ANSWERSTOENDOFCHAPTERANDAPPENDIXQUESTIONS

11(KeyQuestion)Usetheeconomicperspectivetoexplainwhysomeonewhoisnormallyalighteaterat
astandardrestaurantmaybecomesomewhatofagluttonatabuffetstylerestaurantwhichchargesasingle
priceforallyoucaneat.
Thisbehaviorcanbeexplainedintermsofmarginalcostsandmarginalbenefits.Atastandardrestaurant,
itemsarepricedindividuallytheyhaveapositivemarginalcost.Ifyouordermore,itwillcostyoumore.
Youorderuntilthemarginalbenefitfromtheextrafoodnolongerexceedsthemarginalcost.Atabuffet
youpayaflatfeenomatterhowmuchyoueat.Oncethefeeispaid,additionalfooditemshaveazero
marginalcost.Youthereforecontinuetoeatuntilyourmarginalbenefitbecomeszero.
12Whatisthescientificmethodandhowdoesitrelatetotheoreticaleconomics?Whatisthedifference
betweenahypothesisandaneconomiclaworprinciple?
Thescientificmethodisthetechniqueusedbyeconomiststodetermineeconomiclawsorprinciples.These
lawsorprinciplesareformulatedtoexplainand/orpredictbehaviorofindividualsorinstitutions.
A hypothesis is a "guessimate" as to the possible causeand effect relationships between and among the
facts.Aneconomiclaworprincipleisformulatedafterthehypothesishasbeentestedforvalidity.
13Whyisitsignificantthateconomicsisnotalaboratoryscience?Whatproblemsmay be involved in
derivingandapplyingeconomicprinciples?
Because the world of reality is cluttered with innumerable interrelated facts, researchers must be highly
selective in gathering information. They must determine which facts are relevant to the problem under
consideration.Butevenwhenthissortingprocessiscomplete,therelevantinformationmayatfirstseem
randomandunrelated.
Theeconomistseeksprinciplesgeneralizationsaboutthewayindividualsandinstitutionsbehave.Deriving
principles is called theoretical economics or economic analysis. The role of economic theorizing or
economicanalysisistosystematicallyarrangefacts,interpretthem,andgeneralizefromthem.
14Explainthefollowingstatements:
a."Goodeconomicpolicyrequiresgoodeconomictheory."
b."Generalizationandabstractionarenearlysynonymous."
c."Factsservetosortoutgoodandbadhypotheses."
d."Theotherthingsequalassumptionhelpsisolatekeyeconomicrelationships."
(a)Economictheoriesarethefoundationofeconomicpolicy.Economicpolicyisacourseofaction
intendedtoresolveaspecificproblemorfurtheranationseconomicgoals.Therefore,theaction
taken(thepolicy)iseffectiveonlyiftheunderlyingtheoryiscorrect.
(b)Thefullscopeofeconomicrealityistoocomplexandbewilderingtobeunderstoodasawhole.
Economists abstractthat is, build modelsto give meaning to an otherwise overwhelming and
confusing maze of facts. Economic principles are generalizations they are expressed as the
tendencies of typical, or average, consumers, workers, or business firms. Generalizations or

