1.E: Welcome to Economics (Exercises)

1.1: What Economics Is and Why It's Important

Self-Check Questions

Q1

What is scarcity? Can you think of two causes of scarcity?

Q2

Residents of the town of Smithfield like to consume hams, but each ham requires $$10$$ people to produce it and takes a month. If the town has a total of $$100$$ people, what is the maximum amount of ham the residents can consume in a month?

Q3

A consultant works for $$\200$$ per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?

Q4

A computer systems engineer could paint his house, but it makes more sense for him to hire a painter to do it. Explain why.

Review Questions

Q5

Give the three reasons that explain why the division of labor increases an economy’s level of production.

Q6

What are three reasons to study economics?

Critical Thinking Questions

Q7

Suppose you have a team of two workers: one is a baker and one is a chef. Explain why the kitchen can produce more meals in a given period of time if each worker specializes in what they do best than if each worker tries to do everything from appetizer to dessert.

Q8

Why would division of labor without trade not work?

Q9

Can you think of any examples of free goods, that is, goods or services that are not scarce?

Solution

S1

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.

S2

$$100$$ 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 $$10$$.

S3

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).

S4

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: Microeconomics and Macroeconomics

Self-Check Questions

Q1

What would be another example of a “system” in the real world that could serve as a metaphor for micro and macroeconomics?

Review Questions

Q2

What is the difference between microeconomics and macroeconomics?

Q3

What are examples of individual economic agents?

Q4

What are the three main goals of macroeconomics?

Critical Thinking Questions

Q5

A balanced federal budget and a balance of trade are considered secondary goals of macroeconomics, while growth in the standard of living (for example) is considered a primary goal. Why do you think that is so?

Q6

Macroeconomics is an aggregate of what happens at the microeconomic level. Would it be possible for what happens at the macro level to differ from how economic agents would react to some stimulus at the micro level? Hint: Think about the behavior of crowds.

Solution

S1

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).

1.3: How Economists Use Theories and Models to Understand Economic Issues

Self-Check Questions

Q1

Suppose we extend the circular flow model to add imports and exports. Copy the circular flow diagram onto a sheet of paper and then add a foreign country as a third agent. Draw a rough sketch of the flows of imports, exports, and the payments for each on your diagram.

Q2

What is an example of a problem in the world today, not mentioned in the chapter, that has an economic dimension?

Review Questions

Q3

How did John Maynard Keynes define economics?

Q4

Are households primarily buyers or sellers in the goods and services market? In the labor market?

Q5

Are firms primarily buyers or sellers in the goods and services market? In the labor market?

Critical Thinking Questions

Q6

Why is it unfair or meaningless to criticize a theory as “unrealistic?”

Q7

Suppose, as an economist, you are asked to analyze an issue unlike anything you have ever done before. Also, suppose you do not have a specific model for analyzing that issue. What should you do? Hint: What would a carpenter do in a similar situation?

Solution

S1

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.

S2

There are many such problems. Consider the AIDS epidemic. Why are so few AIDS patients in Africa and Southeast Asia treated with the same drugs that are effective in the United States and Europe? It is because neither those patients nor the countries in which they live have the resources to purchase the same drugs.

1.4: How Economies Can Be Organized: An Overview of Economic Systems

Self-Check Questions

Q1

The chapter defines private enterprise as a characteristic of market-oriented economies. What would public enterprise be? Hint: It is a characteristic of command economies.

Q2

Why might Belgium, France, Italy, and Sweden have a higher export to GDP ratio than the United States?

Review Questions

Q3

What are the three ways that societies can organize themselves economically?

Q4

What is globalization? How do you think it might have affected the economy over the past decade?

Critical Thinking Questions

Q5

Why do you think that most modern countries’ economies are a mix of command and market types?

Q6

Can you think of ways that globalization has helped you economically? Can you think of ways that it has not?

Solution

S1

Public enterprise means the factors of production (resources and businesses) are owned and operated by the government.

S2

The United States is a large country economically speaking, so it has less need to trade internationally than the other countries mentioned. (This is the same reason that France and Italy have lower ratios than Belgium or Sweden.) One additional reason is that each of the other countries is a member of the European Union, where trade between members occurs without barriers to trade, like tariffs and quotas.