ANSWERS TO QUESTIONS FOR DISCUSSION AND
PROBLEMS
QUESTIONS FOR DISCUSSION
1. As rich as America is, how can our resources possibly be “scarce?”
LO: 1 AACSB: Analytic BT: Apply
Many believe that America has become rich because of the abundance of
our natural resources. Others believe our democratic political system or
our market-driven economic system play significant roles in our relative
financial success. Regardless, as rich as America is, we still want more. The
concept of scarcity, in the case of America, is the lack of enough resources
to satisfy all American consumer desires. Therefore, resources are scarce
in the U.S. because the desire for these resources is greater than the amount
we possess.
2. What opportunity costs did you incur in reading this chapter?
LO: 2 AACSB: Analytic BT: Apply
There are many other things you could have done with your time instead of
reading this chapter. The most desired activity you gave up is the
opportunity cost.
3. How would you answer the question in the News Wire on page 5? Why?
LO: 3 AACSB: Analytic BT: Apply
, There was a spike of anxiety in 2008-09 regarding the ability of the U.S.
economy to continuously crank out more goods. Today many Americans
still worry about the resiliency of our economic system and our many
resource limitations. The general definition of economics – the study of how
best to allocate scarce resources among competing uses – allows for the
potential of brilliant minds to help the economy continue to grow. Additional
resources, new technologies, insightful entrepreneurial strategies, and great
minds working on economic development provide tremendous hope for
future growth in our economy and the associated increase in our standard
of living.
1. Why might it be necessary to reduce consumer spending in order to attain
faster economic growth? Would it be worth the sacrifice?
LO: 2 AACSB: Reflective Thinking BT: Create
One choice any society must make is whether to use its resources to produce
consumer goods or whether to produce capital with those same resources.
To increase economic growth it may be necessary to produce more capital.
As a result, it may be necessary to reduce output of consumer goods so
resources are available to produce more capital goods. Whether it is worth
the sacrifice depends on which one society values more, current
consumption or future consumption.
,2. In a purely private market economy, how is the FOR WHOM question
answered? Is that optimal?
LO: 3 AACSB: Reflective Thinking BT: Create
FOR WHOM? is one of the three basic economics questions. The other two
questions determine how large of an economic pie to bake (WHAT?) and
how we will bake it (HOW?). This FOR WHOM question deals with how to
slice the pie. Should some get larger or smaller slices than others? The focus
is on how an economy’s output is distributed across members of society.
In a purely private market economy, those who are willing and able to
purchase a slice of pie will receive the slice. Markets are efficient; however,
neither markets nor governments always have the right answers. There are
certainly times (market failure) when the market generates suboptimal
economic outcomes.
3. Why doesn’t North Korea reduce its military and put more resources into
food production (News Wire, p. 11)? What is the optimal mix of “guns” and
“butter” for a nation?
LO: 3 AACSB: Reflective Thinking BT: Create
North Korea doesn’t reduce its military and put more resources into food
production because the North Korean government apparently believes that
a large military establishment is essential to their well-being and security.
The optimal mix of “guns” and “butter” depends on values and, therefore, the
answer to this question will depend on the values of the individual or in this
case, the government answering it.
4. If taxes on the rich were raised to provide more housing for the poor, how
would the willingness to work be affected? What would happen to total
output?
, LO: 3 AACSB: Analytic BT: Analyze
Given the standard assumptions about market participant reactions, we
would expect that those being taxed more would reconsider their choices
between work and leisure. Since their reward for working would now be
less (after taxes) they could be expected to work less. Poor people, too, might
work less if they get free or subsidized housing. Changes in the work
incentives facing both the rich and the poor would lead to less total output.
5. What kind of knowledge must central planners possess to manage an
economy efficiently?
LO: 4 AACSB: Analytic BT: Analyze
A central planner will make all the decisions for an economy including what
goods are produced, at what prices they are sold, and who gets to have
them. For example, a central planner places workers at a bread factory, tells
them how much bread to bake, and specifies who is allowed to eat this
bread. The WHAT, HOW, and FOR WHOM outcomes are all directed by the
central government (planner).
