SOLUTION MANUAL Macroeconomics 23/E Campbell McConnell
Chapter 01 - Limits, Alternatives, and Choices McConnell Brue Flynn 23e
DISCUSSION QUESTIONS
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. LO1.1
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. LO1.1
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 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 it relate to purposeful behavior? LO1.1
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? LO1.2
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 the hypothesis
that have appeared to be valid in prior tests.
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,Chapter 01 - Limits, Alternatives, Choices
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. LO1.3
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” 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? LO1.4
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 the
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? L
O1.5
Answer: Economic resources are the natural, human, and manufactured inputs
used to produce goods and services.
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 into 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.
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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? LO1.5
Answer: Money is not considered a capital resource because money is not
productive. It provides access to resources but by itself, money 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 as 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.
9. Explain the typical shapes of marginal-benefit and marginal-cost curves. How are
these curves used to determine the optimal allocation of resources to a particular
product? If current output is such that marginal cost exceeds marginal benefit, should
more or fewer resources be allocated to this product? Explain. LO1.6
Answer: The marginal benefit curve is downward sloping, MB falls as more of a
product is consumed because additional units of a good yield less satisfaction than
previous units. The marginal cost curve is upward sloping, MC increases as more
of a product is produced since additional units require the use of increasingly
unsuitable resources. The optimal amount of a particular product occurs where
MB equals MC. If MC exceeds MB, fewer resources should be allocated to this
use, as the additional cost is more than the additional benefit. The resources are
more valuable in some alternative use (as reflected in the higher MC) than in this
use (as reflected in the lower MB).
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10. Suppose that, on the basis of a nation’s production possibilities curve, an economy
must sacrifice 10,000 pizzas domestically to get the 1 additional industrial robot it
desires but it can get the robot from another country in exchange for 9,000 pizzas.
Relate this information to the following statement: “Through international
specialization and trade, a nation can reduce its opportunity cost of obtaining goods
and thus ‘move outside its production possibilities curve.” LO1.7
Answer: The message of the production possibilities curve is that an individual
nation is limited to the combinations of output indicated by its production
possibilities curve. International specialization means directing domestic
resources to output which a nation is highly efficient at producing. International
trade involves the exchange of these goods for goods produced abroad.
Specialization and trade have the same effect as having more and better resources
or discovering improved production techniques. The output gains from greater
international specialization and trade are the equivalent of economic growth.
11. LAST WORD Studies indicate that married men on average earn more income than
unmarried men of the same age and education level. Why must we be cautious in
concluding that marriage is the cause and higher income is the effect?
Answer: Cause and effect are difficult to determine in many instances. Here, it
may be possible that the same underlying personality characteristics—such as the
ability to get along with people and a commitment to hard work— that lead
people to on average earn higher incomes also on average lead them to be more
successful in finding mates. Thus, it may not be the case at all that marriage
causes higher incomes. Rather, underlying personality characteristics may drive
both higher earnings and a greater likelihood of getting married.
REVIEW QUESTIONS
1. Match each term with the correct definition. LO1.1
economics
opportunity cost
marginal analysis
utility
a. The next-best thing that must be foregone in order to product one more unit of a
given product.
b. The pleasure, happiness, or satisfaction obtained from consuming a good or
service.
c. The social science concerned with how individuals, institutions, and society make
optimal (best) choices under conditions of scarcity.
d. Making choices based on comparing marginal benefits with marginal costs.
Answer: a. Opportunity cost; b. Utility; c. Economics; d. Marginal analysis
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