Chapter 1: Economics: The Core Issues
Solutions Manual
Learning Objectives for Chapter 1
After reading this chapter, you should know
LO 01-01. How scarcity creates opportunity costs.
LO 01-02. What the production-possibilities curve represents.
LO 01-03. The three core economic questions that every society must answer.
LO 01-04. How market and government approaches to economic problems differ.
Questions for Discussion
1. What opportunity costs did you incur in reading this chapter? If you read another
chapter today, would your opportunity costs (per chapter) increase? Explain. (LO 01-
01)
Answer: Opportunity cost is what you must give up to get the next best alternative. In
this case, opportunity costs include the things you could have done with your time
instead of reading this chapter. The most desired activity you give up is the value of
the opportunity cost. As you first begin to read, you first give up the alternative
activities that have the least value to you. As you spend more time studying, you
begin giving up activities that have increasing value to you. For example, the first
hour of studying may have resulted in you not watching a TV show. The second hour
of studying may result in you not using your PlayStation 4, which you believe offers
more satisfaction than the first TV show that you gave up, and so on.
2. How much time could you spend on homework in a day? How much do you spend?
How do you decide? (LO 01-01)
Answer: You theoretically could spend 24 hours in a day doing homework. However,
in reality, there is a limit to the amount of time in which you can effectively complete
your homework. Most students spend substantially less than 24 hours per day because
there are competing needs for their time, such as work, sleep, and social time. A
person decides how much time to spend on homework based on the perceived payoff
(an improvement in learning or your course grade) and compares this to the value of
what must be given up to complete the homework. Those activities that are perceived
as giving the most benefit are usually the activities completed first. At some point, the
perceived benefit from completing additional homework is less than the benefit from
other activities, and you stop working on homework.
,1. What’s the real cost of the food in the “free lunch” cartoon on page 6? (LO 01-01)
Answer: Even if a bar doesn’t charge for lunch, preparation of the lunch requires the
use of scarce resources. The workers at this bar will spend considerable time
preparing this lunch and could potentially have spent this time doing something else.
The cost of the lunch is the best alternative use of that land, labor, and capital. In
addition, the value of the patron’s time is a cost that he or she must pay for the lunch.
2. How might a nation’s production possibilities be affected by the following? (LO 01-
02)
a. New solar technology.
b. An increase in immigration.
c. An increase in military spending.
d. An increase in college tuition.
Answer:
(a) In general, a nation’s production possibilities curve will shift due to a change in
resources, a change in the quality of resources, or a change in technology. New solar
technology is an example of an advancement in technology which causes an increase
in a country’s production possibilities. Better technology allows a country to have a
greater capacity in the long run leading to more output.
(b) An increase in immigration is an example of an increase in resources for a nation.
An increase in immigration certainly is an increase in the number of labors, which
would necessarily increase the production possibilities. These immigrants also have
varying levels of skills and education (human capital) that also will increase the
production possibilities of a nation.
(c) An increase in military spending will, in general, simply move the economy from
one point on the production possibilities curve to a different point on the curve since
this is nothing more than a trade-off in the government spending pattern. If the
increase in spending results in new research and development that improves
technology that has civilian applications, then the production possibilities could
potentially increase over time.
(d) An increase in college tuition would, in the short run, result in a movement along
the production possibilities curve as people spend their income on other goods and
services. Over time, the quality of the labor force will begin to diminish and the
production possibilities would decline.
3. What are the opportunity costs of developing wind farms to generate “clean”
electricity? Should we make the investment? (LO 01-01)
Answer: Wind is freely available (when it is actually blowing of course). However,
we need a lot of capital investment to harness that wind power. Wind turbines and
wind farms don’t come free. Nor do wind-powered electrical charging stations, wind
, power plants, or the electrical grids that distribute electricity to users. It takes real
factors of production—land, labor, capital, and entrepreneurship—to develop wind
farms. These resources, worth trillions of dollars, could be used to produce something
else. If we invested that many resources in medical technology, we might cure cancer.
To invest all those resources in wind development implies that wind development is
more valuable than all other social goals. In deciding whether to make the investment,
we have to assess opportunity costs—what goods and services we implicitly forsake
in order to harness the wind.
4. Who would go to college in a completely private (market) college system? How does
government intervention change this FOR WHOM outcome? (LO 01-03)
Answer: Financial aid and guaranteed student loans make college accessible to more
people. Many states also subsidize in-state students with low tuition so that more
individuals can afford school. In a completely private system, many people with the
intellectual ability, without access to adequate funds, would not be able to attend.
5. Why do people around the world have so much faith in free markets (World View, p.
15)? (LO 01-04)
Answer: Market-based incomes based on private property may motivate higher
productivity; thus more should be produced in total. Incomes and standards of living
are higher in market-based economies. Also, free markets give people more freedom
in their choices and ensure property rights over what they have produced and the
incomes they earn.
