problem set answers 1

problem set answers 1 - Dr. Seiji Steimetz ECON 101 ANSWERS...

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Dr. Seiji Steimetz ECON 101 Department of Economics California State University, Long Beach Page 1 of 7 A NSWERS FOR P ROBLEM S ET 1 Chapter 1 LEARNING OBJECTIVE LEARNING OBJECTIVE 1.1 Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. Review Questions 1.1 “People are rational” is the assumption that decision makers explicitly or implicitly weigh the benefits and costs of each action, and then choose an action only if the benefits are expected to outweigh the costs. “People respond to incentives” means that people respond to economic incentives – they may change their behavior if the expected benefits or costs of an action change by enough. “Optimal decisions are made at the margin” means that most decisions are not “all or nothing,” but involve doing a little more or a little less of an activity. Thus, the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost. 1.2 Scarcity is the situation in which unlimited wants exceed the limited resources available to fulfill those wants. Economics is the study of the choices consumers, business managers and government officials make to attain their goals. Scarcity is central to economics because scarcity requires people to make choices about how to use their resources to best fulfill their wants. Problems and Applications 1.3 As noted in the chapter, the economic incentive to banks is clear – it is less costly to put up with bank robberies than to take these additional security measures. 1.4 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. In other words, Dell is producing where the marginal cost is greater than the marginal benefit. 1.5 Jill is correct because profit equals revenue minus cost, so the additional revenue minus the additional cost will equal the additional profit. 1.6 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. 1.7 One possibility would be to compensate women only for the second or third child they have. Ideally we would like to know how many children the woman expects to have anyway and give a financial compensation for any child above this level. As this information is impossible to collect, compensation above the average number of children per family may be an alternative. That said, we may in this case be compensating women who would have lots of children anyway and it is not clear that these are the women we want to target. One way of learning whether the incentive scheme is encouraging more
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Dr. Seiji Steimetz ECON 101 Department of Economics
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This note was uploaded on 02/11/2010 for the course ECON 101 taught by Professor Steimetz during the Fall '08 term at CSU Long Beach.

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problem set answers 1 - Dr. Seiji Steimetz ECON 101 ANSWERS...

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