Economics for Today, 8th Edition Solution Manual

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1Chapter1Introducing the Economic Way of ThinkingCHAPTER SUMMARYScarcity permeates the entire human experience. Scarcity means we are unable to have as much aswe would like to have. Our wants are unlimited. But, our production capabilities are limited by our factorsof production, which include land, labor (the entrepreneur is a special type of labor) and capital (plant andequipment). Because we are faced with scarcity we must make choices. Choices are made at the "macro"and "micro" level. Macroeconomics is concerned with the entire economic system, whereasmicroeconomics is concerned with some particular segment of the economy.Economics can be further subdivided into positive ("what is") and normative ("what ought to be")economic analysis. We would all be well advised to first have a firm handle on "what is" before we argue"what ought to be." This takes us to a look at how economists derive positive economic theories---a lookat the methodology of economics. That methodology is the same scientific methodology used in allsciences---it is the process of induction and deduction. Theories can be expressed: 1) verbally, or inwritten form, 2) as a numerical table, 3) graphically, or 4) mathematically. Theories are helpful tounderstanding the relationship between economic variables but should be used with caution. Twocommon pitfalls to clear thinking are the failure to understand theceteris paribusassumption andconfusingassociationandcausation.The appendix to this chapter focuses on how theories can be expressed graphically. Graphs are visualaids that help us see thedirectorinverserelationship between two or more sets of data or variables.scarcitylaboreconomicsentrepreneurshipceteris paribusNEW CONCEPTS INTRODUCEDresourcescapitalmacroeconomicsnormative economicslandmodelmicroeconomicspositive economicsAfter completing this chapter, students should be able to:INSTRUCTIONAL OBJECTIVES1.Understand that if there was no scarcity there would be no such thing as economics. Economics isthe study of scarcity and how we deal with it.2.Understand that scarcity exists because we are unable to produce as much as we would like (ourwants are unlimited while our means of production are limited).3.Understand that we try to do the best we can with what we have---to maximize our production withour limited resources (factors of production).4.List the factors of production: land, labor, and capital.5.Distinguish between "macro" and "micro."6.Distinguish between "positive" and "normative" economic analysis.7.Explain why economists are interested in relationships between economic variables.8.Explain why theories enable us to discern relationships between economic variables.9.Know how theories can be expressed.10.Explain the limitations to the use of theories.

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Economics for Today2CHAPTER OUTLINEI.PreviewII.The Problem of ScarcityIII.Scarce Resources and Productiona.Landb.Laborc.CapitalExhibit 1 "Three Categories of Resources"IV.Economics: The Study of Scarcity and Choicea.Macroeconomicsb.MicroeconomicsV.The Methodology of Economicsa.Problem Identificationb.Model Developmentc.Testing a TheoryExhibit 2 "The Steps in the Model-Building Process"Checkpoint:"Can You Prove There Is No Trillion-Dollar Person?"VI.Hazards of the Economic Way of Thinkinga.The Ceteris Paribus Assumptionb.Association versus CausationCheckpoint:"Should Nebraska State Join a Big-Time Athletic Conference?""Mops and Brooms, the Boston Snow Index, the Super Bowl, and Other Economic Indicators"Applicable Concept: association versus causation.You're The Economist: Analyze the IssueVII. Why do Economists Disagree?a.Positive Economicsb.Normative Economics"Does Raising The Minimum Wage Help The Working Poor?" Applicable Concept: positive andnormative analysis.You're The Economist: Analyze the IssueVII. Careers in EconomicsExhibit 3 "Average Yearly Salary Offers for Selected Majors"VIII. List of Key ConceptsIX.Summary

