Chapter 1 The Nature of Economics - Does the phrase "unlimited wants and limited resources" apply to both a low-income household and a middle-income household? Can the same phrase be applied to a very high-income household? Because wants are unlimited, the phrase applies to very high-income households as well as low- and middle-income households. Consider, for instance, a household with a low income and unlimited wants at the beginning of the year. The household's wants will still remain unlimited if it becomes a high-income household later in the year. - Explain, the rationality assumption, and contrast it with the assumption of bounded rationality proposed by adherents of behavioral economics. The rationality assumption states that people do not intentionally make choices that leave them worse off. The bounded rationality hypothesis suggests that people are almost, but not completely, rational. - Which of the following predictions appear(s) to follow from a model based on the assumption that rational, self-interested individuals respond to incentives? a. For every ten exam points Myrna must earn in order to pass her economics course and meet her graduation requirements, she will study one additional hour for her economics test next week. b. A coin toss will best predict Leonardo's decision about whether to purchase an expensive business suit or an inexpensive casual outfit to wear next week when he interviews for a high-paying job he is seeking. c. Celeste, who uses earnings from her regularly scheduled hours of part-time work to pay for her room and board at college, will decide to purchase and download a newly released video this week only if she is able to work two additional hours. a. Yes, because Myrna is acting in her own self-interest by establishing this allocation of her time to studying economics. b. No, because Leonardo is leaving an important decision affecting his self-interest to random chance, potentially leaving him worse off if he fails to obtain employment. c. Yes, because Celeste is basing her choice on a self-interest assessment of expenditures in light of available resources. - Write a sentence contrasting positive and normative economic analysis. Positive economic analysis deals with economics models with predictions that are statements of fact, which can be objectively proved or disproved. Normative analysis considers subjective personal or social values concerning the way things ought to be. - Based on your answer to previous Problem , categorize each of the following conclusions as resulting from positive analysis or normative analysis. a. A higher minimum wage will reduce employment opportunities for minimum wage workers. b. Increasing the earnings of minimum wage employees is desirable, and raising the minimum wage is the best way to accomplish this. c. Everyone should enjoy open access to health care at no explicit charge. d. Health-care subsidies will increase the consumption of health care. a. Positive b. Normative c. Normative d. Positive - Consider the following statements, based on a positive economic analysis that assumes all other things remain constant. For each, list one other thing that could independently change in a way that offsets the outcome stated. a. Increased demand for digital devices will drive up their price. b. Falling gasoline prices will result in additional vacation travel. c. A reduction of income tax rates will result in more people working. a. An increase in the supply of digital devices, perhaps because of the entry of new device manufacturers into the market, pushes their price back down. b. Another factor, such as higher hotel taxes at popular vacation destinations, makes vacation travel more expensive. c. Some other factor, such as a fall in market wages that workers can earn, discourages people from working additional hours. - Suppose that the U.S. federal government has borrowed $500 billion to expand its total spending on goods and services across the entire economy in an effort to boost by $500 billion the aggregate production by the nation's firms. Would we apply microeconomic or macroeconomic analysis to analyze this policy action? This policy action involves billions of dollars in economywide total spending and aggregate production. Because the action involves the economy has a whole, macroeconomic analysis would be applied.