THE ART AND SCIENCE OF ECONOMIC ANALYSIS

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CHAPTER 1

THE ART AND SCIENCE OF ECONOMIC ANALYSIS

SOLUTIONS TO END OF CHAPTER PROBLEMS

• A resource is scarce when the amount people desire exceeds the amount available at a price

of zero. The concept of scarcity is important to the definition of economics because scarcity forces people to choose how they will use their resources in an attempt to satisfy their unlimited wants and desires. Economics is about making choices. Without scarcity, there would be no economic problem and, therefore, no need to choose between competing wants and desires.

2.

• Individuals will compare the expected benefits of attending college full time with the

expected costs. One benefit might be that the individual’s stock of knowledge and productivity will grow, and so will his or her wage. Costs include not only tuition but also the forgone wages, wages that could have been earned by working instead of attending college full time. If the expected benefits outweigh the costs, then the rational person will choose to go to college full time.

• Individuals will compare the expected benefits of a new textbook with the higher costs of

purchasing a new textbook. The benefits include not being confused by other students’ markings in the book and a higher resale value. However, the out-of-pocket cost of a new book will be higher than the cost of a used book. If the expected benefits outweigh the costs, then a rational person will purchase the new textbook.

• Individuals will compare the expected benefits and costs associated with both colleges

under consideration and will choose the college at which the difference between benefits and costs is greater. The costs of attending an out-of-town college may include greater travel costs and phone bills, while the benefits may include learning about a different region.

• Rational self-interest is not blind materialism, pure selfishness, or greed. Rational self -

interest means we choose the option that maximizes expected benefits with a given cost.People will give more to charities when the contribution is tax deductible. The lower the personal cost of helping others, the more we are willing to help and contribute.

• By increasing its delivery radius, the store will have greater sales. However, these marginal

revenues must be balanced against the additional costs incurred, such as a greater consumption of pizza ingredients, more gasoline for the delivery truck, and possibly the need to hire additional labor and increase advertising.

• Rational decision makers will continue to acquire information as long as the benefit of the

additional information exceeds the additional costs. Oftentimes, we are willing to pay others to gather and digest the information for us.

• This question highlights the fact that economics, like all social sciences, attempts to describe

and explain human behavior. In doing so, it cannot measure and control for all factors influencing behavior. The result is that the behavior of a specific individual cannot be explained or predicted, but the behavior of groups of individuals can be. We cannot, for (ECON MICRO, 6e William McEachern) (Solution Manual all Chapters) 1 / 4

Chapter 1 The Art and Science of Economic Analysis 2

© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.example, predict any particular individual’s buying response to a sale. We can, however, predict what kind of total selling volume will occur because of a sale.

7.

• This assertion is a mistake because the secondary effects of taxes on production and the

labor supply are ignored. If the tax rate were raised to 100 percent, for example, no one would want to work or produce, so government revenues would decline.

• This is the fallacy that association implies causation. It is more likely that recession causes

a change in imports than the other way around.

• This is a fallacy of composition. True, the tariff may help the steel industry. But it hurts

purchasers of steel, including the automobile and construction industries. The overall effect on the economy is unclear.

• This is the fallacy of composition, since attempts to sell so much gold at once would push

down the price of gold.

• You are committing the fallacy that association is causation. The causality is undoubtedly in

the other direction; that is, doctors will tend to locate where there is a lot of disease and, therefore, a greater need for medical care.

• Answers may vary. Students select college majors for a variety of reasons and the expected

pay is only one of them. Some students have the aptitude necessary to successfully study economics.

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CHAPTER 2

ECONOMIC TOOLS AND ECONOMIC SYSTEMS

SOLUTIONS TO END OF CHAPTER PROBLEMS

• This question highlights the importance of ignoring sunk costs in marginal decision making.

Once you have purchased the meal, you cannot get your money back whether or not you finish the meal. There is no benefit to overeating.

• The opportunity cost is the total cost of going to Florida and includes dollar costs incurred as

well as the forgone opportunity of working. Assuming you would work for 5 days if you stayed home, the opportunity cost of going to Florida would total $1,000: the $700 cost of going to Florida plus the net value of what you could have earned—$300 ($400 in earnings less expenses of $100)—if you stayed home.

3.

• In the United Kingdom, the opportunity cost of one unit of wheat is 1/3 unit of cloth

(producing one unit of wheat uses 2 labor hours, the amount of resource that would allow you to produce only 1/3 unit of cloth). In the United States, the opportunity cost of one unit of wheat is 1/5 unit of cloth (producing one unit of wheat uses 1 labor hour, the amount of resource that would allow you to produce only 1/5 unit of cloth).

• The United States has an absolute advantage in both goods; it is able to produce both

products with fewer resources than the United Kingdom requires.

• The United States has a comparative advantage in wheat because it has the lowest

opportunity cost of producing (1/5 unit of cloth versus 1/3 unit of cloth for the United Kingdom), while the United Kingdom has the comparative advantage in cloth. (The opportunity cost of cloth in the United States is 5 units of wheat. The opportunity cost of cloth in the United Kingdom is 3 units of wheat.)

• The United States should specialize in wheat, and the United Kingdom should specialize

in cloth. The country with the lower opportunity cost of producing a good should specialize in producing that output.

• Students’ answers will vary according to their experiences. One specialized market is that for

military weapons. The stock exchange provides a specialized market for buying and selling company shares, and there are specialized markets for selling government bonds and foreign currencies. Specialized retail outlets could include movie theaters specializing in “art” films, wine shops, cheese shops, language schools, and so forth. Media such as the Web allow firms in specialized markets to advertise their products at relatively low costs and also permit customers to conduct interactive online searches for relatively specialized goods and services.

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Chapter 2 Economic Tools and Economic Systems 2

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5.

a. The PPF drawn above is composed of two straight-line segments: AB and BC.

• The cost of a car when 50 cars are produced is 4 washing machines. In segment AB, as

you move from 0 to 100 cars, you must give up 1,000 − 600 = 400 washing machines.Thus, each additional car costs 400/100 = 4 washing machines along segment AB of this PPF.

• The cost of a car when 150 cars are produced is 6 washing machines. In segment BC of

this PPF, as you move from 100 to 200 cars, you must forgo 600 washing machines. Thus, each additional car costs 600/100 = 6 washing machines along segment BC of this PPF.150 cars cost you 6 washing machines.

• The cost of a washing machine when 50 cars are produced is one-fourth of a car. In

segment AB, as you move from 600 to 1,000 washing machines, you must forgo 100 cars.{[100/(1000 − 600)]} = 1/4, the slope of segment AB of the PPF. Note: The PPF would indicate that when 50 cars are produced, 800 washing machines can be produced.The cost of an additional washing machine when 150 cars are produced is one-sixth of a car. In segment BC, as you move from 0 to 600 washing machines, you must forego 100 cars. (100/600) = 1/6, the slope of segment BC of the PPF. Note: The PPF indicates that when 150 cars are produced, only 300 washing machines are produced. Also note that the answers to this question are the inverse of the answers to questions (b) and (c).

• As you increase the production level of either good, its opportunity cost eventually

increases. When you go from 50 cars produced to 150 cars produced, the cost in terms of washing machines forgone rises from 4 washing machines to 6 washing machines. When you go from 300 washing machines produced to 800 washing machines produced, the opportunity cost in terms of cars forgone rises from 1/6 of a car to 1/4 of a car.

• The PPF will shift inward along the axis measuring cloth production and outward along the

axis measuring wheat production. This is represented by a shift from CD to AB on the

following graph:

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