SOLUTIONS MANUAL
,
,section I
Basic Economic
Concepts
1. The four categories of resources are land, labor, capital, and entrepreneur-
ship. Possible examples of resources include the property where the factory
is located (land), factory workers (labor), sewing machines (capital), and
the design of the assembly line (entrepreneurship).
2. a. One of the opportunity costs of going to college is not being able to take a
job. By choosing to go to college, you give up the income you would have
earned on the job and the valuable on-the-job experience you would have
acquired. Another opportunity cost of going to college is the cost of tu-
ition, books, supplies, and so on. On the other hand, the benefit of going
to college is being able to find a better, more highly paid job after gradua-
tion in addition to the joy of learning.
b. Watching the movie gives you a certain benefit, but allocating your time (a
scarce resource) to watching the movie also involves the opportunity cost
of not being able to study for the exam. As a result, you will likely get a
lower grade on the exam—and all that that implies.
c. Riding the bus gets you where you need to go more cheaply than, but prob-
ably not as conveniently as, driving your car. That is, some of the opportu-
nity costs of taking the bus involve waiting for the bus, having to walk from
the bus stop to where you need to go rather than parking right outside the
building, and probably a slower journey. If the opportunity cost of your
time is high (your time is valuable), these costs may be prohibitive.
3. a. The worse the job market, the lower the opportunity cost of getting a
graduate degree. One of the opportunity costs of going to graduate school
is not being able to work. But if the job market is bad, the salary you can
expect to earn is low or you might be unemployed—so the opportunity
cost of going to school is also low.
b. When the economy is slow, the opportunity cost of people’s time is also
lower: the wages they could earn by working longer hours are lower than
when the economy is booming. As a result, the opportunity cost of spend-
ing time doing your own repairs is lower—so more people will decide to do
their own repairs.
S-3
, c. The opportunity cost of parkland is lower in suburban areas. The price
per square foot of land is much higher in urban than in suburban areas. By
creating parkland, you therefore give up the opportunity to make much
more money in cities than in the suburbs.
d. The opportunity cost of time is higher for busy people. Driving long dis-
tances to supermarkets takes time that could be spent doing other things.
Therefore, busy people are more likely to use a nearby convenience store.
4. a. The positive statements are:
workers in Asia . . . [are] earning only pennies an hour
American workers are more productive
American workers are more productive and, as a result, earn higher wages
The normative statement is:
the government should enact legislation banning imports of low-wage
Asian clothing
b. It is not. The statement about the productivity of American and Asian work-
ers is about the absolute advantage that American workers have over Asian
workers. However, Asian workers may still have a comparative advantage.
And if that is the case, then banning imports would result in inefficiency.
c. If America channeled more of its productive resources into producing
clothing, it would have to give up producing other goods. As a result, Amer-
ica would be able to consume less of all goods. And this would make some
Americans clearly worse off. Therefore, this policy would not be efficient.
d. Low-wage Asian workers would also be hurt by this policy. The Asian
country would channel its resources away from producing clothing toward
producing other goods that it previously imported from America. But
since it does not have the comparative advantage in those other goods, the
Asian country would be able to consume less of all goods.
5. a. True. This is a positive statement. It has a factual answer; that is, it is either
right or wrong. There has been some debate about whether the statement
is actually true or false, but in principle there is only one answer.
b. False. This is a statement about what we should do, and this statement has
no clearly right or wrong answer. Your view will depend on whether you
think encouraging more work is a good or a bad idea.
c. True. Economics is best at giving positive answers, for instance, answers
about what the most efficient way is of achieving a certain aim. The ques-
tion of how society ought to be organized is mostly decided in the realm of
politics.
d. False. This is a positive statement. In principle, it has an answer that is ei-
ther right or wrong.
e. False. Some disagreements among economists arise from the fact that in
building a model, one economist thinks that a certain abstraction from re-
ality is admissible but another economist may think that that abstraction
is not admissible. Some disagreements arise from the fact that economists
sometimes disagree about values.
