SOLUTIONS MANUAL
Macroeconomics 14E Arnold
Chapter No. 01: What Economics is About
Answers to Chapter Questions and Problems
1. The United States is considered a rich country because Americans can choose from
an abundance of goods and services. How can there be scarcity in a land of abundance?
Abundance does not imply unlimited resources. No one has unlimited money and time, so everyone must
constantly make choices. This is the fundamental basis of scarcity. Even in a land of abundance, wants exceed
the resources available to meet those wants.
2. Give two examples for each of the following: (a) an intangible good, (b) a tangible
good, (c) a bad.
Answers will vary.
Intangible goods are those that have no concrete existence, such as friendship or an
economics lecture.
Tangible goods are concrete goods that can be exchanged and reproduced more easily
than intangible goods, such as a videotape of an economics lecture or a cell phone.
Bads are goods that provide disutility. Examples are pollution, the noise produced by
planes taking off at an airport, or the smell a skunk produces, etc.
3. Give an example of something that is a good for one person and a bad for
someone else.
Answers will vary.
4. What is the difference between labor as a resource and entrepreneurship as a
resource?
Labor consists of the physical and mental talents people contribute to the existing production process, while
entrepreneurship refers to creatively seeking new business opportunities and new ways to organize
production and developing new ways of doing things.
5. Can either scarcity or one of the effects of scarcity be found in a car dealership?
Explain your answer.
Answers will vary. One example is that the resources used to produce a car sold in the dealership could have
been used to produce a different good.
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6. Explain the link between scarcity and each of the following: (a) choice, (b)
opportunity cost, (c) the need for a rationing device, (d) competition.
Because there is scarcity, individuals have to choose between the different goods that
they have the opportunity to consume.
In choosing between different goods, individuals face an opportunity cost. When they
decide to choose one good (go to a baseball game), they give up the opportunity to
consume another good (see a movie).
Because wants exceed resources, some method for allocating scarce resources is
necessary. Although there are many rationing devices, the most common one used in
economic transactions is the price mechanism, which defines how much of one resource
(money) an individual must give up in order to obtain another resource.
Because resources are limited, people compete with one another both to obtain the
resources they need to purchase the limited resources, and to get the resources that are
available. This process is called competition.
7. Is it possible for a person to incur an opportunity cost without spending any
money? Explain.
Yes. An opportunity cost occurs when an individual gives up any resource when making a choice. An example
would be leisure time. When students study for an exam, the opportunity cost is the time they could have
spent watching a movie or listening to music. Of course, not studying for the exam could also have an
opportunity cost—flunking the course.
8. Discuss the opportunity costs of attending college for four years. Is college more
or less costly than you thought it was? Explain.
Answers will vary. Students sho uld include the cost of tuition, fees, and supplies that
they purchase only because they are enrolled in college. They should also include that
portion of room and board that they would not have spent had they not matriculated,
remembering that, had they not enrolled in college, they would still have to eat and sleep
somewhere. Finally, they should consider the opportunity cost of the time they spend in
college. For example, s uppose that Suzie has the following choices: she can go to college for the
year, she can spend the entire year relaxing in leisure, she can take a job paying $25,000 a year as a
legal secretary for a hometown law firm, or she can take a job with the Peace Corps in Africa,
earning $17,000. If she decides that the best alternative use of her time would be to take a job
paying $25,000 a year as a legal secretary, the opportunity cost of going to college will include the
$25,000 that Susie foregoes. Once students include their opportunity costs, they find that college is
considerably more expensive than they thought it was when they only considered out-of-pocket
expenses.
9. Explain the relationship between changes in opportunity cost and changes in
behavior.
