3 the marginal benefit of a glass of water depends on

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3. The marginal benefit of a glass of water depends on your circumstances. If you've just run a marathon, or you've been walking in the desert sun for three hours, the marginal benefit is very high. But if you've been drinking a lot of liquids recently, the marginal 1
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benefit is quite low. The point is that even the necessities of life, like water, don't always have large marginal benefits. 4. Policymakers need to think about incentives so they can understand how people will respond to the policies they put in place. The text's example of seat belts shows that policy actions can have quite unintended consequences. If incentives matter a lot, they may lead to a very different type of policy; for example, some economists have suggested putting knives in steering columns so that people will drive much more carefully! While this suggestion is silly, it highlights the importance of incentives. 5. Trade among countries isn't a game with some losers and some winners because trade can make everyone better off. By allowing specialization, trade between people and trade between countries can improve everyone's welfare. 6. The "invisible hand" of the marketplace represents the idea that even though individuals and firms are all acting in their own self-interest, prices and the marketplace guide them to do what is good for society as a whole. 7. The two main causes of market failure are externalities and market power. An externality is the impact of one person’s actions on the well-being of a bystander, such as from pollution or the creation of knowledge. Market power refers to the ability of a single person (or small group of people) to unduly influence market prices, such as in a town with only one well or only one cable television company. In addition, a market economy also leads to an unequal distribution of income. 8. Productivity is important because a country's standard of living depends on its ability to produce goods and services. The greater a country's productivity (the amount of goods and services produced from each hour of a worker's time), the greater will be its standard of living. 9. Inflation is an increase in the overall level of prices in the economy. Inflation is caused by increases in the quantity of a nation's money. 10. Inflation and unemployment are negatively related in the short run. Reducing inflation entails costs to society in the form of higher unemployment in the short run. Problems and Applications 1. a. A family deciding whether to buy a new car faces a tradeoff between the cost of the car and other things they might want to buy. For example, buying the car might mean they must give up going on vacation for the next two years. So the real cost of the car is the family's opportunity cost in terms of what they must give up.
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