Chapter 01 - Limits, Alternatives, Choices
SOLUTION MANUAL
Economics 22nd Edition By Campbell McConnell
CHAPTER 1
LIMITS,ALTERNATIVES,CHOICES
1. What is an opportunity cost? How does the idea relate to the definition of
economics?
Which of the following decisions would entail the greater opportunity cost:
Allocating a square block in the heart of New York City for a surface parking lot
or allocating a square block at the edge of a typical suburb for such a lot?
Explain. LO1
Answer: An opportunity cost is what was sacrificed to do or acquire
something else. The condition of scarcity creates opportunity cost. If there
was no scarcity, there would be no need to sacrifice one thing to acquire
another. The opportunity cost would be much higher in New York City as the
alternative uses for that square block are much more valuable than for a typical
suburban city block.
2. Cite three examples of recent decisions that you made in which you, at least
implicitly, weighed marginal cost and marginal benefit. LO1
Answer: Answers will vary, but may include the decision to come to class, to
skip breakfast to get a few extra minutes of sleep, to attend college, or to make
a purchase. Marginal benefits of attending class may include the acquisition
of knowledge, participation in discussion, and better preparation for an
upcoming examination. Marginal costs may include lost opportunities for
sleep, meals, or studying for other classes. In evaluating the discussion of
,Chapter 01 - Limits, Alternatives, Choices
marginal benefits and marginal costs, be careful to watch for sunk costs
offered as a rationale for marginal decisions.
3. What is “utility” and how does the idea relate to purposeful behavior? LO1
Answer: “Utility” refers to the pleasure, happiness, or satisfaction gained
from engaging in an activity (eating a meal, attending a ball game, etc.). It is
an important component of purposeful behavior because people will allocate
their scarce time, energy, and money in an attempt to gain the most utility
possible.
4. What are the key elements of the scientific method, and how does this method
relate to economic principles and laws? LO2
Answer: The key elements include the gathering of data (observation), the
formulation of possible explanations (hypothesis), testing the hypothesis,
determining the validity of the hypothesis, and repeated testing of hypotheses
that have appeared to be valid in prior tests.
The scientific method is the technique used by economists to determine
economic laws or principles. These laws or principles are formulated to
explain and/or predict behavior of individuals or institutions.
5. Make (a) a positive economic statement of your choice, and then (b) a
normative economic statement relating to your first statement. LO3
Answer: Answers will vary. Example: (a) The unemployment rate is 4.8
percent; (b) the unemployment rate is too high. In general, we treat “what is”
,Chapter 01 - Limits, Alternatives, Choices
statements as positive, “what should be” as normative, but keep an eye out for
statements like “at full employment an increase in the production of pizzas
should come at the cost of less robots.” Some students may incorrectly
identify the statement as normative because of the term “should.”
6. How does the slope of a budget line illustrate opportunity cost and trade-
offs? How does a budget line illustrate scarcity and the effect of limited
incomes? LO4
Answer: Budget lines are always sloped downward. This downward slope
shows an inverse relationship between the two goods, meaning that as you
increase one, the other must decrease. This decrease is what you are giving
up, or opportunity cost, of the good you are getting more of.
Budget lines illustrate scarcity in that they show you are limited by your
income. Since they slope downward, they show you cannot keep getting
more and more of both goods. There is always a trade-off. The area beyond
the budget line represents combinations of the goods that are beyond your
income.
7. What are economic resources? What categories do economists use to classify
them? Why are resources also called factors of production? Why are they
called inputs? LO5
Answer: Economic resources are the natural, human, and manufactured
inputs used to produce goods and services.
, Chapter 01 - Limits, Alternatives, Choices
Economic resources fall into four main categories: labor, land (natural
resources), real capital (machines, factories, buildings, etc.,) and
entrepreneurs.
Economic resources are also called factors of production because they are
used to produce goods and services. They are called inputs because they go in
to a production process (like ingredients go into a bowl to make a cake), with
the resulting goods and services also being referred to as output.
8. Why is money not considered to be a capital resource in economics? Why is
entrepreneurial ability considered a category of economic resource, distinct
from labor? What roles do entrepreneurs play in the economy? LO5
Answer: Money is not considered a capital resource because money is not
productive – it provides access to resources but itself does not directly
contribute to the production of goods and services. Additionally, the quantity
of money in circulation does not determine an economy’s productive capacity,
while the amount of capital and other resources does. Doubling the amount
of money in circulation does not change the economy’s physical capacity to
produce goods and services. Money is, however, referred as a financial
resource and financial capital, reflecting its ability to acquire real economic
resources.
Entrepreneurial ability and labor are both human resources, but they perform
different functions in the productive process. Entrepreneurial ability does not
directly produce goods and services; it organizes the resources that do. Labor
refers to the human inputs that directly engage in production.
Entrepreneurs are risk-takers: They coordinate the activities of the other three
inputs for profit—or loss, which is why they are called risk-takers.
Entrepreneurs sometimes manage companies that they own, but a manager
who is not an owner is not necessarily an entrepreneur but may be performing
some of the entrepreneurial functions for the company. Entrepreneurs are also
innovators, or perhaps inventors, and profits help to motivate such activities.