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Chapter 1: Introducing the Economic Way of Thinking3X.Summary of Conclusion Statementsa.The problem of scarcity and choice are basic economic problems faced by every society.b.Money by itself does not produce goods and services; instead, it is only a means of buyingcapital.c.The fact that one event follows another does not necessarily mean that the first event causedthe second event.d.Economists’ forecasts can differ because using the same methodology, economists can agreethat event A causes event B, but disagree over the assumption that event A will occur.e.When opinions or points of view are not based on facts, they are scientifically untestable.XI.Study Questions and ProblemsXII. Checkpoint AnswersXIII. Sample QuizHINTS FOR EFFECTIVE TEACHING1.Try to use this chapter for generating as much interest in economics as possible. Don't feel toopressed for time. Treat this chapter thoroughly---especially, "theories." It will be time well spent.(Some additional comments with respect to theories are found below.)You may want to start the class by asking students what they want to get out of the class---what theyalways wanted to know and were afraid to ask. Let them know that there is no such thing as a "silly"question. (Establishing a rapport with your students at the first opportunity will pay off!) Althoughyou may field some questions which are best treated in some detail later, go ahead and survey theissues at hand and indicate that they will be treated in more detail later when it is more logical to doso---but for now ask them to note that these issues stem from the fact that we are faced with scarcity.Moreover, you will probably be given the opportunity to stress the difference between "positive" and"normative" economic analysis---the difference between "fact" and "opinion." For the “You’re theEconomist” on the minimum wage, be sure to note that you will return to this issue in Chapter 4 as anapplication of supply and demand analysis. Finally, take the opportunity to show by your actions thatyou will be keeping the course as application-oriented, or "user-friendly" as possible.2.Indicate that in economics,capitalis not money! It is defined as "plant and equipment." Studentsoften get "capital" and "money" confused.3.Point out that scarcity is not a synonym for poverty. Even "rich" nations like the United States (andrich people) are faced with scarcity because they are unable to have as much as they would like tohave. Indicate that all nations face scarcity and as a result they face 3 challenges: 1) They all try toproduce as much as they can and this is why full employment is an important goal; 2) All nations tryto produce that combination that most satisfies society; and 3) All nations try to distribute productionin some fair or equitable fashion. This is related to the 3 fundamental economic questions (”What,”How,” and For Whom”) discussed in Chapter 2.4.Give some examples of economic investigations and ask students to distinguish between whether theyare of concern to "macro" or "micro."5.Indicate thattheories are realisticbecause they are based on facts.Theories are practicalbecausethey avoid unnecessary detail and enhance our understanding of relationships among economicvariables.Theories(general statements about the causal relationship between variables based onfacts)are extremely useful in developing workable policiesto address a real-world problem. In sum,stress that economists derive economic theories because they are useful in the development ofeconomic policies designed to solve real-world economic problems.

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Economics for Today46.Indicate that there are really three forces at play in the real world in which we all live: economic,social and political. These three forces are often in conflict. Sound or rational economic reasoningdoesn't always prevail---especially when it comes to developing "economic" policy in a politicalenvironment.CRITICAL THINKING /GROUP DISCUSSION QUESTIONS1.Why isn't money a resource?It isn't used in the production process; it merely facilitates trade.2.Respond to the following statement: "Theories are of no use to me because they are not very practical.All I need are the facts because they speak for themselves."Facts don't speak for themselves. Facts are meaningless unless there is a theory to tie themtogether.3.Does economics help to teach us how to approach problems, or does it provide us with a set ofanswers to problems?It teaches us "how to think." It doesn't provide us with answers.4.To what extent do you think normative economic analysis, as opposed to positive economic analysisdetermines our nation's public policy decisions made by government? Why? Is that "good" or "bad?"Why?This is debatable.5.What are our nation's major macroeconomic goals? Are they in conflict with each other?Full employment, low inflation, and high rates of economic growth are our nation's majormacro goals. Also note that they are often in conflict with each other. For example, fullemployment and more rapid growth create higher rates of inflation.CLASSROOM GAMESApproximately 170 non-computerized economic games (experiments) for use in the classroom areavailable for free athttp://www.marietta.edu/~delemeeg/games/. The following games are recommendedto help teach some of the concepts in this chapter:There are no recommended games for this chapter.ANSWERS TO:"You're the Economist: Analyze the Issue"MOPS AND BROOMS, THE BOSTON SNOW INDEX, THE SUPER BOWL, AND OTHERECONOMIC INDICATORSDo you believe any of the above indicators are examples of causation? Explain.Each example involves association and not causation.DOES RAISING THE MINIMUM WAGE HELP THE WORKING POOR?1.Identify two positive and two normative statements given concerning raising the minimum wage. Listother minimum wage arguments not discussed in the Economics in Practice, and classify them aseither positive or normative economics."In 1938 Congress enacted. . ."(positive economics)"Today a minimum wage worker. . . deplorable annual increase."(normative economics)"Only a small percentage. . .are full-time workers below the poverty line."(positive economics)"They say it is outrageous that a worker can work full-time and. . ."(normative economics)