abstractionsareofpracticalusebecausethesimplificationandremovalofcluttermakeanalysisof
problemseasier.
(c) To test a hypothesis, economists must subject it to systematic and repeated comparison with
relevant facts. If realworld data confirm the hypothesis repeatedly, we have a good theory,
otherwiseitmustbediscardedandanewhypothesisdeveloped.
(d)Naturalscientistssuchaschemistsorphysicistscanmuchmoreeasilycontrolexperimentsand
testwithgreatprecisionanassumedrelationshipbetweentwovariables.Economists have a much
moredifficulttimetryingtoisolatekeyeconomicrelationships.Nonetheless,the"otherthingsequal
assumption" is extremely important. Economists must test their theories using real world data,
generatedbytheactualoperationoftheeconomy.Undertheseconditions"otherthings"dochange
anddespitesophisticatedstatisticaltechniques,controlsarelessthanperfect.Asaresulteconomics
principlesarelessprecisethanthoseoflaboratorysciences.
15 (Key Question) Explain in detail the interrelationships between economic facts, theory, and policy.
Criticallyevaluatethisstatement:"Thetroublewitheconomictheoryisthatitisnotpractical.Itisdetached
fromtherealworld."
Economictheoryconsistsoffactuallysupportedgeneralizationsabouteconomicbehaviorthatcanbeused
toformulateeconomicpolicies.Economictheoryenablespolicymakerstoformulateeconomicpoliciesthat
arerelevanttorealworldgoalsandproblemsthatarebaseduponcarefullyobservedfacts.
6.Towhatextentdoyouaccepttheeighteconomicgoalsstatedanddescribedinthischapter?What
prioritieswouldyouassigntothem?
Thefirsttwopartsofthisquestionwillbeanswereddifferentlydependingonthebasicphilosophyorvalues
ofthestudent.
Thosewhofavorespeciallyahighandgrowingstandardoflivingshouldfavorgoals1(economicgrowth)
and2(fullemployment).
Thosemorecommittedtoequity,to"fairshares,"andthelesseningofpoverty,willprobablyprefertostress
goals6(anequitabledistributionofincome)and7(economicsecurity).Suchstudentsshouldalsomakeat
leastsomereferencetogoals1and2oratleastexplainhowtheyexpectgreaterfairnessintheeconomyto
come about in the absence of a growing economy that in itself requires at least the absence of heavy
unemployment.
Thosemostcommittedtofreeenterprisewillprobablymentiongoal5(economicfreedom)first.Butthese
studentsshouldnotcompletelyignoretheothergoals,forfreedomtochangejobsortoseekoneisoflittle
useintimesofhighunemploymentandnoornegativegrowth.Moreover,suchtimescanwellleadtosocial
unresttosuchanextentthateventheeconomicfreedomofthewealthyisthreatened.
Those concerned by the growing international indebtedness of the United States will mention goal 8
(balance of trade) but, at this stage of their studies, should not be expected to go very deeplyif at
allintotheneedforincreasingproductivity(impliedingoal3:economicefficiency)andmaintainingprice
stabilityinrelationtoAmericastradingpartnersinordertoimprovethebalanceofinternationaltradein
goodsandservices.NorshouldstudentsatthisstagebeexpectedtorelatetheFederalbudgetdeficitand
therelatedFederalborrowingabroadtothetradedeficit.

Withregardtothethirdpartofthisquestion,moststudentswillprobablyagreethatprogress,stability,
justice,andfreedomarecompatiblewiththelistofgoalsgiveninthechapter.Itishardtoimagineprogress
withouteconomicgrowthandatleasttheabsenceofsubstantialunemployment.Highinflationandthe
consequentarbitraryredistributionofincomesprecludestability,asdoes,infact,highunemployment.
Justice,intheviewofmost,isboundupwiththegoalofanequitabledistributionofincome,asitisdefined
inthechapter.Andfreedom,inthebroadestsense,islinkedwithalleightofthegoalsevenoftheeighth,
ifAmericanswishtobefreeoftheundueinfluencecreditorscanexertonadebtor.
17 (Key Question) Indicate whether each of the following statements applies to microeconomics or
macroeconomics:
(a),(d),and(f)aremacro(b),(c),and(e)aremicro.
18(KeyQuestion)Identifyeachofthefollowingaseitherapositiveoranormativestatement:
a.Thehightemperaturetodaywas89degrees.
b.Itwastoohottoday.
c.Otherthingsbeingequal,higherinterestratesreducethetotalamountofborrowing.
d.Interestratesaretoohigh.
(a)and(c)arepositive(b)and(d)arenormative..
19(KeyQuestion)Explainandgiveanillustrationof(a)thefallacyofcompositionand(b)the"afterthis,
therefore because of this" fallacy. Why are causeandeffect relationships difficult to isolate in the social
sciences?
(a)Thefallacyofcompositionisthemistakeofbelievingthatsomethingtrueforanindividualpartis
necessarilytrueforthewhole.Example:Asingleautoproducercanincreaseitsprofitsbylowering
its price and taking business away from its competitors. But matched price cuts by all auto
manufacturerswillnotnecessarilyyieldhigherindustryprofits.
(b) The "after this, therefore because of this" fallacy is incorrectly reasoning that when one event
precedesanother,thefirstevennecessarilycausedthesecond.Example:Interestratesrise,followed
byanincreaseintherateofinflation,leadingtotheerroneousconclusionthattheriseininterestrates
causedtheinflation.Actuallyhigherinterestratesslowinflation.
Causeandeffectrelationshipsaredifficulttoisolatebecause"otherthings"arecontinuallychanging.
10.Supposestudiesshowthatstudentswhostudymorehoursreceivehighergrades.Doesthisrelationship
guaranteethatanyparticularstudentwhostudieslongerwillgethighergrades?
No,notnecessarily,becausecauseandeffectarenotclear.Theobservedrelationshipcouldlargelyreflect
thefactthatsmarterstudentsstudymorehoursthandolessablestudents.Alessablestudentthusmight
notgetbettergradesbystudyinglonger,atleasttotheextentsuggestedbythegraph.
11.Studiesindicatethatmarriedmenonaverageearnmoreincomethanunmarriedmenofthesameage.Why
mustwebecautiousinconcludingthatmarriageisthecauseandhigherincomeistheeffect?

