Solutions for Macroeconomics, 4th Canadian Edition by Hubbard (All Chapters included)
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Course
Macroeconomics
Institution
Macroeconomics
Complete Solutions Manual for Macroeconomics, 4th Canadian Edition by R. Glenn Hubbard, Anthony Patrick O'Brien, Apostolos Serletis, Jason Childs ; ISBN13: 9780137688319. (Full Chapters included Chapter 1 to 14).
1.Economics: Foundations and Models.
2.Trade-offs, Comparative Advantage and the Mar...
, CHAPTER 1 | Economics: Foundations and Models
SOLUTIONS TO END-OF-CHAPTER EXERCISES
Three Key Economic Ideas
1.1
Learning Objective: Explain these three key economic ideas: People are rational; people
respond to incentives; and optimal decisions are made at the margin.
Review Questions
1.1 “People are rational” is the assumption that decision makers explicitly or implicitly weigh the benefits
and costs of each action and then choose an action only if the benefits are expected to outweigh the
costs. “People respond to incentives” means that consumers and firms consistently respond to
economic incentives. “Optimal decisions are made at the margin” means that most decisions are not
“all or nothing” but involve doing a little more or a little less of an activity. Therefore, the optimal
decision is to continue any activity up to the point where the marginal benefit equals the marginal
cost.
1.2 Scarcity is the situation in which unlimited wants exceed the limited resources available to fulfill those
wants. Economics is the study of the choices consumers, business managers, and government officials
make to attain their goals. Scarcity is central to the study of economics because scarcity requires
people to make choices about how to use their resources to best fulfill their wants.
Problems and Applications
1.3 As noted in the chapter, the economic incentive to banks is clear—it is less costly to put up with bank
robberies than to take these additional security measures. The marginal cost of adding the additional
security is greater than the expected marginal benefit.
1.4 a. Students face scarcity of time, like everyone else, and respond to the incentives of the teacher’s
grading system. Students have more incentive to direct their efforts into the parts of the course
that have the most weight in the grading system.
b. Too little weight on outside readings or the like gives students little incentive to read and master
the material. Students will put less effort into the parts of the course that have little effect on their
grades.
c. Quizzes over assigned readings would give students an incentive to come to class having read the
upcoming material. Some teachers give preparation assignments where students have to read and
answer questions about the upcoming material, and over the course of the semester students have
to successfully complete a certain percentage of the preparation assignments to qualify for an A,
or B, or other grade in the course.
1.5 The carbon price and the subsequent increase in the price of gasoline (and other carbon-intensive
products) will encourage people to use less gasoline. If people respond to the negative incentive of
higher gas prices by using less gas, maybe by taking the bus or buying a more fuel-efficient car, we
will emit fewer greenhouse gases and do less damage to the environment.
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