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Chapter 1: Introducing the Economic Way of Thinking52.Give a positive and a normative argument why a business leader would oppose raising the minimumwage. Give a positive and a normative argument why a labor leader would favor raising the minimumwage.A business leader might argue that a higher minimum wage raises labor costs and cuts profits(positive economics). The business leader might also argue that a higher minimum wage is unfairto businesses because the business should be able to set wages without government intervention(normative economics). A labor leader could state that there is no relationship between higherminimum wage rates and unemployment (positive economics). The labor leader may also arguethat the government must insure that workers earn a decent living (normative economics).3.Explain your position on this issue. Identify positive and normative reasons for your decision. Arethere alternative ways to aid the working poor?Students should give thoughtful answers. One alternative to aid the working poor is simply tomail them a check.ANSWERS TO EVEN-NUMBERED"Study Questions and Problems"2.Money itself cannot physically be used to produce anything. Money is only a means to purchaseresources, such as labor or capital that can actually produce goods and services.4.a. microeconomic issueb. macroeconomic issuec. microeconomic issued. macroeconomic issue6.The real world is full of complexities that make it difficult to understand and predict the relationshipsbetween variables. For example, the relationship between changes in the price of gasoline andchanges in consumption of gasoline requires abstraction from the reality that such variables as thefuel economy of cars and weather conditions often change at the same time as the price of gasoline.8.The positive argument is that airbags are worth an additional cost of about $600 because of thereduction in the number and severity of injuries to and deaths of motorists. This argument can betested by data collected from drivers using airbags versus drivers using only seat belts. Thenormative argument is whether the government should make airbags mandatory or allow thedecision to be voluntary. This policy question involves people's opinions on the appropriate role ofgovernment in the automobile market. Students can research the Internet and share their findingswith the class.CHAPTER 1 SUMMARY QUIZ1.Scarcity:a.exists because resources are unlimited while human wants are limited.b.means we are unable to have as much as we would like to have.c.will likely be eliminated as technology continues to expand.d.is not an issue addressed in economics.

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Economics for Today62.Which of the following isnota resource?a.landb.laborc.moneyd.capital3.Microeconomics is concerned with:a.some specific segment of the economic system.b.the entire economic system.c.reducing national unemployment and inflation rates.d.what causes changes in the overall level of economic activity.4.Which of the following is anormativeeconomic statement?a.The unemployment rate for the United States is currently 5.4%.b.The inflation rate in the United States is too high.c.An increase in the price of a good will reduce the amount purchased.d.Higher profits in an industry will attract more entrepreneurs into the industry.5.A model (or theory):a.is a general statement about the causal relationship between variables based on facts.b.helps explain and predict the relationship between variables.c.when expressed as a downward (negatively) sloping graph implies an inverse relationshipbetween the variables.d.all of the above.ANSWERS TO CHAPTER 1 SUMMARY QUIZ1.b2.c3.a4.b5.d

