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.
2. Find examples of scarcity in today’s headlines.
A headline in The Sacramento Bee on May 6, 2014 was “Sleep Train Kicks Off Annual ‘Clothing Drive for
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
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1. Describe the broad facts about what, how, and for whom goods and services are produced.
What gets produced is significantly different 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
1
WHAT IS
ECONOMICS?
C h a p t e r
2. Use headlines from the recent news to illustrate the potential for conflict 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
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1. Explain the idea of a tradeoff and think of three tradeoffs that you have made today.
A tradeoff reflects 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 tradeoffs that are
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 benefits of the different actions and then chooses
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
W H A T 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
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 benefits of different actions to their marginal
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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
2. What is a model? Can you think of a model that you might use in your everyday life?
3. How do economists try to disentangle cause and effect?
Economists use models to understand some aspect of the economic world. Testing the predictions of
4. How is economics used as a policy tool?
Individuals, businesses, and governments use economics as a policy tool. Individuals use the economic
4 C H A P T E R 1
A n s w e r s t o t he S t u d y P l a n P r o bl e m s a n d A p p l i c a t io 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 incentives to buy an
iPod to take advantage of the newly “free” music available on iTunes.
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
Labor earns wages, so this pair matches.
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
b. McDonald’s Moves into Gourmet Coffee
McDonald’s decision to serve gourmet coffee is a decision made by McDonald’s to further McDonald’s
c. Food Must Be Labeled with Nutrition Data
The decision to require that food must be labeled with nutrition information is made in the social
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 tradeoff?
b. What was the opportunity cost of your evening at the movies?
5. Cost of Sochi Winter Olympics
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 definitely an opportunity cost of the Sochi Olympics. The
6. Which of the following statements is positive, which is normative, and which can be tested?
a. The United States should cut its imports.
The statement is normative and cannot be tested.
6 C H A P T E R 1
Answers to Additional Problems and Applications
7. Rapper Offers Free Tickets for Concert
Eminem will hit the road with Rihanna offering 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.
8. How does the creation of a successful movie influence what, how, and for whom goods and services
are produced?
9. How does a successful movie illustrate self-interested choices that are also in the social interest?
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 influence the opportunity cost of hiring Robert Downey Jr.?
b. How have the incentives for a movie producer to hire Robert Downey Jr. changed?
11. What might be an incentive for you to take a class in summer school? List some of the benefits
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
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 tradeoffs 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 floods, drought, and other weather-related disasters, all of which harm the nation’s
economy.
This story implicitly discusses the “how” question: Will goods and services be produced in ways that
limit climate change or not? It also discusses the “what” question: Will goods and services that limit
climate change, such as solar panels, be produced?
13. Provide two microeconomic statements and two macroeconomic statements. Classify your
statements as positive or normative, and explain your classifications.
Microeconomic statements are: Fewer deep water oil wells should be drilled in the Gulf of Mexico. If