978-1259663048 Chapter 3 Solutions Manual

Unlock access to all the studying documents.

View Full Document

CHAPTER 3: ECONOMIC INSTITUTIONS

Questions and Exercises

1. In a market economy, fluctuations in prices play a role in coordinating

2. In a centrally planned socialist economy, sometimes called a command economy,

3. Market economies solve the three problems through markets and the system of

4. Centrally planned socialist economies solve the three problems by using

administrative control. Central planners decide what to produce according to what

5. Although economics does not provide an answer to normative questions such as

this, economics can be used to describe the characteristics of capitalistic and

6. A market economy depends on coordination, and the mechanisms of coordination

depend on the people who choose which goods to supply and what to demand.

any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

7. Business is dynamic; it involves meeting new problems constantly, recognizing

needs, and meeting those needs in a timely fashion. These are precisely the skills

8. The three forms of businesses are corporations, partnerships and sole

proprietorships.

a. In the United States, sole proprietorships are the most common.

9. You would most likely choose a sole proprietorship because it’s easy to start,

requires minimal bureaucratic hassle, and is controlled by you, the owner. If you

10. The state and local government’s two largest categories of spending are education

(approximately 33 percent) and health (approximately 24 percent), with

11. The six roles of government in a market economy are (1) providing a stable set of

institutions and rules, (2) promoting effective and workable competition, (3)

12. Pollution permits require firms to pay the cost of pollution they create. When

these permits are tradable, firms that face the lowest cost of reducing pollution

13. A merit good is a good that government believes is good for you even if you

choose not to buy it. An example might be operas.

any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

A demerit good is a good that government believes is bad for you even if you

choose to buy it. An example is alcohol or drugs.

14. Economic actions are coordinated by a wide variety of international organizations

15. Countries have developed global and regional organizations whose role is to

16. International organizations are limited in their effectiveness because membership

Questions from Alternative Perspectives

1. Austrian

a. The dangers of government intervention and support of activities is that once

b. If governments financially support families, they might attempt to limit the

2. Religious

any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

He meant that strongly held religious beliefs can lead people to violate the law,

3. Feminist

a. Economists know relatively little about intra-household decision-making and have

generally assumed that households have a single joint utility function. In one

b. Absolutely. Bargaining is likely to take place among individuals within a

c. The ability to walk away from the bargain is what gives someone power. Paying

the bills also gives power. In families the individual with higher income is likely

d. Individuals are more likely to act cooperatively within a household because there

are additional mechanisms besides money to maintain accountability. However,

e. It makes sense within the theory of social behavior of groups of various sizes and

4. Institutionalist

The dilemma is obvious and represents an inherent conflict in a society whose values

are greatly influenced by the Judeo-Christian ethic of charity towards all, and the free

market ethic, which emphasizes the pursuit of self-interest. In thinking about ethics,

there is a difference between intention and result, and in the Theory of Moral

5. Radical

any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

a. To some degree consumer’s desires influence what is produced, but with so much

advertising, it is difficult to determine people’s true desires, and whether those

b. Firms have a strong incentive to develop tastes for the products that they are

selling, and they spend lots of money on advertising to shape tastes. But since we

c. The other group that has some sovereignty is business. If business sovereignty

holds, then the analysis based on consumer sovereignty is misleading, and should

Issues to Ponder

1. Markets have little role in most families. In most families decisions about who

gets what are usually made by benevolent parents. Because families are small and

social bonds are strong, this benevolence can work. Thus, a socialist organization

seems more appropriate to a family and a market-based organization to a large

2. a. The fact that more money is spent on adults than on children in the family does

b. Yes, these percentages probably change with income. The lower the income, the

larger the percent of total expenditures spent on children. The reason is that most

c. Our suspicion is that the allocation would not be significantly different in

command economies as compared to capitalist economies. If, however, the

3. a. Innovation requires a certain level of freedom of thought and a possibility of

profit-making from the innovation. Neither existed in centrally-planned

economies. Government planners directed production with income based on need,

any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

b. Both freedom and the possibility of making profits provide the means and

c. Schumpeter’s argument was based on the idea that profit-making by innovators

d. Since his predictions did not materialize, one must believe that firms have either

been able to create incentive structures to foster innovation or that some other

venue for innovation has arisen. Firms have large research and development

4. a. Such an idea could be expanded to include college courses, but that is unlikely to

happen because the quantity of in-person college courses demanded would

decline as people substitute toward recorded lectures. Substitution, however, is

b. Technical problems are virtually nonexistent. Socially, the problems are

substantial. A diminishing role of the university would significantly change its

role of providing a focal point for intellectual discussion and discovery, thus

changing the nature of education. There would be great social pressures to

c. Even though the program is technically possible and cost efficient, it will not

5. Answers will vary. There are no “correct” answers; it is more an exercise that asks

you to gather information about the limitations on businesses of different types in

their communities. You are then asked to make judgments as to whether the

6. Consumers decide what goods they want, and demonstrate their decisions in their

willingness to pay for the goods. Businesses decide what to produce, but their

decisions reflect consumer desires. Thus, there is no contradiction. However,

any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

7. Individuals might disagree as to the categorization of a good as a merit, demerit or

public good or a good that involves an externality. In the case of an externality,

8. There is market failure only if people do not value operas as much as they should.

This normative statement is valid only if the “should” can be measured against

some absolute truth as to the value of operas, otherwise how would one decide

9. People have made decisions based on the rules that were set up, so changing them

after the game has been started may be more unfair than continuing to play by the

10. When making such trade agreements, it is important for countries to realize that

trade includes not only economic issues, but cultural and social ones as well.

While free and unregulated trade is generally the most economically beneficial

any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.