SOLUTION MANUAL
Economics 22nd Edition By Campbell McConnell
CHAPTER 1
LIMITS,ALTERNATIVES,CHOICES
1. What is an opportunity cost? How does the idea relate to the definition of
economics?
Which of the following decisions would entail the greater opportunity cost:
Allocating a square block in the heart of New York City for a surface parking lot
or allocating a square block at the edge of a typical suburb for such a lot?
Explain. LO1
Answer: An opportunity cost is what was sacrificed to do or acquire
something else. The condition of scarcity creates opportunity cost. If there
was no scarcity, there would be no need to sacrifice one thing to acquire
another. The opportunity cost would be much higher in New York City as the
alternative uses for that square block are much more valuable than for a typical
suburban city block.
2. Cite three examples of recent decisions that you made in which you, at least
implicitly, weighed marginal cost and marginal benefit. LO1
Answer: Answers will vary, but may include the decision to come to class, to
skip breakfast to get a few extra minutes of sleep, to attend college, or to make
a purchase. Marginal benefits of attending class may include the acquisition
of knowledge, participation in discussion, and better preparation for an
upcoming examination. Marginal costs may include lost opportunities for
sleep, meals, or studying for other classes. In evaluating the discussion of
,Chapter 01 - Limits, Alternatives, Choices
marginal benefits and marginal costs, be careful to watch for sunk costs
offered as a rationale for marginal decisions.
3. What is “utility” and how does the idea relate to purposeful behavior? LO1
Answer: “Utility” refers to the pleasure, happiness, or satisfaction gained
from engaging in an activity (eating a meal, attending a ball game, etc.). It is
an important component of purposeful behavior because people will allocate
their scarce time, energy, and money in an attempt to gain the most utility
possible.
4. What are the key elements of the scientific method, and how does this method
relate to economic principles and laws? LO2
Answer: The key elements include the gathering of data (observation), the
formulation of possible explanations (hypothesis), testing the hypothesis,
determining the validity of the hypothesis, and repeated testing of hypotheses
that have appeared to be valid in prior tests.
The scientific method is the technique used by economists to determine
economic laws or principles. These laws or principles are formulated to
explain and/or predict behavior of individuals or institutions.
5. Make (a) a positive economic statement of your choice, and then (b) a
normative economic statement relating to your first statement. LO3
Answer: Answers will vary. Example: (a) The unemployment rate is 4.8
percent; (b) the unemployment rate is too high. In general, we treat “what is”
,Chapter 01 - Limits, Alternatives, Choices
statements as positive, “what should be” as normative, but keep an eye out for
statements like “at full employment an increase in the production of pizzas
should come at the cost of less robots.” Some students may incorrectly
identify the statement as normative because of the term “should.”
6. How does the slope of a budget line illustrate opportunity cost and trade-
offs? How does a budget line illustrate scarcity and the effect of limited
incomes? LO4
Answer: Budget lines are always sloped downward. This downward slope
shows an inverse relationship between the two goods, meaning that as you
increase one, the other must decrease. This decrease is what you are giving
up, or opportunity cost, of the good you are getting more of.
Budget lines illustrate scarcity in that they show you are limited by your
income. Since they slope downward, they show you cannot keep getting
more and more of both goods. There is always a trade-off. The area beyond
the budget line represents combinations of the goods that are beyond your
income.
7. What are economic resources? What categories do economists use to classify
them? Why are resources also called factors of production? Why are they
called inputs? LO5
Answer: Economic resources are the natural, human, and manufactured
inputs used to produce goods and services.
, Chapter 01 - Limits, Alternatives, Choices
Economic resources fall into four main categories: labor, land (natural
resources), real capital (machines, factories, buildings, etc.,) and
entrepreneurs.
Economic resources are also called factors of production because they are
used to produce goods and services. They are called inputs because they go in
to a production process (like ingredients go into a bowl to make a cake), with
the resulting goods and services also being referred to as output.
8. Why is money not considered to be a capital resource in economics? Why is
entrepreneurial ability considered a category of economic resource, distinct
from labor? What roles do entrepreneurs play in the economy? LO5
Answer: Money is not considered a capital resource because money is not
productive – it provides access to resources but itself does not directly
contribute to the production of goods and services. Additionally, the quantity
of money in circulation does not determine an economy’s productive capacity,
while the amount of capital and other resources does. Doubling the amount
of money in circulation does not change the economy’s physical capacity to
produce goods and services. Money is, however, referred as a financial
resource and financial capital, reflecting its ability to acquire real economic
resources.
Entrepreneurial ability and labor are both human resources, but they perform
different functions in the productive process. Entrepreneurial ability does not
directly produce goods and services; it organizes the resources that do. Labor
refers to the human inputs that directly engage in production.
Entrepreneurs are risk-takers: They coordinate the activities of the other three
inputs for profit—or loss, which is why they are called risk-takers.
Entrepreneurs sometimes manage companies that they own, but a manager
who is not an owner is not necessarily an entrepreneur but may be performing
some of the entrepreneurial functions for the company. Entrepreneurs are also
innovators, or perhaps inventors, and profits help to motivate such activities.
