1、 (1) people face tradeoffs; (2) the cost of something is what you give up to get it; (3) rational people think at the margin; and (4) people respond to incentives. People face tradeoffs because to get one thing that they like, they usually have to give up another thing that they like. The cost of so
2、mething is what you give up to get it, not just in terms of monetary costs but all opportunity costs. Rational people think at the margin by taking an action if and only if the marginal benefits exceed the marginal costs. People respond to incentives because as they compare benefits to costs, a chan
3、ge in incentives may cause their behavior to change.2. The three principles concerning economic interactions are: (1) trade can make everyone better off; (2) markets are usually a good way to organize economic activity; and (3) governments can sometimes improve market outcomes. Trade can make everyo
4、ne better off because it allows countries to specialize in what they do best and to enjoy a wider variety of goods and services. Markets are usually a good way to organize economic activity because the invisible hand leads markets to desirable outcomes. Governments can sometimes improve market outco
5、mes because sometimes markets fail to allocate resources efficiently because of an externality or market power.3. The three principles that describe how the economy as a whole works are: (1) a countrys standard of living depends on its ability to produce goods and services; (2) prices rise when the
6、government prints too much money; and (3) society faces a short-run tradeoff between inflation and unemployment. A countrys standard of living depends on its ability to produce goods and services, which in turn depends on its productivity, which is a function of the education of workers and the acce
7、ss workers have to the necessary tools and technology. Prices rise when the government prints too much money because more money in circulation reduces the value of money, causing inflation. Society faces a short-run tradeoff between inflation and unemployment that is only temporary and policymakers
8、have some ability to exploit this relationship using various policy instruments.Questions for Review1. Examples of tradeoffs include time tradeoffs (such as studying one subject over another, or studying at all compared to engaging in social activities) and spending tradeoffs (such as whether to use
9、 your last ten dollars on pizza or on a study guide for that tough economics course).2. The opportunity cost of seeing a movie includes the monetary cost of admission plus the time cost of going to the theater and attending the show. The time cost depends on what else you might do with that time; if
10、 its staying home and watching TV, the time cost may be small, but if its working an extra three hours at your job, the time cost is the money you could have earned.3. The marginal benefit of a glass of water depends on your circumstances. If youve just run a marathon, or youve been walking in the d
11、esert sun for three hours, the marginal benefit is very high. But if youve been drinking a lot of liquids recently, the marginal benefit is quite low. The point is that even the necessities of life, like water, dont always have large marginal benefits.4. Policymakers need to think about incentives s
12、o they can understand how people will respond to the policies they put in place. The texts 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
13、 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 isnt a game with some losers and some winners because trade can make everyone better off. By allowing specialization,
14、 trade between people and trade between countries can improve everyones 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 who
15、le.7. The two main causes of market failure are externalities and market power. An externality is the impact of one persons 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)
16、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 countrys standard of living depends on its ability to produce goods and s
17、ervices. The greater a countrys productivity (the amount of goods and services produced from each hour of a workers 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 natio
18、ns 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 Applications1. a. A family deciding whether to buy a new car faces a tradeoff between the cost of the car and
19、 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 familys opportunity cost in terms of what they must give up.b. For a member of Congress deciding whether to increase spending on
20、 national parks, the tradeoff is between parks and other spending items or tax cuts. If more money goes into the park system, that may mean less spending on national defense or on the police force. Or, instead of spending more money on the park system, taxes could be reduced.c. When a company presid
21、ent decides whether to open a new factory, the decision is based on whether the new factory will increase the firms profits compared to other alternatives. For example, the company could upgrade existing equipment or expand existing factories. The bottom line is: Which method of expanding production
22、 will increase profit the most?d. In deciding how much to prepare for class, a professor faces a tradeoff between the value of improving the quality of the lecture compared to other things she could do with her time, such as working on additional research.2. When the benefits of something are psycho
23、logical, such as going on a vacation, it isnt easy to compare benefits to costs to determine if its worth doing. But there are two ways to think about the benefits. One is to compare the vacation with what you would do in its place. If you didnt go on vacation, would you buy something like a new set
24、 of golf clubs? Then you can decide if youd rather have the new clubs or the vacation. A second way is to think about how much work you had to do to earn the money to pay for the vacation; then you can decide if the psychological benefits of the vacation were worth the psychological cost of working.
25、3. If you are thinking of going skiing instead of working at your part-time job, the cost of skiing includes its monetary and time costs, which includes the opportunity cost of the wages you are giving up by not working. If the choice is between skiing and going to the library to study, then the cos
26、t of skiing is its monetary and time costs including the cost to you of getting a lower grade in your course.4. If you spend $100 now instead of saving it for a year and earning 5 percent interest, you are giving up the opportunity to spend $105 a year from now. The idea that money has a time value
27、is the basis for the field of finance, the subfield of economics that has to do with prices of financial instruments like stocks and bonds.5. The fact that youve already sunk $5 million isnt relevant to your decision anymore, since that money is gone. What matters now is the chance to earn profits a
28、t the margin. If you spend another $1 million and can generate sales of $3 million, youll earn $2 million in marginal profit, so you should do so. You are right to think that the project has lost a total of $3 million ($6 million in costs and only $3 million in revenue) and you shouldnt have started
29、 it. Thats true, but if you dont spend the additional $1 million, you wont have any sales and your losses will be $5 million. So what matters is not the total profit, but the profit you can earn at the margin. In fact, youd pay up to $3 million to complete development; any more than that, and you wo
30、nt be increasing profit at the margin.6. Harry suggests looking at whether productivity would rise or fall. Productivity is certainly important, since the more productive workers are, the lower the cost per gallon of potion. Ron wants to look at average cost. But both Harry and Ron are missing the o
31、ther side of the equation revenue. A firm wants to maximize its profits, so it needs to examine both costs and revenues. Thus, Hermione is right its best to examine whether the extra revenue would exceed the extra costs. Hermione is the only one who is thinking at the margin.7. a. The provision of S
32、ocial Security benefits lowers an individuals incentive to save for retirement. The benefits provide some level of income to the individual when he or she retires. This means that the individual is not entirely dependent on savings to support consumption through the years in retirement.b. Since a person gets fewer after-tax Social Security benefits the greater is his or her earnings, there is an incentive not to work (or not work as much)
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