Correlationdoesnotnecessarilymeanthatthereiscausation.Therelationshipcouldbepurelycoincidental
ordependentonsomeotherfactornotincludedintheanalysis.Itisalsopossiblethathigherincomeisthe
variablethat"causes"marriage.
112(LastWord)Usetheeconomicperspectivetoexplainthebehavioroftheworkers(ratherthanthe
customers) observed at a fastfood restaurant. Why are these workers there, rather than, say cruising
aroundintheircars?Whydotheyworksodiligently?Whydosomanyofthemquitthesejobsoncethey
havegraduatedhighschool?
Workersatthefastfoodrestaurantarealsoengaginginrationalbehaviorattemptingtoachievemaximum
fulfillmentoftheirgoals.Eachworkerisweighingtheopportunitycostofbeingintherestaurantratherthan
participatingintheactivitythatisperceivedasthenextbestalternative(say,cruisingaroundintheircars).
Thediligenceobservedisafunctionoftheirdesiretomaintainemploymentandthemarginalbenefitthey
receivefromanotherdayspay.Manyofthemquittheirjobsafterhighschoolgraduationbecausethey
receivemorehighlyvaluedoffersfortheuseoftheirtime.
Chapter1Appendix
11 Briefly explain the use of graphs as a way to present economic relationships. What is an inverse
relationship?Howdoesitgraph?Whatisadirectrelationship?Howdoesitgraph?Graphandexplainthe
relationshipsyouwouldexpecttofindbetween(a)thenumberofinchesofrainfallpermonthandthesale
ofumbrellas,(b)theamountoftuitionandthelevelofenrollmentatauniversity,and(c)thepopularityofa
musicartistandthepriceofherconcerttickets.
In each case cite and explain how variables other than those specifically mentioned might upset the
expected relationship. Is your graph in part b consistent with the fact that, historically, enrollments and
tuitionhavebothincreased?Ifnot,explainanydifference.
Graphscanbeusedtoillustratetherelationshipbetweentwosetsofdata.Aninverserelationshipiswhen
thetwovariableschangeinoppositedirections.Thelineisdownwardsloping.Adirectrelationshipiswhen
thetwovariableschangeinthesamedirection.Thelineisupwardsloping.Statements(a)and(c)illustrate
directrelationships.Statement(b)illustratesaninverserelationship.Theinverserelationshipisassumingthat
everythingelseremainsequal.
12(KeyQuestion)IndicatehoweachofthefollowingmightaffectthedatashowninTable2andFigure2
ofthisappendix:
a.GSUsathleticdirectorscheduleshigherqualityopponents.
b.AnNBAteamlocatesinthecitywhereGSUplays.
c.GSUcontractstohaveallitshomegamestelevised.
(a)Moreticketsareboughtateachpricethelineshiftstotheright.
(b)Fewerticketsareboughtateachprice,thelineshiftstotheleft.
(c)Fewerticketsareboughtateachprice,thelineshiftstotheleft.