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Appendix to Chapter1Applying Graphs to EconomicsAPPENDIX SUMMARYIn economics, graphs are used as visual aids to illustrate relationships between economic variables. Ifa relationship exists between two variables, then the relationship is either direct (also known as a positiverelationship) or inverse (also known as a negative relationship).A direct relationship between two variables means that as one variable increases (the independentvariable) this causes the other variable (the dependent variable) to also increase in value; and vice versa.A direct relationship is illustrated graphically as an upward sloping, or positively sloped line or curve.An inverse relationship between two variables means that as one variable increases (the independentvariable) this causes the other variable (the dependent variable) to decrease in value; and vice versa. Aninverse relationship is illustrated graphically as a downward sloping, or negatively sloped line or curve.An independent relationship means there is no relationship between two variables. This is expressedgraphically as a horizontal line.A shift in a curve (or line) occurs when the ceteris paribus assumption is relaxed and a third variablenot on either axis of the graph is allowed to change.NEW CONCEPTS INTRODUCEDdirect relationshipslopeinverse relationshipindependent relationshipAfter completing this appendix, students should be able to:INSTRUCTIONAL OBJECTIVES1.Know what a direct relationship is and how it is reflected graphically.2.Know what an inverse relationship is and how it is reflected graphically.APPENDIX TO CHAPTER 1 OUTLINEI.A Direct RelationshipExhibit A-1 "A Direct Relationship between Variables"II.An Inverse RelationshipExhibit A-2 "An Inverse Relationship between Variables"III.The Slope of a Straight LineIV.The Slope of a Curve

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Economics for Today8Exhibit A-3 "An Independent Relationship between Variables"Exhibit A-4 "The Slope of an Upward-Sloping Curve"Exhibit A-5 "The Slope of a Downward-Sloping Curve"V.A Three-Variable Relationship in One GraphExhibit A-6 "Changes in Price, Quantity, and Income in Two Dimensions"VI.A Helpful Study Hint Using GraphsVII. List of Key ConceptsVIII. SummaryIX.Summary of Conclusion Statementsa.A shift in a curve occurs only when the ceteris paribus assumption is relaxed and a thirdvariable not on either axis of the graph is allowed to change.X.Study Questions and ProblemsXI.Sample QuizHINTS FOR EFFECTIVE TEACHING1.Stress the limitations of theory---especially association versus causation. Just because two thingshappen to occur together doesn't mean one necessarily causes the other. For example, the rooster maythink his crowing is causing the sun to rise but we know better.2.Providing a solid understanding of graphs will avoid many problems later. Point out that thedependent variable goes on the "Y" or vertical axis. The independent variable goes on the "X" orhorizontal axis. A direct (also known as a positive) relationship is always expressed as a positivelysloped line or curve. An inverse (negative) relationship always has a negative slope. Take severalexamples from outside the world of economics and ask students how they would be graphed (see"Critical Thinking/Group Discussion Question" # 6 below).3.Remind students that we often use graphs as a visual aid to illustrate relationships. Graphs are oftenpreferred to simply stating what a relationship is or expressing that relationship in terms of anumerical table or a mathematical equation. Most people prefer graphs over the alternativemathematical expression! So, maybe graphs aren’t so bad after all!4.Explain that the general form for the equation of a straight line is: y = mx + b where “m” is the slopeand “b” is the y-intercept (and “y” is the dependent variable and “x” is the independent variable). Ata glance we can tell what the relationship is by simply looking at the sign of the slope (a positivevalue implies a direct or positive relationship and a negative value implies a negative or inverserelationship). Moreover, the absolute value of the slope indicates the extent to which the variable ychanges for every one unit change in x. Also note that changes in the value of “b” indicates a shift ofthe line. This can come in handy later when discussing demand and supply curves.CRITICAL THINKING /GROUP DISCUSSION QUESTIONS1.What is the relationship between the annual sale of umbrellas and the annual amount of rainfallreceived in inches. How would this relationship be graphed?Direct relationship. The line or curve slopes upward (positive slope). The variable "annual saleof umbrellas" would be placed on the vertical axis (or "Y" axis) because it is the dependent

