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1、SOLUTIONS TO TEXT PROBLEMS:Quick Quizzes1.The four principles of economic decisionmaking are: (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 th
2、ing that they like, they usually have to give up another thing that they like. The cost of something 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 m
3、arginal costs. People respond to incentives because as they compare benefits to costs, a change 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 economi
4、c activity; and (3) governments can sometimes improve market outcomes. Trade can make everyone 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 invisi
5、ble hand leads markets to desirable outcomes. Governments can sometimes improve market outcomes 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 standar
6、d of living depends on its ability to produce goods and services; (2) prices rise when the 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 tur
7、n depends on its productivity, which is a function of the education of workers and the access 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 sho
8、rt-run tradeoff between inflation and unemployment that is only temporary and policymakers 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
9、 compared to engaging in social activities) and spending tradeoffs (such as whether to use 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 a
10、nd attending the show. The time cost depends on what else you might do with that time; if 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 dep
11、ends on your circumstances. If youve just run a marathon, or youve been walking in the desert 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, d
12、ont always have large marginal benefits.4.Policymakers need to think about incentives so 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 m
13、ay lead to a very different type of policy; for example, some economists have suggested 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 an
14、d some winners because trade can make everyone better off. By allowing specialization, 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-in
15、terest, prices and the marketplace guide them to do what is good for society as a whole.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 knowledg
16、e. Market power refers to the ability of a single person (or small group of people) 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 services. The