6. How many resources should we allocate to space exploration? How will we make this
decision? (LO 01-04)
Answer: As a society, we have to make important choices about the economy
tomorrow, including space exploration. Do we want to journey to Mars? If so, how
fast do we want to get there? How many earthly goods and services do we want to
give up to pay for the journey? Every year the president and the U.S. Congress have
to answer these questions. Their answers are reflected in the funds allocated to NASA
(rather than other programs) in each year’s federal budget. The key to making this
decision is understanding the opportunity costs of space exploration.
7. What is the connection between North Korea’s missile program and its hunger
problem? (World View, p. 10) (LO 01-01)
Answer: North Korea is a relatively small country: its population of 24 million ranks
40th in the world. Yet North Korea maintains an extremely large army and continues
to develop a nuclear weapons capability. To do so, it must allocate 16 percent of all
, its resources to feeding, clothing, and equipping its military forces. As a consequence,
there aren’t enough resources available to produce food. Currently Korea’s farmers
can’t feed the country’s population. This is an example of a “guns versus butter”
choice. When North Korea uses more resources for missiles (guns), it necessarily has
fewer resources available to produce food (butter).
8. Why might more reliance on markets rather than government be desirable? When and
how might it be undesirable? (LO 01-04)
Answer: Markets don’t require any direct contact between consumers and producers.
Communication is indirect and transmitted by market prices and sales. In fact, it is the
view of many that the price signals and responses of the marketplace will likely do a
better job of allocating resources than any government could. If the market fails,
however, we end up with a suboptimal mix of output. In a market-driven economy,
for example, producers will select production methods based on cost. Cost-driven
production methods might encourage a factory to pollute rather than use a cleaner but
more expensive method of production. In cases such as these, government
intervention may be necessary to move us closer to our economic goals.
Problems
1. According to Table 1.1 (or Figure 1.1), what is the opportunity cost of the first truck
produced? (LO 01-01)
Answer: 0.5 tanks.
Feedback: A production possibilities curve (PPC) describes the various output
combinations that could be produced in a given time period with available resources
and technology. In order to move from producing 0 trucks (Point F) to producing 1
truck (Point E), we must give up the production of a half tank. The opportunity cost
of the first truck is, therefore, 0.5 tanks.
2. (a) Compute the opportunity cost in forgone tanks for each additional truck produced:
Truck output 0 1 2 3 4 5
Tank output 5 4.5 3.8 3.0 2.0 0
Opportunity cost __ __ __ 0.8 __ __
(b) As truck output increases, are opportunity costs (A) increasing, (B) decreasing, or
(C) remaining constant? (LO 01-02)
Answers:
(a) Opportunity cost 0 0.5 0.7 0.8 1 2.
Solutions Manual
Learning Objectives for Chapter 1
After reading this chapter, you should know
LO 01-01. How scarcity creates opportunity costs.
LO 01-02. What the production-possibilities curve represents.
LO 01-03. The three core economic questions that every society must answer.
LO 01-04. How market and government approaches to economic problems differ.
Questions for Discussion
1. What opportunity costs did you incur in reading this chapter? If you read another
chapter today, would your opportunity costs (per chapter) increase? Explain. (LO 01-
01)
Answer: Opportunity cost is what you must give up to get the next best alternative. In
this case, opportunity costs include the things you could have done with your time
instead of reading this chapter. The most desired activity you give up is the value of
the opportunity cost. As you first begin to read, you first give up the alternative
activities that have the least value to you. As you spend more time studying, you
begin giving up activities that have increasing value to you. For example, the first
hour of studying may have resulted in you not watching a TV show. The second hour
of studying may result in you not using your PlayStation 4, which you believe offers
more satisfaction than the first TV show that you gave up, and so on.
2. How much time could you spend on homework in a day? How much do you spend?
How do you decide? (LO 01-01)
Answer: You theoretically could spend 24 hours in a day doing homework. However,
in reality, there is a limit to the amount of time in which you can effectively complete
your homework. Most students spend substantially less than 24 hours per day because
there are competing needs for their time, such as work, sleep, and social time. A
person decides how much time to spend on homework based on the perceived payoff
(an improvement in learning or your course grade) and compares this to the value of
what must be given up to complete the homework. Those activities that are perceived
as giving the most benefit are usually the activities completed first. At some point, the
perceived benefit from completing additional homework is less than the benefit from
other activities, and you stop working on homework.
,1. What’s the real cost of the food in the “free lunch” cartoon on page 6? (LO 01-01)
Answer: Even if a bar doesn’t charge for lunch, preparation of the lunch requires the
use of scarce resources. The workers at this bar will spend considerable time
preparing this lunch and could potentially have spent this time doing something else.
The cost of the lunch is the best alternative use of that land, labor, and capital. In
addition, the value of the patron’s time is a cost that he or she must pay for the lunch.
2. How might a nation’s production possibilities be affected by the following? (LO 01-
02)
a. New solar technology.
b. An increase in immigration.
c. An increase in military spending.
d. An increase in college tuition.
Answer:
(a) In general, a nation’s production possibilities curve will shift due to a change in
resources, a change in the quality of resources, or a change in technology. New solar
technology is an example of an advancement in technology which causes an increase
in a country’s production possibilities. Better technology allows a country to have a
greater capacity in the long run leading to more output.
