ECONOMICS AND LIFE - manner. This document may not be copied, scann...

1-1 © 2021 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.

CHAPTER 1

ECONOMICS AND LIFE

Solutions to End-of-Chapter Questions and Problems Review Questions 1.Suppose you are shopping for new clothes to wear to job interviews, but you’re on a tight budget. In this situation, what are your wants and constraints? What does it mean to behave rationally in the face of scarcity? [LO 1.1] Answer: If you are deciding what to buy for a job interview, your want is to buy clothing that looks clean and professional, so you can present the best possible impression to potential employers. Your constraint is the amount of money you can spend on this clothing. A person behaving rationally would buy the nicest clothes they could afford.

2.You are a student with a demanding schedule of classes. You also work part time and your supervisor allows you to determine your schedule. In this situation, what is your scarce resource? How do you decide how many hours to work? [LO 1.1] Answer: Your scarce resource is time. You need both time to study and time to work.Presumably, you want to do well in school and also make money. You will try to balance your schedule so that you work as much as possible while still having enough time to study and do well in school.

3.Think about the definition of scarcity that you learned in this chapter. Name three ways that you confront scarcity in your own life. [LO 1.1] Answer: People face scarcity in many aspects of their lives. Some people love to travel and explore new places, so they face scarcity in both time and money that keeps them from traveling as often as they would like. Others face scarcity in their professional life, in that there are often many worthwhile projects to address, but the available resources are limited in terms of employees, time, and budget.

4.When shopping for your interview clothes, what are some trade-offs you face? What is the opportunity cost of buying new clothes? What are the benefits? How do you balance the two?

[LO 1.2]

Answer: The money you spend on clothes for a job interview could be spent on other things instead, so it is one opportunity cost. Another opportunity cost is the time you spend MacroEconomics, 3e Dean Karlan, Jonathan Morduch (Solutions Manual All Chapters) Supplement files download link at the end of this file. 1 / 4

Chapter 01 - Economics and Life 1-2 © 2021 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.

shopping, which could be spent preparing for your interview or playing Frisbee. The benefits include looking put-together during the interview, which provides a boost to your job prospects. You balance the costs and benefits by accepting costs that are less than (or no greater than) the benefits they provide.

• You have an 8:30 class this morning but you are feeling extremely tired. How do you decide

whether to get some extra sleep or go to class? [LO 1.2]

Answer: If you are behaving rationally, you decide by comparing the trade-offs. The opportunity cost of going to class is missing out on some extra sleep. Depending on what else in on your schedule that day (perhaps an important interview), it may make sense to choose extra sleep over class. The opportunity cost of extra sleep is that you will miss the lecture. If your grade will suffer significantly by your absence, you may want to grab some coffee and go to class!

• It’s Friday night. You already have a ticket to a concert, which cost you $30. A friend invites

you to go out for a game of paintball instead. Admission would cost you $25, and you think you’d get $25 worth of enjoyment out of it. Your concert ticket is nonrefundable. What is your opportunity cost (in dollars) of playing paintball? [LO 1.2]

Answer: The opportunity cost of going to play paintball is whatever amount of enjoyment (in dollars) you would get out of going to the concert. The $30 you paid for the concert ticket is not relevant to the decision, as it is a sunk cost and is nonrefundable regardless of what you do.

• Suppose you have two job offers and are considering the trade-offs between them. Job A

pays $45,000 per year and includes health insurance and two weeks of paid vacation. Job B pays $30,000 per year; it includes four weeks of paid vacation but no health insurance. [LO 1.2]

• List the benefits of Job A and the benefits of Job B.
• List the opportunity cost of Job A and the opportunity cost of Job B.

Answer:

• The benefits of Job A are the extra pay and health insurance. For Job B, the benefit is two

extra weeks of vacation.

• The opportunity cost of Job A is losing out on the extra two weeks of vacation that comes

with Job B. For Job B, the opportunity costs are the extra $15,000 in salary and the health insurance that come with Job A.