13 (Key Question) The following table contains data on the relationship between saving and income.
Rearrangethesedataintoameaningfulorderandgraphthemontheaccompanyinggrid.Whatistheslope
of the line? The vertical intercept? Interpret the meaning of both the slope and the intercept. Write the
equationwhichrepresentsthisline.Whatwouldyoupredictsavingtobeatthe$12,500levelofincome?

Income

Saving

(peryear)`

(peryear)

$15,000

$1,000

500

10,000

500

5,000

20,000

1,500

Income column: $0 $5,000 $10,000, $15,000 $20,000. Saving column: $500 0 $500 $1,000
$1,500. Slope = 0.1 (= $1,000 $500)/($15,000 $10,000). Vertical intercept = $500. The slope
showstheamountsavingwillincreaseforevery$1increaseinincometheinterceptshowstheamountof
saving(dissaving)occurringwhenincomeiszero.Equation:S=$500+0.1Y(whereSissavingandYis
income).Savingwillbe$750atthe$12,500incomelevel.
14Constructatablefromthefollowingdatashownontheaccompanyinggraph.Whichisthedependent
variableandwhichtheindependentvariable?Summarizethedatainequationform.

Studytime

(hours)

Exam
scores
10
30
50

70

90

100

Thedependentvariable(theeffect)istheexamscoreandtheindependentvariable(thecause)isthestudy
time.

Theequationis:

Proof:
Examscorewhenstudytimeis6hours:

15Supposethatwhentheinterestrateis16percent,businessesfinditunprofitabletoinvestinmachinery
andequipment.However,whentheinterestrateis14percent,$5billionworthofinvestmentisprofitable.
At12percentinterest,atotalof$10billionofinvestmentisprofitable.Similarly,totalinvestmentincreases
by$5billionforeachsuccessive2percentagepointdeclineintheinterestrate.Describetherelevant
relationshipbetweentheinterestrateandinvestmentinwords,inatable,graphically,andasanequation.
Puttheinterestrateontheverticalaxisandinvestmentonthehorizontalaxis,andinyourequationusethe

formi=a+bI,whereiistheinterestrate,aistheverticalintercept,bistheslopeoftheline(whichis
negative),andIisthelevelofinvestment.Commentontheadvantagesanddisadvantagesoftheverbal,
tabular,graphic,andequationformsofdescription.
Interest

Amountof

rate

investment

(inpercent)

(billionsofdollars)

16

$0

14

12

10

10

15

20

25

30

35

40

Whentheinterestrateis16%,investmentspendingwillbezero.Whentheinterestrateis14%,investment
spendingwillbe$5billion.Foreachsuccessivedropof2percentagepointsintheinterestrate,investment
spendingwillincreaseby$5billion.

Proof:substitutingdatafromthetablewhenIis$25billion,i=162/5(25)=1610=6
Theverbalpresentationcanbemade,butishardtovisualize.Thetabularpresentationispreciseallthe
facts are there, neatly arrayed, and it is easier to visualize than the verbal one. The graphic presentation
showsataglancetherelationshipbetweenthevariablesand,moreover,isbestforshowinglargechanges,
thatis,movementsofawholecurve.However, the graph requires careful drafting to ensure that it is as
accurateasthetable.Theequationisaspreciseasthetableand,moreover,describesalltheintermediate
points not set out in the table. For most people, though, the equation form is probably the hardest to
visualize.

16 (Key Question) The accompanying graph shows curve XX and tangents at points A, B, and C.
Calculatetheslopeofthecurveatthesethreepoints.

Slopes:atA=+4atB=0atC=4.

17Intheaccompanyinggraph,istheslopeofcurveAApositiveornegative?Doestheslopeincrease
ordecreaseaswemovealongthecurvefromAtoA?AnswerthesametwoquestionsforcurveBB.
SlopeofAAispositive(risingfromlefttoright).TheslopeincreasesaswemovefromAtoA.
SlopeofBBisnegative(droppingfromlefttoright).TheslopeincreasesaswemovefromBtoB.
Theslopesofbothcurvesaretendingtoinfinityastheycontinuetomovetotheright.