PROBLEMS
QUESTIONS FOR DISCUSSION
1. As rich as America is, how can our resources possibly be “scarce?”
LO: 1 AACSB: Analytic BT: Apply
Many believe that America has become rich because of the abundance of
our natural resources. Others believe our democratic political system or
our market-driven economic system play significant roles in our relative
financial success. Regardless, as rich as America is, we still want more. The
concept of scarcity, in the case of America, is the lack of enough resources
to satisfy all American consumer desires. Therefore, resources are scarce
in the U.S. because the desire for these resources is greater than the amount
we possess.
2. What opportunity costs did you incur in reading this chapter?
LO: 2 AACSB: Analytic BT: Apply
There are many other things you could have done with your time instead of
reading this chapter. The most desired activity you gave up is the
opportunity cost.
3. How would you answer the question in the News Wire on page 5? Why?
LO: 3 AACSB: Analytic BT: Apply
, There was a spike of anxiety in 2008-09 regarding the ability of the U.S.
economy to continuously crank out more goods. Today many Americans
still worry about the resiliency of our economic system and our many
resource limitations. The general definition of economics – the study of how
best to allocate scarce resources among competing uses – allows for the
potential of brilliant minds to help the economy continue to grow. Additional
resources, new technologies, insightful entrepreneurial strategies, and great
minds working on economic development provide tremendous hope for
future growth in our economy and the associated increase in our standard
of living.
1. Why might it be necessary to reduce consumer spending in order to attain
faster economic growth? Would it be worth the sacrifice?
LO: 2 AACSB: Reflective Thinking BT: Create
One choice any society must make is whether to use its resources to produce
consumer goods or whether to produce capital with those same resources.
To increase economic growth it may be necessary to produce more capital.
As a result, it may be necessary to reduce output of consumer goods so
resources are available to produce more capital goods. Whether it is worth
the sacrifice depends on which one society values more, current
consumption or future consumption.
,2. In a purely private market economy, how is the FOR WHOM question
answered? Is that optimal?
LO: 3 AACSB: Reflective Thinking BT: Create
FOR WHOM? is one of the three basic economics questions. The other two
questions determine how large of an economic pie to bake (WHAT?) and
how we will bake it (HOW?). This FOR WHOM question deals with how to
slice the pie. Should some get larger or smaller slices than others? The focus
is on how an economy’s output is distributed across members of society.
In a purely private market economy, those who are willing and able to
purchase a slice of pie will receive the slice. Markets are efficient; however,
neither markets nor governments always have the right answers. There are
certainly times (market failure) when the market generates suboptimal
economic outcomes.
3. Why doesn’t North Korea reduce its military and put more resources into
food production (News Wire, p. 11)? What is the optimal mix of “guns” and
“butter” for a nation?
LO: 3 AACSB: Reflective Thinking BT: Create
North Korea doesn’t reduce its military and put more resources into food
production because the North Korean government apparently believes that
a large military establishment is essential to their well-being and security.
The optimal mix of “guns” and “butter” depends on values and, therefore, the
answer to this question will depend on the values of the individual or in this
case, the government answering it.
4. If taxes on the rich were raised to provide more housing for the poor, how
would the willingness to work be affected? What would happen to total
output?
, LO: 3 AACSB: Analytic BT: Analyze
Given the standard assumptions about market participant reactions, we
would expect that those being taxed more would reconsider their choices
between work and leisure. Since their reward for working would now be
less (after taxes) they could be expected to work less. Poor people, too, might
work less if they get free or subsidized housing. Changes in the work
incentives facing both the rich and the poor would lead to less total output.
5. What kind of knowledge must central planners possess to manage an
economy efficiently?
LO: 4 AACSB: Analytic BT: Analyze
A central planner will make all the decisions for an economy including what
goods are produced, at what prices they are sold, and who gets to have
them. For example, a central planner places workers at a bread factory, tells
them how much bread to bake, and specifies who is allowed to eat this
bread. The WHAT, HOW, and FOR WHOM outcomes are all directed by the
central government (planner).
