INSTRUCTOR MANUAL
ECON MICRO
7TH EDITION
CHAPTER 1: THE ART AND SCIENCE OF ECONOMIC ANALYSIS
ANSWERS TO END OF CHAPTER QUESTIONS
REVIEW QUESTIONS
1. A resource is scarce when the amount people desire exceeds the amount available at a price of zero.
The concept of scarcity is important to the definition of economics because scarcity forces people to
choose how they will use their resources in an attempt to satisfy their unlimited wants and desires.
Economics is about making choices. Without scarcity, there would be no economic problem and,
therefore, no need to choose between competing wants and desires.
2. a. Individuals will compare the expected benefits of attending college full time with the expected
costs. One benefit might be that the individual’s stock of knowledge and productivity will grow, and
so will their wage. Costs include not only tuition but also the forgone wages, wages that could have
been earned by working instead of attending college full time. If the expected benefits outweigh the
costs, then the rational person will choose to go to college full time.
b. Individuals will compare the expected benefits of a new textbook with the higher costs of
purchasing a new textbook. The benefits include not being confused by other students’ markings in
the book and a higher resale value. However, the out-of-pocket cost of a new book will be higher than
the cost of a used book. If the expected benefits outweigh the costs, then a rational person will
purchase the new textbook.
c. Individuals will compare the expected benefits and costs associated with both colleges under
consideration and will choose the college at which the difference between benefits and costs is
greater. The costs of attending an out-of-town college may include greater travel costs and phone
bills, while the benefits may include learning about a different region.
,3. Rational self-interest is not blind materialism, pure selfishness, or greed. Rational self-interest means
we choose the option that maximizes expected benefits with a given cost. People will give more to
charities when the contribution is tax deductible. The lower the personal cost of helping others, the
more we are willing to help and contribute.
4. By increasing its delivery radius, the store will have greater sales. However, these marginal revenues
must be balanced against the additional costs incurred, such as a greater consumption of pizza
ingredients, more gasoline for the delivery truck, and possibly the need to hire additional labor and
increase advertising.
5. Rational decision makers will continue to acquire information as long as the benefit of the additional
information exceeds the additional costs. Oftentimes, we are willing to pay others to gather and digest
the information for us.
6. Answers may vary. Students select college majors for a variety of reasons, and the expected pay is
only one of them. Some students have the aptitude necessary to successfully study economics.
PROBLEMS AND APPLICATIONS
1.1
a. macro
b. micro
c. macro
d. micro
e. macro
f. micro
g. macro
1.2
a. positive
b. positive
c. normative
d. normative
e. normative
, f. positive
g. normative
h. normative
1.3
a. Owen, stove, utensils, other kitchen appliances, building where the pizza place is located –
capital, pizza chef, delivery person – labor, skills and experience of pizza chef and driving skills
and driving licence of the delivery person – human capital, ingredients, electricity, water, land –
natural resources
b. Lecture hall, classroom building, chairs, desks, projector – capital, faculty, administrators,
genitors – labor, education and skills of faculty, administrators, and genitors – human capital,
electricity, water, land – natural resources
c. Scissors, brushes, mirrors, hairclips – capital, hairstylist, receptionist – labor, skills and education
of hairstylist and receptionist – human capital, electricity, water, land – natural resources
1.4 The things that influence how well corn grows are: amount of water, soil quality, amount of sun
exposure, temperature, type of seeds, etc. These are the things to be hold constant, the same for
the control and treatment group. The only thing that should be different between the two groups is
the fertilizer – if it is added or not.
1.5
a. The professor, classroom, classroom size, the textbook, other material used for teaching, the
students should be also the same or as similar as possible (based on socioeconomic status –
race/ethnicity, sex, income, parental education) and their major, full-time vs part-time students,
working or not, on campus resident or not, year in college, etc. The amount and effort put into
studying.
b. If there is a national recession or expansion, other major macroeconomic events that impact the
economy and employment like the Covid-19 pandemic. These are the things that should be held
constant and anything else that can impact the employment/unemployment. The only thing that
should change is the minimum wage. This is a very hard and unlikely to achieve.
c. One of the most important effect on the wage are personal characteristics of a person – work
habit, perseverance, health, motivation, talent and ability. In addition, the type of the major and
which college you go to also matter. Finally, there are a number of life events that might prevent
you from completing the college. So, these thing should be held constant among individuals that
, we are comparing. The only difference should be if the person completed college or not –
everything else should be identical or near identical (very difficult to achieve).
d. How many people are in a country (population size), how wealthy is the country (GDP or GDP
per capita), how much money they are investing in health, or education, or sports as a share of
GDP. All of these characteristics should be held constant. They only difference should be income
inequality.
1.6
• Add the government (with taxes, subsidies and government expenditure) as well as government
employment of people and production of goods and services.
• Financial sector with financial intermediaries such as banks, so that households and firms can
also save or borrow.
• International trade – imports and exports.
1.7
a. This assertion is a mistake because the secondary effects of taxes on production and the labor
supply are ignored. If the tax rate were raised to 100 percent, for example, no one would want to
work or produce, so government revenues would decline.
b. This is the fallacy that association implies causation. It is more likely that recession causes a
change in imports than the other way around.
c. This is a fallacy of composition. True, the tariff may help the steel industry. But it hurts
purchasers of steel, including the automobile and construction industries. The overall effect on
the economy is unclear.
d. This is the fallacy of composition, since attempts to sell so much gold at once would push down
the price of gold.
e. You are committing the fallacy that association is causation. The causality is undoubtedly in the
other direction; that is, doctors will tend to locate where there is a lot of disease and, therefore, a
greater need for medical care.
