strong incentive to choose what he considered
c. Product placement in movies is legal, as are free newspapers to professors for
11. Three ways (among many) that dormitory rooms could be rationed are
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behavior would be forced to fit the will of the administrator. Individuals probably
would complain and try to influence the administrator's decision. Because
behavior would be forced to fit the luck of the draw; individuals probably would
12. It suggests that policy should be willing to give up more in possible gains to avoid
losses than otherwise would be the case. Economic policies should be risk-averse
13. A good economist always tries to be objective. However, no one can ever be
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
