Economics 104 Chapter 1 Review Questions Answers ANSWERS TO QUESTIONS FOR REVIEW 1 Definition of Economics What determines whether or not a resource is scarce Why is the concept of scarcity important to the definition of economics 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 Resources To which category of resources does each of the following belong a A taxi b Computer software c One hour of legal counsel d A parking lot e A forest f The Mississippi River g An individual introducing a new way to market products on the Internet a capital a manufactured item employed to produce a service b capital a manufactured item employed to produce a good c d capital and natural resources the parking lot is on a natural resource land but the land has labor human effort undergone capital improvement in the form of leveling and paving e natural resource f natural resource g entrepreneurial ability 3 Goods and Services Explain why each of the following would not be considered free for the economy as a whole a Food vouchers b U S aid to developing countries c Corporate charitable contributions d Noncable television programs e Public high school education a Even if food vouchers allow individuals to purchase food at no cost producing the food in the first place uses resources and hence has a cost b U S aid while free to the recipient country involves costs to the United States because the aid requires the use of U S resources to assist developing countries c The corporation and its owners pays for these gifts d This is perhaps the most interesting example Free TV is paid for by consumers through the higher prices of the products advertised there The cost of advertising is passed along to consumers e Public high school education is paid for by citizens either through taxes or borrowing 4 Economic Decision Makers Which group of economic decision makers plays the leading role in the economic system Which groups play supporting roles In what sense are they supporting actors The main decision makers are households with firms governments and the rest of the world serving as supporting actors Households are considered to be the lead actors since they supply resources used in production and demand goods and services produced by other actors Firms governments and the rest of the world are supporting actors because they demand the resources that households supply and use them to produce and supply the goods that households demand 5 Micro versus Macro Determine whether each of the following is primarily a microeconomic or a macroeconomic issue a What price to charge for an automobile b Measuring the impact of tax policies on total consumer spending in the economy c Your family s decisions about what to buy d A worker s decision regarding how much to work each week e Designing a government policy to increase total employment Microeconomics is the study of the individual economic behavior of decision making units in the economy whereas macroeconomics studies the performance of the economy as a whole a Microeconomic issue it refers to the price of an individual good b Macroeconomic issue it refers to the economy as a whole c Microeconomic issue it refers to the decision of one individual household d Microeconomic issue it refers to the decisions of one worker e Macroeconomic issue it refers to the economy as a whole 6 Micro versus Macro Some economists believe that in order to really understand macroeconomics you must first understand microeconomics How does microeconomics relate to macroeconomics Microeconomics studies the behavior and choices made by individuals The behavior and choices made by these individuals is added together to determine the economy wide or macroeconomic measures such as total production and unemployment Microeconomics studies the individual pieces of the economic puzzle macroeconomics fits those pieces together 7 Normative versus Positive Analysis Determine whether each of the following statements is normative or positive a The U S unemployment rate was 6 2 percent in 2014 b The inflation rate in the United States is too high c The U S government should increase the minimum wage d U S trade restrictions cost consumers 100 billion annually A positive statement is a statement about what is It can be supported or rejected by reference to facts A normative statement concerns what someone thinks ought to be It is an opinion and can t be shown to be true or false by reference to facts a Positive Either the unemployment rate was 6 2 percent or it was not The validity of the statement can be checked with appropriate data b Normative There is no objective measure of when the inflation rate is high and when it is not The statement reflects someone s opinion of what rate is too high c Normative The word should is usually an indication of an opinion a normative statement d Positive In principle the cost of trade restrictions could be measured Measurement does not involve opinions 8 Role of Theory What good is economic theory if it can t predict the behavior of a specific individual 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 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 ANSWERS TO PROBLEMS AND EXERCISES 9 Rational Self Interest Discuss the impact of rational self interest on each of the following decisions a Whether to attend college full time or enter the workforce full time b Whether to buy a new textbook or a used one c Whether to attend a local college or an out of town college a 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