Chapter 1 – Questions & Exercises
Question 2
State whether the following are primarily microeconomic or macroeconomic policy
issues:
a. Should U.S. interest rates be lowered to decrease unemployment?
b. Will doctors selling practices to managed care networks increase efficiency?
c. Should the federal income tax be lowered to reduce unemployment?
d. Should the federal minimum wage be raised?
e. Should Sprint and Verizon both be allowed to build local phone networks?
f. Should commercial banks be required to provide loans in all areas of the territory
from which they accept deposits?
Answer:
a. Macroeconomic – deals with nationwide interest rates and unemployment.
b. Microeconomic – relates to efficiency in the healthcare industry.
c. Macroeconomic – concerns national tax policy and unemployment.
d. Macroeconomic – addresses labor markets and wage policy at the national level.
e. Microeconomic – involves competition between firms in a specific industry.
f. Microeconomic – concerns regulation of banking services within communities.
Question 8
What is the opportunity cost of buying a $20,000 car?
Answer:
The opportunity cost is what I give up by spending the $20,000 on the car instead of
something else. For example, I could have invested it, saved it for education, bought a
cheaper car and kept the remainder, or used it for housing. Opportunity cost is always
the value of the next-best alternative forgone.
Question 9
Suppose you currently earn $60,000 a year. You’re considering a job that will increase
your lifetime earnings by $600,000 but requires an MBA. The MBA means 2 years of
school at $50,000 per year. You already spent $160,000 on your bachelor’s degree.
Which of the above information is relevant to your decision on whether to take the job?
Answer:
Relevant costs:



Tuition for MBA: $100,000 (2 × $50,000).
Foregone income: $120,000 (2 × $60,000).
Total relevant cost = $220,000.
Relevant benefit:

Higher lifetime earnings: $600,000.
Not relevant:

The $160,000 spent on the bachelor’s degree (this is a sunk cost).
Decision: Since the benefit of $600,000 is greater than the cost of $220,000, it is
economically worthwhile to pursue the MBA.
Question 17
What is the difference between normative and positive statements?
Answer:

A positive statement describes what is; it is factual and can be tested or proven.
Example: “If the government increases the minimum wage, some firms will hire
fewer workers.”

A normative statement describes what ought to be; it is based on opinions and
value judgments. Example: “The government should raise the minimum wage to
ensure a fair standard of living.”
The key difference is that positive statements are objective and fact-based, while
normative statements are subjective and opinion-based.