(b) An increase in immigration is an example of an increase in resources for a nation.
An increase in immigration certainly is an increase in the number of labors, which
would necessarily increase the production possibilities. These immigrants also have
varying levels of skills and education (human capital) that also will increase the
production possibilities of a nation.
(c) An increase in military spending will, in general, simply move the economy from
one point on the production possibilities curve to a different point on the curve since
this is nothing more than a trade-off in the government spending pattern. If the
increase in spending results in new research and development that improves
technology that has civilian applications, then the production possibilities could
potentially increase over time.
(d) An increase in college tuition would, in the short run, result in a movement along
the production possibilities curve as people spend their income on other goods and
services. Over time, the quality of the labor force will begin to diminish and the
production possibilities would decline.
3. What are the opportunity costs of developing wind farms to generate “clean”
electricity? Should we make the investment? (LO 01-01)
Answer: Wind is freely available (when it is actually blowing of course). However,
we need a lot of capital investment to harness that wind power. Wind turbines and
wind farms don’t come free. Nor do wind-powered electrical charging stations, wind
, power plants, or the electrical grids that distribute electricity to users. It takes real
factors of production—land, labor, capital, and entrepreneurship—to develop wind
farms. These resources, worth trillions of dollars, could be used to produce something
else. If we invested that many resources in medical technology, we might cure cancer.
To invest all those resources in wind development implies that wind development is
more valuable than all other social goals. In deciding whether to make the investment,
we have to assess opportunity costs—what goods and services we implicitly forsake
in order to harness the wind.
4. Who would go to college in a completely private (market) college system? How does
government intervention change this FOR WHOM outcome? (LO 01-03)
Answer: Financial aid and guaranteed student loans make college accessible to more
people. Many states also subsidize in-state students with low tuition so that more
individuals can afford school. In a completely private system, many people with the
intellectual ability, without access to adequate funds, would not be able to attend.
5. Why do people around the world have so much faith in free markets (World View, p.
15)? (LO 01-04)
Answer: Market-based incomes based on private property may motivate higher
productivity; thus more should be produced in total. Incomes and standards of living
are higher in market-based economies. Also, free markets give people more freedom
in their choices and ensure property rights over what they have produced and the
incomes they earn.
6. How many resources should we allocate to space exploration? How will we make this
decision? (LO 01-04)
Answer: As a society, we have to make important choices about the economy
tomorrow, including space exploration. Do we want to journey to Mars? If so, how
fast do we want to get there? How many earthly goods and services do we want to
give up to pay for the journey? Every year the president and the U.S. Congress have
to answer these questions. Their answers are reflected in the funds allocated to NASA
(rather than other programs) in each year’s federal budget. The key to making this
decision is understanding the opportunity costs of space exploration.
7. What is the connection between North Korea’s missile program and its hunger
problem? (World View, p. 10) (LO 01-01)
Answer: North Korea is a relatively small country: its population of 24 million ranks
40th in the world. Yet North Korea maintains an extremely large army and continues
to develop a nuclear weapons capability. To do so, it must allocate 16 percent of all
, its resources to feeding, clothing, and equipping its military forces. As a consequence,
there aren’t enough resources available to produce food. Currently Korea’s farmers
can’t feed the country’s population. This is an example of a “guns versus butter”
choice. When North Korea uses more resources for missiles (guns), it necessarily has
fewer resources available to produce food (butter).
8. Why might more reliance on markets rather than government be desirable? When and
how might it be undesirable? (LO 01-04)
Answer: Markets don’t require any direct contact between consumers and producers.
Communication is indirect and transmitted by market prices and sales. In fact, it is the
view of many that the price signals and responses of the marketplace will likely do a
better job of allocating resources than any government could. If the market fails,
however, we end up with a suboptimal mix of output. In a market-driven economy,
for example, producers will select production methods based on cost. Cost-driven
production methods might encourage a factory to pollute rather than use a cleaner but
more expensive method of production. In cases such as these, government
intervention may be necessary to move us closer to our economic goals.
Problems
1. According to Table 1.1 (or Figure 1.1), what is the opportunity cost of the first truck
produced? (LO 01-01)
Answer: 0.5 tanks.
Feedback: A production possibilities curve (PPC) describes the various output
combinations that could be produced in a given time period with available resources
and technology. In order to move from producing 0 trucks (Point F) to producing 1
truck (Point E), we must give up the production of a half tank. The opportunity cost
of the first truck is, therefore, 0.5 tanks.
2. (a) Compute the opportunity cost in forgone tanks for each additional truck produced:
Truck output 0 1 2 3 4 5
Tank output 5 4.5 3.8 3.0 2.0 0
Opportunity cost __ __ __ 0.8 __ __
(b) As truck output increases, are opportunity costs (A) increasing, (B) decreasing, or
(C) remaining constant? (LO 01-02)
Answers:
(a) Opportunity cost 0 0.5 0.7 0.8 1 2.
