SOLUTIONS TO SELF-CHECK QUESTIONS
1.1 What Is Economics, and Why Is It Important?
- Scarcity means human wants for goods and services exceed the available supply. Supply is limited because resources are limited. Demand, however, is virtually unlimited. Whatever the supply, it seems human nature to want more.
- 100 people / 10 people per ham = a maximum of 10 hams per month if all residents produce ham. Since consumption is limited by production, the maximum number of hams residents could consume per month is 10.
- She is very productive at her consulting job, but not very productive growing vegetables. Time spent consulting would produce far more income than it what she could save growing her vegetables using the same amount of time. So on purely economic grounds, it makes more sense for her to maximize her income by applying her labor to what she does best (i.e. specialization of labor).
- The engineer is better at computer science than at painting. Thus, his time is better spent working for pay at his job and paying a painter to paint his house. Of course, this assumes he does not paint his house for fun!
1.2 What Kind of Economist Are You?
- There are many physical systems that would work, for example, the study of planets (micro) in the solar system (macro), or solar systems (micro) in the galaxy (macro).
- Since an op-ed makes a case for what should be, it is considered normative.
- Assuming that the study is not taking an explicit position about whether soft drink consumption is good or bad, but just reporting the science, it would be considered positive.
1.3 How Do Economists Use Theories and Models?
- Draw a box outside the original circular flow to represent the foreign country. Draw an arrow from the foreign country to firms, to represents imports. Draw an arrow in the reverse direction representing payments for imports. Draw an arrow from firms to the foreign country to represent exports. Draw an arrow in the reverse direction to represent payments for imports.
- Households are primarily buyers in the goods and services market, as they use their income to purchase food, housing, education, transportation and many other items. Households are typically sellers in the labor market, offering their labor for a salary or hourly wage in order to earn a living.
- Firms are primarily sellers in the goods and services market, offering their wares to consumers. They are primarily buyers in the labor market, hiring employees to produce for them.
1.4 How Do We Make Choices?
- Because of the improvement in technology, the vertical intercept of the PPF would be at a higher level of healthcare. In other words, the PPF would rotate clockwise around the horizontal intercept. This would make the PPF steeper, corresponding to an increase in the opportunity cost of education, since resources devoted to education would now mean forgoing a greater quantity of healthcare.
- The production possibilities frontier is the set of every combination of goods that is both possible and efficient to produce.
- Some inputs are better suited to one area of production than another. As these are diverted towards less efficient uses, some amount of production is lost, causing the PPF to bend.