17.
Answers will vary.
Chapter2
Problems and Applications 1.
See Figure 5; the four transactions are shown.
Figure 5
2.
a.
Figure 6 shows a production possibilities frontier between guns and butter. It is bowed out because the opportunity cost of butter depends on how much butter and how many guns the economy is producing. When the economy is producing a lot of butter, workers and machines best suited to making guns are being used to make butter, so each unit of guns given up yields a small increase in the production of butter. Thus, the frontier is steep and the opportunity cost of producing butter is high. When the economy is producing a lot of guns, workers and machines best suited to making butter are being used to make guns, so each unit of guns given up yields a large increase in the production of butter. Thus, the frontier is very flat and the opportunity cost of producing butter is low.
Figure 6
b.
Point A is impossible for the economy to achieve; it is outside the production possibilities frontier. Point B is feasible but inefficient because it is inside the production possibilities frontier.
d.
If both Hawks and Doves reduced their desired quantity of guns by the same amount, the Hawks would get a bigger peace dividend because the production possibilities frontier is much flatter at point H than at point D. As a result, the reduction of a given number of guns, starting at point H, leads to a much larger increase in the quantity of butter produced than when starting at point D.
c.
The Hawks might choose a point like H, with many guns and not much butter. The Doves might choose a point like D, with a lot of butter and few guns.
3. See Figure 7. The shape and position of the frontier depend on how costly it is to maintain a clean environment?the productivity of the environmental industry. Gains in environmental productivity, such as the development of new way to produce electricity that emits fewer pollutants, lead to shifts of the production-possibilities frontier, like the shift from PPF1 to PPF2 shown in the figure.
Figure 7
4. a. A: 40 lawns mowed; 0 washed cars
B: 0 lawns mowed, 40 washed cars C: 20 lawns mowed; 20 washed cars D: 25 lawns mowed; 25 washed cars
Figure 8
b.
c.
d.
The production possibilities frontier is shown in Figure 8. Points A, B, and D are on the frontier, while point C is inside the frontier.
Larry is equally productive at both tasks. Moe is more productive at washing cars, while Curly is more productive at mowing lawns.
Allocation C is inefficient. More washed cars and mowed lawns can be produced by simply reallocating the time of the three individuals.
5. a. A family's decision about how much income to save is related to microeconomics.
b.
c.
d.
e.
6.
a.
The statement that society faces a short-run tradeoff between inflation and unemployment is a positive statement. It deals with how the economy is, not how it should be. Since economists have examined data and found that there is a short-run negative relationship between inflation and unemployment, the statement is a fact, thus it is a positive statement.
b.
The statement that a reduction in the rate of growth of money will reduce the rate of inflation is a positive statement. Economists have found that money growth and inflation are very closely related. The statement thus tells how the world is, and so it is a positive statement.
c.
The statement that the Federal Reserve should reduce the rate of growth of money is a normative statement. It states an opinion about something that should be done, not how the world is.
d.
The statement that society ought to require welfare recipients to look for jobs is a normative statement. It does not state a fact about how the world is. Instead, it is a statement of how the world should be and is thus a normative statement.
e.
The statement that lower tax rates encourage more work and more saving is a positive statement. Economists have studied the relationship between tax
The effect of government regulations on auto emissions is related to microeconomics.
The impact of higher saving on economic growth is related to macroeconomics.
A firm's decision about how many workers to hire is related to microeconomics. The relationship between the inflation rate and changes in the quantity of money is related to macroeconomics.
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