Answers to Exercises

1. Steaks, houses, cars, and t-shirts are scarce goods since people are willing to pay for these goods. Garbage is not a scarce good since people do not desire garbage even when they do not have to pay for it. In fact, people pay to have garbage removed.

2. In each case, people are comparing costs and benefits and selecting the option they think is in their own best interest. For some people, the time spent at the doctor's office plus the costs are worth the medicine or advice the doctor provides. For others, the costs exceed the benefits.

3. If Erin had known about the party before she purchased the ticket, then she would have compared the costs and benefits of the party and the concert. Not knowing about the party, Erin compared the costs and benefits of the concert to other activities, but not the party. She chose the concert, which was worth at least $35 to her. Suppose Erin placed a value on the party of $40 and a value on the concert of $38. Then Erin would choose to attend the party even though she has already purchased the ticket. If, to her, the party is worth $40, then she is better off attending the party. If, however, she values out-of-pocket costs more than opportunity costs, she will select the concert. In this case, the value Erin places on the out-of-pocket cost of $35 is greater than the value she places on missing the party.

4. The principle of rational self-interest suggests that people who choose to smoke compare the costs and benefits of smoking and come down on the side of greater benefits. Perhaps people believe that they will escape the harmful effects; or perhaps people believe that the weight they gain by stopping smoking will be more harmful than continuing to smoke; or perhaps people so enjoy smoking that this enjoyment overrides any health concerns. The argument for bans is a normative argument. Those supporting the bans believe that they know what is better for the smokers than the smokers themselves do.

5. a. F. Positive should be replaced with normative.
b. F. It is Latin for "everything else the same."
c. F. It can be in one's self-interest to be very generous.
d. T.
e. F. A bad is something that people pay to have less of.
f. F. Resource and factors of production are two names for the same things: the items that are used to produce goods and services.
6. a. Normative. If the government provides free tuition to all college students, more students will attend college.
b. Positive.
c. Normative. If the government provides job training, then industries using those government-trained workers will be able to produce less expensively and thus will be able to compete with foreign producers.

7. If stockholders, managers, and entrepreneurs want income, they must be responsive to what customers desire. It is in their self-interest to do what customers want. If customers desire firms that destroy the environment and treat people horribly, then firms will act that way. To do otherwise would be to cause customers to shift their purchases to other firms. Similarly, if customers want firms to treat the environment and people in a beneficial way, then firms will do that.

8. The second economist assumes that it is in people's best interest to pick up a $20 bill lying on the sidewalk. Thus, if anyone has seen the bill, surely it has been picked up. The economist is also assuming that people have seen the bill. The economist is also ignoring all other factors that might be only slightly relevant to the issue, such as whether the day is a bad-weather or good-weather day.

9. It is less costly for the building contractors to keep water and sewer pipes close to the restrooms and thus to keep restrooms close to each other. Also, it is easier to have the restrooms close to each other in order to reduce the number of people who inquire as to the location of a restroom.

10. Diamonds are scarcer than water.

11. People leave tips at a restaurant they frequent often in order to ensure high-quality future service. People leave tips at a restaurant they go to only once for several reasons: to lessen their guilt, to ensure that their companions think they are generous, and to contribute to higher-quality service throughout the entire restaurant industry with the idea that they will get better service in the future if everyone acts as they act.

12. People find contributing to charities gives them a good feeling. People might also find that they feel less bad when they see a homeless person.

13. When the speed limit was low, some people chose to drive on surface, or noninterstate, roads instead of the slow interstates. With more traffic on the surface streets, the accident rates there were higher. Increasing the speed limit on the interstates meant that more people chose to use them instead of the noninterstates, thus raising the accident rate on the interstates and lowering it on the surface roads.

Answers to Study Guide Homework

Land, labor, capital 2. There are not enough resources to allow any society to produce everything that people want.

3. Using models or theories reduces the complexity of the real world, and allows us to concentrate on the fundamental principles underlying real-world events.

4. a. Macroeconomics looks at how the economy works as a single unit, while microeconomics looks at how the individual actors in an economy work, and how their actions are coordinated by markets.

b. Positive analysis looks at what is (how the world actually works), while normative analysis looks at what ought to be (how the world should work, based on your value judgments).

5. Senator's Walden's comments are based on the need to make decisions about how to allocate scarce resources. His comments imply that he thinks Oregon doesn't have enough resources (tax dollars) to support education, jails and railroad service, and that he believes "kids' education and keeping criminals behind bars" provide more value that does subsidizing rail passengers.

Answers to Internet Exercise

This exercise offers students a chance to access current information regarding educational attainment. It directly relates to the Chapter Preview and will give students an opportunity to explore the concept of choice. It also opens up the opportunity for discussion regarding their individual choices pertaining to education attainment.

White males have the highest percentage with 4 or more years of college.

Differences between males and females could be explained by a number of reasons. Try to gear student discussion toward choices and opportunity cost differences between the sexes.

Whites have the greatest differential between male and female in educational attainment.