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Appendix to Chapter 1: Applying Graphs to Economics9variable while the variable "annual amount of rainfall received in inches" would be placedon thehorizontal (or "X" axis) because it is the independent variable.2.What is the relationship between a student's grade point average and the number of hours spentstudying per week. How would this relationship be graphed?Direct relationship. The line or curve slopes upward (positive slope). The variable "grade pointaverage" would be placed on the vertical axis (or "Y" axis) because it is the dependent variablewhile the variable "hours spent studying per week" would be placedon the horizontal (or "X"axis) because it is the independent variable.3.What is the relationship between tuition and student enrollment at a university. How would thisrelationship be graphed?Inverse relationship. The line or curve slopes downward (negative slope). The variable "studentenrollment" would be placed on the vertical axis (or "Y" axis) because it is the dependentvariable while the variable "tuition" would be placedon the horizontal (or "X" axis) because it isthe independent variable.CLASSROOM GAMESApproximately 170 non-computerized economic games (experiments) for use in the classroom areavailable for free athttp://www.marietta.edu/~delemeeg/games/. The following games are recommendedto help teach some of the concepts in the appendix to this chapter:There are no recommended games for the appendix to this chapter.ANSWERS TO EVEN-NUMBERED"Study Questions and Problems"2.(a)The relevant relationship is that there is an inverse relationship between the price perhamburger and the quantity consumers will purchase at each alternative price.(b)The numerical table is:Price perQuantity of hamburgershamburgerdemanded per year$4.0020,0003.0040,0002.0060,0001.0080,000(c)Most students will prefer the graphical model because of its clarity.See Figure A-1 below.Figure A-1

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Economics for Today10APPENDIX TO CHAPTER 1 SUMMARY QUIZ1.A direct relationship exists when:a.there is no association between two variables.b.one variable increases and there is no change in the other variable.c.one variable increases and the other variable increases.d.one variable increases and the other variable decreases.2.An inverse relationship exists when:a.there is no association between two variables.b.one variable increases and there is no change in the other variable.c.one variable increases and the other variable increases.d.one variable increases and the other variable decreases.3.A direct relationship is expressed graphically as a:a.positively sloped line or curve.b.negatively sloped line or curve.c.horizontal line.d.vertical line4.Which of the following statements is correct?a.Slope is the ratio of the vertical change (the rise or fall) to the horizontal change (the run).b.A direct relationship is one in which two variables change in the same direction.c.An inverse relationship is one in which two variables change in opposite directions.d.An independent relationship is one in which two variables are unrelated.e.All of the above.ANSWERS TO APPENDIX TO CHAPTER 1 SUMMARY QUIZ1.c2.d3.a4.e

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Chapter2Production Possibilities, Opportunity Cost, andEconomic GrowthCHAPTER SUMMARYTheWhat,HowandFor Whomquestions are introduced as the fundamental economic questions thatmust be addressed by all societies. Because any nation's resources are scarce and its wants are unlimitedthen all nations are faced with scarcity. Therefore, we must all try to do the best with what we have---tomaximize production given limited resources. This is shown in terms of the production possibilitiesmodel. There are only two general types of products which can be produced. These are consumer andcapital products. Consumer products satisfy our wants directly and in the present. Capital products satisfyour wants indirectly and in the future. If we are efficient with our use of resources then we are producinga combination of consumer and capital products shown by a point on the production possibilities curve.Inefficiency is shown by a point inside the curve. A point outside is a combination of output which iscurrently unobtainable. However, the greater the investment in capital production, then the greater the rateof economic growth and therefore the larger the rightward shifts of the production possibilities curve andthe sooner the nation will be able to produce any point which is currently outside its curve. But, theopportunity cost of greater rates of economic growth over time is foregone consumer goods productiontoday, and therefore current satisfaction.Indeed, there is an increasing opportunity cost associated with producing ever larger quantities ofany one good. Marginal analysis enables us to make more rational decisions by concentrating on themarginal, or extra, benefits and costs associated with a decision to see if that activity or good "is worth it."NEW CONCEPTS INTRODUCEDWhat,HowandFor WhomQuestionsmarginal analysislaw of increasing opportunity costinvestmentopportunity costeconomic growthproduction possibilities curvetechnologyAfter completing this chapter, students should be able to:INSTRUCTIONAL OBJECTIVES1.Explain how capitalism answers theWhat,How, andFor Whomfundamental economic questions.2.Understand what is meant by an opportunity cost and give some examples.3.Explain why an opportunity cost is an implicit cost incurred in making all decisions.4.Explain why marginal analysis can give rise to more rational decisions.5.Graphically express a production possibilities model.6.Understand that the production possibilities model illustrates the problem of scarcity, thereforechoices have to made, and when choices are made that an opportunity cost is incurred.7.Illustrate production efficiency and inefficiency in the context of the production possibilities graph.

