Econo 101 Chapter 1

Why does the textbook author focus on coordination rather than on scarcity when defining economics?

The author focuses on coordination rather than on scarcity to emphasize that wants are changeable and partially society-determined, and to emphasize that the degree of scarcity changes as the quantity of goods, services and usable resources changes with technology and human action that underlie production.








Define deduction and give an example of deductive reasoning.
Answer: A method of reasoning in which one deduces a theory based on a set of almost self-evident principles. An example is the invisible hand theory.

Define induction and give an example of inductive reasoning.
Answer:

A method of reasoning in which one develops general principles by looking for patterns in the data. An example is the theory of bounded rationality that people are rational within limits.

Your study partner has suggested that deductive reasoning is much more accurate than inductive reasoning. How would you respond?
Answer:  Neither deductive reasoning nor inductive reasoning is more accurate. Each takes a different approach to understanding a problem.

a. The number of rings inside a tree is the age of a tree. This tree has 10 rings. Conclusion: This tree is 10 years old.

Deductive


b. People spend 80 percent of their income. Susan will earn $60,000 this year. Conclusion: Susan will spend $48,000.


Deductive


c. Ten college students are standing in a line to choose either an economics course or an English course. The first student chooses economics. The second student chooses economics and so does the third. Conclusion: All college students prefer economics over English.


Inductive


d. Ten college students are standing in a line to choose either an economics course or an English course. The first student chooses economics. The second student chooses economics and so does the third. Conclusion: All college students prefer economics over English. The fourth student in line chooses English. The first three students were women; the fourth was a man. Revised conclusion: Male college students prefer English. Female college students prefer economics.



Abductive
List one recent choice you made and explain why you made the choice in terms of marginal benefits and marginal costs.
Answer:
I went to Professor Colander’s lecture because the marginal benefit of going (passing the inevitable quiz) was greater than the marginal benefit of not going (an hour of leisure time).

Economists Henry Saffer of Kean University, Frank J. Chaloupka of the University of Illinois at Chicago, and Dhaval Dave of Bentley College estimated that the government must spend $4,170 on drug control to deter one person from using drugs and the cost that one drug user imposes on society is $897. Based on this information alone, should the government spend the money on drug control?

Answer: No, since the marginal cost of drug control exceeds the marginal benefit, government should not spend $4,170 to deter one person from using drugs.

Suppose your college has been given $5 million. You have been asked to decide how to spend it to improve your college. Explain how you would use the economic decision rule and the concept of opportunity costs to decide how to spend it.

Answer:  I would spend the $5 million on those projects that provide the highest marginal benefit per dollar spent.

 Your opportunity cost of attending college.
Answer:
My opportunity cost of attending college is the benefit of the next best alternative; that benefit becomes a cost because I forgo it by attending college. My personal opportunity cost is probably the leisure I could enjoy if I wasn't studying as well as the money I could be earning if I was working instead of attending college.

Your opportunity cost of taking this course.
Answer:
My opportunity cost of taking this course is the benefit of the next best alternative; that benefit becomes a cost because I forgo one activity by taking this course. My personal opportunity cost is probably the knowledge, perspective, or skills I could have gained from taking a different course.

Your opportunity cost of attending yesterday's lecture in this course.
Answer:
My opportunity cost of attending yesterday’s lecture is the benefit of the next best alternative; that benefit becomes a cost because I forgo another activity by attending the lecture. My personal opportunity cost is probably the benefit I would have gained from missing the lecture by sleeping in or spending more time at breakfast.

In 1999 Royal Philips Electronics paid $180 million to buy 20-year naming rights of the Atlanta, Georgia, stadium, home of NBA’s Atlanta Hawks. University of Massachusetts Professor Timothy D. DeSchriver and Drexel University Professor Paul E. Jensen analyzed naming rights. In their study, what was the likely impact of each of the following on a corporation’s willingness to pay to name a stadium?

An existing team is relocating to the stadium.
Answer:
Greater willingness to pay.

The stadium is in a highly populated area.
Answer;
Greater willingness to pay.


The stadium’s current name is the Staples Center and has had that name for 20 years.
Answer:
Lower willingness to pay.

Give two examples of social forces and explain how they keep economic forces from becoming market forces.
Answer:
Two examples of social forces are our unwillingness to charge friends interest, and our unwillingness to “buy” dates with other people. These issues are still subject to economic forces; however, there is no market in “dates” or in loans to friends, and hence the economic force does not become a market force.

Give two examples of political or legal forces and explain how they might interact with economic forces.
Answer;
Two examples of political or legal forces are rent control laws and restrictions on immigration. Both prevent the invisible hand from working. The rent control laws place a price ceiling on rent, causing shortages of apartments, and the immigration restrictions cause the number of immigrants seeking entry to exceed those allowed to enter, which tends to cause wage rates to differ among countries.

Individuals have two kidneys, but most of us need only one. People who have lost both kidneys through accident or disease must be hooked up to a dialysis machine, which cleanses waste from their bodies. Say a person who has two good kidneys offers to sell one of them to someone whose kidney function has been totally destroyed. The seller asks $30,000 for the kidney, and the person who has lost both kidneys accepts the offer.

Who benefits from the deal?
Answer:
Both parties benefit.

Who is hurt?
Answer:
Neither person is hurt.

Should a society allow such market transactions? Why?
Answer:
Economics alone cannot answer whether society should allow such market transactions.

State whether the following are primarily microeconomic or macroeconomic policy issues:
Should U.S. interest rates be lowered to decrease the amount of unemployment?
Answer:
Macro

 Will the fact that more and more doctors are selling their practices to managed care networks increase the efficiency of medical providers?
Answer:
Micro

Should the current federal income tax be lowered to reduce unemployment?
Answer:
Macro

Should the federal minimum wage be raised?
Answer:
Micro


Should Sprint and Verizon both be allowed to build local phone networks?
Answer:
Micro

Should commercial banks be required to provide loans in all areas of the territory from which they accept deposits?
Answer:
Micro

What is an economic model? What besides a model do economists need to make policy recommendations?
Answer:
An economic model is a framework that places the generalized insights of a theory in a more specific contextual setting. Policymakers need to understand the empirical evidence supporting the theory as well as real-world economic institutions to make policy recommendations.

Does economic theory prove that the free market system is best? Why?
Answer:
No, economic theory proves nothing about what system is best. It simply gives ways to look at systems, and what the advantages and disadvantages of various systems will likely be. Normative decisions about what is best can only follow from one’s value judgments.


a. In a market, when quantity supplied exceeds quantity demanded, price tends to fall.

Positive


b. When determining tax rates, the government should take into account the income needs of individuals.

Normative


c. What society feels is fair is determined largely by cultural norms.

Positive or normative


d. When deciding which rationing mechanism is best (lottery, price, first-come/first-served), one must take into account the goals of society.
Answer:
Normative or art of economics


e. California currently rations water to farmers at subsidized prices. Once California allows the trading of water rights, it will allow economic forces to be a market force.
Answer:
Positive

Distinguish between theorems and precepts. Is it possible for two economists to agree about theorems but disagree about precepts? Why or why not?
Answer:
A theorem is a proposition that is logically true based on the assumptions of the model while a precept is a policy rule that a particular course of action is preferable. Economists can agree about theorems but disagree about precepts if they have different value judgments about appropriate goals.