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To the extent that opportunity costs determine behavior by identifying those activities and goods
that are “worth” making “sacrifices” for and those that aren’t, as opportunity costs change so will a
rational consumer’s assessment of various options. For example, suppose that Becky, a high school
graduate, is currently working as a model and is earning $25,000 per year. In order to go to college,
she would have to cut back on her modeling, reducing her annual income to $10,000. Further,
suppose that tuition, books, and fees at the college of Becky’s choice total $15,000 per year. In
deciding whether to quit modeling full-time and go to college, Becky is faced with balancing a
present opportunity cost of $30,000, ceteris paribus, against the future benefits of a college
education. Now, suppose that Becky earns a scholarship that will reduce her tuition, books, and fees
bill to $5,000 per year, thus reducing her present opportunity cost to $20,000. While this may not
change Becky’s mind (she may have already decided to accept the present burden for the future
benefit), such a change in opportunity cost would certainly weigh in favor of going to college.
10. Owen says that we should eliminate all pollution in the world. William disagrees.
Who is more likely to be an economist, Owen or William? Explain your answer.
William is more likely to be the economist. Owen is advocating the elimination of
pollution by only considering the obvious benefits and not considering the serious costs
of eliminating all pollution (such as costs incurred from finding an alternative to f ossil
fuels). William probably determined that the costs of eliminating all pollution are higher
than the benefits from eliminating it.
11. A friend pays for your lunch. Is this an example of a “free lunch”? Why or why not?
This is not an example of a free lunch, since your friend could have bought something
else with the money she used to buy your lunch.
12. A noneconomist says that a proposed government project simply costs too much and therefore
shouldn’t be undertaken. How might an economist’s evaluation be different?
The noneconomicist may only be looking at the cost of the project and not considering
the benefits. An economist would consider both the marginal costs and the marginal
benefits of the project. For example, the interstate highway system in the United State s
has cost a lot of money, but it has also provided a lot of benefits. Consequently, the
United States has introduced an interstate highway system because the benefits of the
system exceed the costs. On the other hand, the Apollo project that sent men to t he
Moon was suspended after a handful of flights because many people perceived that the
marginal costs of sending men to the Moon was exceeding the marginal benefits. The
individual may also be making a proper economic evaluation. The project might create
large benefits to society, but none to that person. So while most people might see
benefits exceeding costs, to some there are only costs and no benefits.
13. Economists say that individuals make decisions at the margin. What does this
mean?
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When economists say that individuals make decisions at the margin, they are referring to
the fact that individuals consider the additional (marginal) benefits of their actions and
the additional (marginal) costs of their actions. If the marginal benefits e xceed the
marginal costs, they proceed with the action. If the marginal costs are greater than the
marginal benefits, then they do not carry out the action. For example, we decide whether
or not to eat another piece of pizza by comparing the benefits and c osts of that piece,
not the benefits and costs of all the pieces we have already eaten.
14. How would an economist define the efficient amount of time spent playing tennis?
Economists state that efficiency occurs when the marginal benefits (MB) of an activity
equal the marginal costs (MC) of that activity. The efficient level of time spent playing
tennis would exist where the MB of playing tennis equals the MC of playing tenn is.
15. Ivan stops studying before the point at which his marginal benefits of studying equal his marginal
costs. Is Ivan forfeiting any net benefits? Explain your answer.
Ivan is forfeiting net benefits because net benefits are maximized when marginal benefits equal marginal
costs.
16. What does an economist mean if they say that there are no $10 bills on the sidewalk?
They mean that people try to maximize their net benefits.
17. A change in X will lead to a change in Y. The predicted change is desirable, so we should
change X. Do you agree or disagree? Explain.
Assuming that the relationship between X and Y had been accurately measured, and that the relationship
did not change, then the change in X would be desirable; however, several caveats should be recognized.
First, the relationship could have been misspecified. Important factors that also influence Y, perhaps more
strongly than X, could have been ignored in the analysis. It might be more efficient to change these other
factors rather than X. Some logical explanation of why the relationship between X and Y occurs should be
developed before proceeding. Second, the relationship between X and Y can change over time. You don’t
want to commit the fallacy of confusing correlation with causation. You can reduce the probability of this
error by developing a logical explanation of why X will lead to a change in Y.