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Economics for Today128.Describe what is meant by the law of increasing opportunity cost and why it exists.9.Explain what is meant by investment.10.Explain why a nation's decision to invest and produce more capital goods now will increase thenation's rate of economic growth over time.11.Illustrate and explain economic growth in the context of a production possibilities model.I.PreviewCHAPTER OUTLINEII.The Three Fundamental Economic Questionsa.What To Produce?b.How To Produce?c.For Whom To Produce?III.Opportunity CostExhibit 1 “The Links between Scarcity, Choice, and Opportunity Cost”IV.Marginal AnalysisV.The Production Possibilities CurveExhibit 2 "The Production Possibilities Curve for Military Goods and Consumer Goods"VI.The Law of Increasing Opportunity CostsExhibit 3 "The Law of Increasing Opportunity Costs"VII. Sources of Economic Growtha.Changes in Resourcesb.Technological ChangeExhibit 4 "An Outward Shift of the Production Possibilities Curve for Computers and Pizzas"Checkpoint:"What Does a War of Terrorism Really Mean?""FedEx Wasn't an Overnight Success" Applicable Concept: entrepreneurship.You're The Economist: Analyze the IssueVIII.Present Investment and Future Production Possibilities CurveExhibit 5 "Alpha's and Beta's Present and Future Production Possibilities Curves""How Does Public Capital Affect a Nation’s Curve?” Applicable Concept: economic growth.Global Economics: Analyze the IssueIX.List of Key ConceptsX.SummaryXI.Summary of Conclusion Statementsa.Scarcity limits an economy to points on or below its production possibilities curve.

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Chapter 2: Production Possibilities, Opportunity Costs and Economic Growth13b.The production possibilities curve consists of all efficient output combinations where aneconomy can produce more of one good only by producing less of the other good.c.The lack of perfect interchangeability between workers is the cause of increasing opportunitycosts and the bowed-out shape of the production possibilities curve.d.A nation can accelerate economic growth by increasing its production of capital goods in excessof the capital being worn out in the production process.XII. Study Questions and ProblemsXIV. Checkpoint AnswerXV. Sample Quiz1.Some instructors prefer to teach comparative advantage with the concepts in this chapter. Theseinstructors should assign the first few pages of Chapter 28 which covers this topic.HINTS FOR EFFECTIVE TEACHING2.You may want to elaborate on the three fundamental economic questions ("How", "What" and "ForWhom") which any society must address. These fundamental questions are related to the desire tomaximize production, to produce a combination of products most desired by society, and to distributeproducts in some equitable manner. All nations have to grapple with these issues as a result ofscarcity. You may have alluded to this in the first chapter. You may want to ask students what theythink the answers are to these questions. In the process point out that in a capitalist system consumerdemand (sovereignty) predominately determines what gets produced. The "How" question ispredominately answered by businesses when they determine the resource mix used in the productionprocess subject to their desire to limit their costs and to maximize their profits. For whom goods andservices are produced is largely determined by the distribution of income. If you have more moneyyou get more goods and services.Moreover, you may want to reiterate that social and political forces, in addition to economic forcesalso help to determine the answers to the fundamental economic questions. Ask students to provideexamples of how social and political forces can impact these fundamental economic questions.3.Because opportunity cost is such a fundamental economic concept you should make sure that studentsunderstand what it is through the use of several examples. Ask them what their opportunity cost is forbeing in class today.4.Point out that opportunity costs are associated witheverydecision. Sometimes they are not soobvious--they are often implicit costs.5.Point out thatallcosts are opportunity costs.Note that opportunity costs cannot always be measuredin dollars and cents.6.You may wish to elaborate on marginal analysis, which is at the heart ofrationaldecision making.Note that if the marginal benefits exceed the marginal costs of a decision, then it is rational to domore of that activity because "its worth it"---you are adding more in benefits than in costs; and viceversa. Point out, however, that benefits and costs of a decision are not always clear. You don't alwaysknow what they are going to be. Moreover, they may not be easily measured or quantified. Instead,they often must be subjectively estimated. Therefore, what may appear as rational to one person maynot appear as rational to someone else because of the different subjective estimates of benefits andcosts.After discussing a consumption decision, you may want to drive the point home by pointing outthat reasonable people can disagree over whether government involvement in a particular situation is"worth it" or not, because of their differing subjective measures of the benefits and costs associatedwith that government involvement.