ECON MICRO
7TH EDITION
CHAPTER 1: THE ART AND SCIENCE OF ECONOMIC ANALYSIS
ANSWERS TO END OF CHAPTER QUESTIONS
REVIEW QUESTIONS
1. A resource is scarce when the amount people desire exceeds the amount available at a price of zero.
The concept of scarcity is important to the definition of economics because scarcity forces people to
choose how they will use their resources in an attempt to satisfy their unlimited wants and desires.
Economics is about making choices. Without scarcity, there would be no economic problem and,
therefore, no need to choose between competing wants and desires.
2. a. Individuals will compare the expected benefits of attending college full time with the expected
costs. One benefit might be that the individual’s stock of knowledge and productivity will grow, and
so will their wage. Costs include not only tuition but also the forgone wages, wages that could have
been earned by working instead of attending college full time. If the expected benefits outweigh the
costs, then the rational person will choose to go to college full time.
b. Individuals will compare the expected benefits of a new textbook with the higher costs of
purchasing a new textbook. The benefits include not being confused by other students’ markings in
the book and a higher resale value. However, the out-of-pocket cost of a new book will be higher than
the cost of a used book. If the expected benefits outweigh the costs, then a rational person will
purchase the new textbook.
c. Individuals will compare the expected benefits and costs associated with both colleges under
consideration and will choose the college at which the difference between benefits and costs is
greater. The costs of attending an out-of-town college may include greater travel costs and phone
bills, while the benefits may include learning about a different region.
,3. Rational self-interest is not blind materialism, pure selfishness, or greed. Rational self-interest means
we choose the option that maximizes expected benefits with a given cost. People will give more to
charities when the contribution is tax deductible. The lower the personal cost of helping others, the
more we are willing to help and contribute.
4. By increasing its delivery radius, the store will have greater sales. However, these marginal revenues
must be balanced against the additional costs incurred, such as a greater consumption of pizza
ingredients, more gasoline for the delivery truck, and possibly the need to hire additional labor and
increase advertising.
5. Rational decision makers will continue to acquire information as long as the benefit of the additional
information exceeds the additional costs. Oftentimes, we are willing to pay others to gather and digest
the information for us.
6. Answers may vary. Students select college majors for a variety of reasons, and the expected pay is
only one of them. Some students have the aptitude necessary to successfully study economics.
PROBLEMS AND APPLICATIONS
1.1
a. macro
b. micro
c. macro
d. micro
e. macro
f. micro
g. macro
1.2
a. positive
b. positive
c. normative
d. normative
e. normative
, f. positive
g. normative
h. normative
1.3
a. Owen, stove, utensils, other kitchen appliances, building where the pizza place is located –
capital, pizza chef, delivery person – labor, skills and experience of pizza chef and driving skills
and driving licence of the delivery person – human capital, ingredients, electricity, water, land –
natural resources
b. Lecture hall, classroom building, chairs, desks, projector – capital, faculty, administrators,
genitors – labor, education and skills of faculty, administrators, and genitors – human capital,
electricity, water, land – natural resources
c. Scissors, brushes, mirrors, hairclips – capital, hairstylist, receptionist – labor, skills and education
of hairstylist and receptionist – human capital, electricity, water, land – natural resources
1.4 The things that influence how well corn grows are: amount of water, soil quality, amount of sun
exposure, temperature, type of seeds, etc. These are the things to be hold constant, the same for
the control and treatment group. The only thing that should be different between the two groups is
the fertilizer – if it is added or not.
1.5
a. The professor, classroom, classroom size, the textbook, other material used for teaching, the
students should be also the same or as similar as possible (based on socioeconomic status –
race/ethnicity, sex, income, parental education) and their major, full-time vs part-time students,
working or not, on campus resident or not, year in college, etc. The amount and effort put into
studying.
b. If there is a national recession or expansion, other major macroeconomic events that impact the
economy and employment like the Covid-19 pandemic. These are the things that should be held
constant and anything else that can impact the employment/unemployment. The only thing that
should change is the minimum wage. This is a very hard and unlikely to achieve.
c. One of the most important effect on the wage are personal characteristics of a person – work
habit, perseverance, health, motivation, talent and ability. In addition, the type of the major and
which college you go to also matter. Finally, there are a number of life events that might prevent
you from completing the college. So, these thing should be held constant among individuals that
, we are comparing. The only difference should be if the person completed college or not –
everything else should be identical or near identical (very difficult to achieve).
d. How many people are in a country (population size), how wealthy is the country (GDP or GDP
per capita), how much money they are investing in health, or education, or sports as a share of
GDP. All of these characteristics should be held constant. They only difference should be income
inequality.
1.6
• Add the government (with taxes, subsidies and government expenditure) as well as government
employment of people and production of goods and services.
• Financial sector with financial intermediaries such as banks, so that households and firms can
also save or borrow.
• International trade – imports and exports.
1.7
a. This assertion is a mistake because the secondary effects of taxes on production and the labor
supply are ignored. If the tax rate were raised to 100 percent, for example, no one would want to
work or produce, so government revenues would decline.
b. This is the fallacy that association implies causation. It is more likely that recession causes a
change in imports than the other way around.
c. This is a fallacy of composition. True, the tariff may help the steel industry. But it hurts
purchasers of steel, including the automobile and construction industries. The overall effect on
the economy is unclear.
d. This is the fallacy of composition, since attempts to sell so much gold at once would push down
the price of gold.
e. You are committing the fallacy that association is causation. The causality is undoubtedly in the
other direction; that is, doctors will tend to locate where there is a lot of disease and, therefore, a
greater need for medical care.
