rates and work, as well as the relationship between tax rates and saving. They have found a negative relationship in both cases. So the statement reflects how the world is, and is thus a positive statement.
7.
Two of the statements in Table 2 are clearly normative. They are: \ If the federal budget is to be balanced, it should be done over the business cycle rather than yearly\ The government should restructure the welfare system along the lines of a 'negative income tax.'\ Both are suggestions of changes that should be made, rather than statements of fact, so they are clearly normative statements.
The other statements in the table are positive. All the statements concern how the world is, not how the world should be. They can each be evaluated using data.
8.
As the president, you would be interested in both the positive and normative views of economists, but you would probably be most interested in their positive views. Economists are on your staff to provide their expertise about how the economy works. They know many facts about the economy and the interaction of different sectors. So you would be most likely to call on them about questions of fact?positive analysis. Since you are the president, you are the one who has to make the normative statements as to what should be done, with an eye to the political consequences. The normative statements made by economists represent their own views, not necessarily your views or the electorate’s views.
9.
10. There are many possible answers.
There are many possible answers.
Chapter3
Problems and Applications 1.
a.
See Figure 2. If Maria spends all five hours studying economics, she can read 100 pages, so that is the vertical intercept of the production possibilities frontier. If she spends all five hours studying sociology, she can read 250 pages, so that is the horizontal intercept. The opportunity costs are constant, so the production possibilities frontier is a straight line.
Figure 2
b.
It takes Maria two hours to read 100 pages of sociology. In that time, she could read 40 pages of economics. So the opportunity cost of 100 pages of sociology is 40 pages of economics.
2. a. U.S. Japan
Workers needed to make: One Car 1/4 1/4 One Ton of Grain 1/10 1/5 b. See Figure 3. With 100 million workers and four cars per worker, if either economy were devoted completely to cars, it could make 400 million cars. Because a U.S. worker can produce 10 tons of grain, if the United States produced only grain it would produce 1,000 million tons. Because a Japanese worker can produce 5 tons of grain, if Japan produced only grain it would produce 500 million tons. These are the intercepts of the production possibilities frontiers shown in the figure. Note that because the trade-off between cars and grain is constant for both countries, the production possibilities frontiers are straight lines.
Figure 3
c.
Because a U.S. worker produces either four cars or ten tons of grain, the opportunity cost of one car is two and one-half tons of grain, which is ten divided by four. Because a Japanese worker produces either four cars or five tons of grain, the opportunity cost of one car is one and one-fourth tons of grain, which is five divided by four. Similarly, the U.S. opportunity cost of one ton of grain is 2/5 car (4 divided by 10) and the Japanese opportunity cost of one ton of grain is 4/5 car (4 divided by 5). This results in the following table:
Opportunity Cost of: d.
e.
f.
g.
3.
a.
One Car (in terms of tons One Ton of Grain (in of grain given up) terms of cars given up) U.S. 2 1/2 2/5 Japan 1 1/4 4/5 Neither country has an absolute advantage in producing cars, because they are equally productive (the same output per worker); the United States has an absolute advantage in producing grain, because it is more productive (greater output per worker).
Japan has a comparative advantage in producing cars, because it has a lower opportunity cost in terms of grain given up. The United States has a
comparative advantage in producing grain, because it has a lower opportunity cost in terms of cars given up.
With half the workers in each country producing each of the goods, the United States would produce 200 million cars (50 million workers times 4 cars each) and 500 million tons of grain (50 million workers times 10 tons each). Japan would produce 200 million cars (50 million workers times 4 cars each) and 250 million tons of grain (50 million workers times 5 tons each).
From any situation with no trade, in which each country is producing some cars and some grain, suppose the United States changed one worker from producing cars to producing grain. That worker would produce four fewer cars and ten additional tons of grain. Then suppose the United States offers to trade seven tons of grain to Japan for four cars. The United States will do this because it values four cars at ten tons of grain, so it will be better off if the trade goes through. Suppose Japan changes one worker from producing grain to producing cars. That worker would produce four more cars and five fewer tons of grain. Japan will take the trade because it values four cars at five tons of grain, so it will be better off. With the trade and the change of one worker in both the United States and Japan, each country gets the same amount of cars as before and both get additional tons of grain (three for the United States and two for Japan). Thus, by trading and changing their production, both countries are better off.
Pat's opportunity cost of making a pizza is one-half gallon of root beer, because she could brew one-half gallon in the time (two hours) it takes her to make a pizza. Pat has an absolute advantage in making pizza because she can make one in two hours, while it takes Kris four hours. Kris' opportunity cost of making a pizza is two-thirds gallon of root beer, because she could brew two-thirds of a gallon in the time (four hours) it takes her to make a pizza. Because Pat's opportunity cost of making pizza is less than Kris', Pat has a comparative advantage in making pizza.
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