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Chapter 01 - Economics and Life 1-3 © 2021 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.

• Your former neighbors gave you their lawnmower when he moved. You are thinking of

using this gift to mow lawns in your neighborhood this summer for extra cash. As you think about what to charge your neighbors and whether this idea is worth your effort, what opportunity costs do you need to consider? [LO 1.2]

Answer: You need to consider the opportunity cost of your time. Your lawn mowing business would need to cover the opportunity cost of what you could earn in another summer job. You also need to consider the cost of gasoline for the mower and the value of the lawn mower itself. Just because it was a gift does not mean that it has no opportunity cost. The opportunity cost of using the lawnmower for your business is its sale value, if you decide to sell the gift rather than use it yourself. Your lawn mowing business needs to cover all of these costs (the value of your time in another job, gasoline, and the sale value of the lawnmower) in order for it to be a worthwhile endeavor.

• Think of a few examples of incentives in your daily life. How do you respond to those

incentives? [LO 1.3]

Answer: An incentive is something that causes people to behave in a certain way by changing the trade-offs they face. No parking signs encourage people not to park in certain places and speed limit signs encourage people not to drive too fast. The consequence in either case is the risk of getting a ticket. The ability to devote a certain percentage of income to a 401(k) retirement account each month before paying taxes encourages people to save for retirement.

• You supervise a team of salespeople. Your employees already receive a company discount.

Suggest a positive incentive and a negative incentive you could use to improve their productivity. [LO 1.3]

Answer: For a positive incentive, you could offer a reward such as a bonus, a gift certificate, or an extra discount on company merchandise to the most productive employee of the month.For a negative incentive, you could announce that employees who fail to meet targets will lose their company discount.

• Your boss decides to pair workers in teams and offer bonuses to the most productive team.

Why might your boss offer team bonuses instead of individual bonuses? [LO 1.3]

Answer: Your boss is creating a reward system for a project that requires group effort. Even if you are not motivated to compete for an individual bonus, you are likely to feel responsibility to your teammate and make a greater effort to be productive. Your teammate can encourage, pressure, and/or help you to achieve greater productivity.

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Chapter 01 - Economics and Life 1-4 © 2021 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.

• Think of a public policy—a local or national law, tax, or public service—that offers an

incentive for a particular behavior. Explain what the incentive is, who is offering it, and what they are trying encourage or discourage. Does the incentive work? [LO 1.3]

Answer: The U.S. government places a subsidy on growing corn. This provides an incentive for farmers to plant corn on more of their land instead of alternative crops. The government is trying to encourage the production of domestic corn so that the United States can produce corn-based ethanol more cheaply.

• Why do individuals or firms usually provide the goods and services people want? [LO 1.4]

Answer: If firms didn’t produce goods that people want, no one would buy their goods.These firms would lose money and go out of business, and would be replaced by firms that did produce goods that customers want.

• You may have seen TV advertisements for products or programs that claim to teach a sure-

fire way to make millions on the stock market. Apply the Why isn’t someone already doing it? test to this situation. Do you believe the ads? Why or why not? [LO 1.4]

Answer: Guessing which stocks are going to perform well and which are going to tank is a hard, if not impossible, task which makes it very hard to make millions in the stock market.You should not believe the ads for that reason. (If there really was a surefire way to make millions, you can bet everyone would already be doing it!)

• Describe an innovation in technology, business, or culture that had a major economic impact

in your lifetime. [LO 1.4]

Answer: The Internet has completely changed the way people do business. While writing this textbook, we have collaborated with people all over the country, sharing documents online that we once would have had to send through the mail.

• Why do people confuse correlation with causation? [LO 1.5]

Answer: Correlation means that two events occur together. Since the two often occur together, people often believe that one causes the other, but this is not always true. People once thought that ice cream caused polio, for example. The real relationship was that people ate more ice cream in the summer, and this also happened to be the time of year that the polio virus spread more rapidly.

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