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Chapter 1: Economics and Economic Reasoning Questions and Exercises 1. Coordination refers to how the three central problems facing any economy are solved. Those three problems are what and how much to produce, how to produce, and for whom to produce. Inevitably individuals desire more than is available given how much theyre willing to work, causing a problem of scarcity. The concept of scarcity has two elements, our wants and our means of fulfilling those wants. Those two elements are interrelated since wants are changeable and partially determined by society and the means of fulfilling those wants. In addition, the degree of scarcity is constantly changing depending upon the available means of production and the development of new wants. Therefore, the author of the textbook focused on coordination instead of scarcity to emphasize the subsidiary nature of scarcity to the overall concept of coordination. Economics is not merely about our wants or the means of fulfilling those wants; it is also about reconciling our wants with reality, where reality consists of decision-making mechanisms, social customs, and political realities. 2. Deduction is 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. 3. Induction is a method of reasoning in which one develops general principles by looking for patterns in the data. An example is the short-run Phillips curve in macroeconomics. 4. Neither deductive reasoning nor inductive reasoning is more accurate. Each takes a different approach to understanding a problem. 5. a. Deduction b. Deduction c. Induction d. Abduction 6. Answers will differ. A correct answer will indicate that the student compared the marginal costs and benefits and chose the activity because the marginal benefit exceeded the marginal cost. 7. The marginal costs are the additional costs. They are 15 cents per mile for miles above 150 plus the cost of gas. Therefore the marginal cost is $7.50 plus the cost of gas. The initial payment can be forgotten because it is a sunk cost; it is not part of marginal costs. 8. 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. 9. The opportunity cost of buying a $20,000 car is the benefit we would have gained by using that $20,000 for the next-best alternative, which could be spending it on other goods and services, or saving it. 10. Only the marginal costs and benefits of taking the job are relevant. That means the sunk cost of the bachelors degree is irrelevant. Therefore, the relevant costs are the opportunity cost of taking the job (forgone earnings from your current job) and other things you could have done with the money you need to pay business school tuition. The relevant benefit is the increased lifetime earnings of $300,000. 11. I would spend the $5 million on those projects that provide the highest marginal benefit per ... View Full Document

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