Economics 104Chapter 1 Review Questions & AnswersANSWERS TO QUESTIONS FOR REVIEW1. (Definition of Economics) What determines whether or not a resource is scarce? Why is the concept ofscarcity important to the definition of economics?A resource is scarce when the amount people desire exceeds the amount available at a price of zero. Theconcept of scarcity is important to the definition of economics because scarcity forces people to choosehow they will use their resources in an attempt to satisfy their unlimited wants and desires. Economics isabout making choices. Without scarcity there would be no economic problem, and therefore no need tochoose between competing wants and desires. 2. (Resources) To which category of resources does each of the following belong?a. A taxib. Computer softwarec. One hour of legal counseld. A parking lote. A forestf. The Mississippi Riverg. 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. labor; human effort.d. capital and natural resources; the parking lot is on a natural resource (land), but the land has 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 vouchersb. U.S. aid to developing countriesc. Corporate charitable contributionsd. Noncable television programs e. Public high school educationa 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 requiresthe 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 assupporting actors. Households are considered to be the lead actors since they supply resources used inproduction, and demand goods and services produced by other actors. Firms, governments, and the rest ofthe world are supporting actors because they demand the resources that households supply and use themto 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 automobileb. Measuring the impact of tax policies on total consumer spending in the economyc. Your family’s decisions about what to buyd. A worker’s decision regarding how much to work each weeke. Designing a government policy to increase total employmentMicroeconomics 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, youmust first understand microeconomics. How does microeconomics relate to macroeconomics?Microeconomics studies the behavior and choices made by individuals. The behavior and choices made bythese individuals is added together to determine the economy–wideor macroeconomicmeasures, suchas total production and unemployment. Microeconomics studies the individual pieces of the economicpuzzle; 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. Anormative statement concerns what someone thinks ought to be. It is an opinion and can't be shown to betrue 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 opinions8. (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 explainhuman behavior. In doing so, it cannot measure and control for all factors influencing behavior. Theresult is that the behavior of a specific individual cannot be explained or predicted, but the behavior ofgroups of individuals can be. We cannot, for example, predict any particular individual’s buying responseto 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 timeb. Whether to buy a new textbook or a used onec. Whether to attend a local college or an out-of-town collegea. Individuals will compare the expected benefits of