S-4 section I Basic Economic Concepts
,
,section I
Basic Economic
Concepts
1. The four categories of resources are land, labor, capital, and entrepreneur-
ship. Possible examples of resources include the property where the factory
is located (land), factory workers (labor), sewing machines (capital), and
the design of the assembly line (entrepreneurship).
2. a. One of the opportunity costs of going to college is not being able to take a
job. By choosing to go to college, you give up the income you would have
earned on the job and the valuable on-the-job experience you would have
acquired. Another opportunity cost of going to college is the cost of tu-
ition, books, supplies, and so on. On the other hand, the benefit of going
to college is being able to find a better, more highly paid job after gradua-
tion in addition to the joy of learning.
b. Watching the movie gives you a certain benefit, but allocating your time (a
scarce resource) to watching the movie also involves the opportunity cost
of not being able to study for the exam. As a result, you will likely get a
lower grade on the exam—and all that that implies.
c. Riding the bus gets you where you need to go more cheaply than, but prob-
ably not as conveniently as, driving your car. That is, some of the opportu-
nity costs of taking the bus involve waiting for the bus, having to walk from
the bus stop to where you need to go rather than parking right outside the
building, and probably a slower journey. If the opportunity cost of your
time is high (your time is valuable), these costs may be prohibitive.
3. a. The worse the job market, the lower the opportunity cost of getting a
graduate degree. One of the opportunity costs of going to graduate school
is not being able to work. But if the job market is bad, the salary you can
expect to earn is low or you might be unemployed—so the opportunity
cost of going to school is also low.
b. When the economy is slow, the opportunity cost of people’s time is also
lower: the wages they could earn by working longer hours are lower than
when the economy is booming. As a result, the opportunity cost of spend-
ing time doing your own repairs is lower—so more people will decide to do
their own repairs.
S-3
, c. The opportunity cost of parkland is lower in suburban areas. The price
per square foot of land is much higher in urban than in suburban areas. By
creating parkland, you therefore give up the opportunity to make much
more money in cities than in the suburbs.
d. The opportunity cost of time is higher for busy people. Driving long dis-
tances to supermarkets takes time that could be spent doing other things.
Therefore, busy people are more likely to use a nearby convenience store.
4. a. The positive statements are:
workers in Asia . . . [are] earning only pennies an hour
American workers are more productive
American workers are more productive and, as a result, earn higher wages
The normative statement is:
the government should enact legislation banning imports of low-wage
Asian clothing
b. It is not. The statement about the productivity of American and Asian work-
ers is about the absolute advantage that American workers have over Asian
workers. However, Asian workers may still have a comparative advantage.
And if that is the case, then banning imports would result in inefficiency.
c. If America channeled more of its productive resources into producing
clothing, it would have to give up producing other goods. As a result, Amer-
ica would be able to consume less of all goods. And this would make some
Americans clearly worse off. Therefore, this policy would not be efficient.
d. Low-wage Asian workers would also be hurt by this policy. The Asian
country would channel its resources away from producing clothing toward
producing other goods that it previously imported from America. But
since it does not have the comparative advantage in those other goods, the
Asian country would be able to consume less of all goods.
5. a. True. This is a positive statement. It has a factual answer; that is, it is either
right or wrong. There has been some debate about whether the statement
is actually true or false, but in principle there is only one answer.
b. False. This is a statement about what we should do, and this statement has
no clearly right or wrong answer. Your view will depend on whether you
think encouraging more work is a good or a bad idea.
c. True. Economics is best at giving positive answers, for instance, answers
about what the most efficient way is of achieving a certain aim. The ques-
tion of how society ought to be organized is mostly decided in the realm of
politics.
d. False. This is a positive statement. In principle, it has an answer that is ei-
ther right or wrong.
e. False. Some disagreements among economists arise from the fact that in
building a model, one economist thinks that a certain abstraction from re-
ality is admissible but another economist may think that that abstraction
is not admissible. Some disagreements arise from the fact that economists
sometimes disagree about values.
S-4 section I Basic Economic Concepts
