hubbard_essentials01_answers - Chapter 1 Answers to...

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1 Chapter 1 Answers to End-of-Chapter Problems and Applications 2. Yes, even Bill Gates faces scarcity because his wants exceed his resources. Gates has established a foundation with billions of dollars to spend on worthy causes like eradicating malaria and reducing homelessness. However, there are an unlimited number of worthy causes that Gates desires to fund, so even he faces scarcity. Secondly, even Gates has only twenty-four hours in a day, so he must make choices about how to spend his scarce time. Everyone I know faces scarcity, because human desires are virtually unlimited. Because the world’s resources are limited, the only way to not face scarcity is to reduce one’s wants to be less than one’s resources. 4. The manager is failing to think at the margin. Dell has lost $400,000 on the last 10,000 laptops, so their profits would have been higher if they had not produced them. 6. Your friend is failing to think at the margin. It doesn’t matter how much time has already been spent studying psychology. What matters is the marginal benefit to be received from studying psychology relative to the marginal cost, where cost is measured as the opportunity cost of lower grades in other subjects. If the course is required, that may raise the marginal benefit. 8. The contractors had little incentive to deliver the Indians to Oklahoma alive. Instead, they benefited when the Indians died along the way, because they had to spend even less money on food and transportation. One way to change the incentives to lower the death rate would have been to pay the contractors more if the Indians arrived safely in Oklahoma. 10. The problem with Dr. Strangelove’s theory is that it cannot be tested unless we can devise a way to measure the emission of these subatomic particles, which seems to be impossible since they don’t exist in our universe. Because we cannot test the model’s predictions, it is not very useful to us – even though it might be true, we have no way of knowing. 12. a. It is doubtful that centrally planned economies have been less efficient purely by chance. The underlying reason seems to be that centrally planned economies don’t give as great incentives for hard work and innovation as market economies do. In addition, the people running centrally planned economies cannot make the most productive decisions because they don’t have the information that is in the minds of all the decentralized decision makers in a market economy.
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b. You might still prefer having a centrally planned economy if you considered it to be more equitable. (Also, you might prefer a centrally planned economy if you were in charge.) 14. a. The groups that are most likely to get the tickets will be those for whom the expected marginal benefit of going to City Hall on Monday morning is greater than the expected marginal costs. These might include people who have a very low opportunity cost of traveling to City Hall and standing in line, such as people who don’t have a job in the morning and those who live or work very close by. These
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