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Economics for Today147.Stress that all nations attempt to produce on their production possibilities curves---to maximizeproduction given their limited resources. To do so will require employing all their resources. This iswhyfull employment is a universal national economic (macroeconomic) goal.Because fullemploymentis illustrated as a point on the curve, then all nations attempt to be on their productionpossibilities curves. If some unemployment and/or underemployment is experienced, then it isillustrated as a combination of output shown by a point inside the curve.A point outside the curve iscurrentlyunattainable. However, with enough economic growth thatcombination of consumer and capital products may be feasible.8.In terms of the production possibilities model, stress that there are only two general types of productswhich can be produced---consumer and capital products. Consumer products satisfy our wantsdirectly and in the present. Capital products satisfy our wants indirectly and in the future. It mayappear tempting to produce a lot of consumer products now because this will satisfy us more now.However, the opportunity cost is fewer capital goods production which is necessary for future growth.(Explain that investment in capital goods will increase future production possibilities because workersare more productive the more plant and equipment they have to work with. Emphasize that greatergrowth is illustrated as a rightward shift of the production possibilities curve.) Therefore, if we choosea lot of consumer goods production now it will be at the expense of not so much later on. In short,ourpresent location on the production possibilities curve will determine the future location of the curve.Moreover, emphasize thateconomic growth is another one of the three major macroeconomicgoals.It is a major macroeconomic goal because it increases the size of the "economic pie."Assuming no change in the distribution of income, growth ensures that everyone gets "a bigger pieceof the pie." Otherwise stated,economic growth is desired because it increases the nation's averageabsolute standard of living.But, higher standards of living require the sacrifice of currentconsumption in order to free up resources to be devoted to the production of capital products.Weneed less consumption and more investment for greater growth and higher standards of living.1.How does government affect the answer to the "What" fundamental economic question?CRITICAL THINKING/GROUP DISCUSSION QUESTIONSWhenever it taxes or spends money, or when it bans the production of some products...2.How does government affect the answer to the "How" fundamental economic question?By setting government standards and regulatory guidelines...3.How does government affect the answer to the "For Whom" fundamental economic question?By redistributing income via the personal income tax system...4.What is the opportunity cost of attending college?The foregone income which could have been earned working full time.5.What is the cost of a new car?The amount of other goods and services which could have been purchased but now must begiven up.6.What is the profit-maximizing quantity of output for a firm to produce?That output in which the marginal benefits from production no longer exceed the marginal cost(where MR = MC).7.Under what conditions would a nation be able tocurrentlyproduce more of both consumer andcapital products?If production is currently occurring at a point inside its production possibilities curve---if thereis currently some unemployment and/or underemployment.8.What are the necessary ingredients for a nation to experience greater rates of economic growth,higher average standards of living, and a greater ability to compete in the global economy? That is,what could the U.S. do to achieve all this?

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Chapter 2: Production Possibilities, Opportunity Costs and Economic Growth15Need: 1) investment in private capital; 2) investment in public capital (infrastructure); 3)investment in human capital---people (e.g. education); 4) growth in technology; 5)entrepreneurship; 6) stable political environment.9.What are some problems associated with economic growth?Environmental problems...Note, one needs to weigh the benefits against the costs to determinewhether more growth is worth it.CLASSROOM GAMESApproximately 170 non-computerized economic games (experiments) for use in the classroom areavailable for free athttp://www.marietta.edu/~delemeeg/games/. The following games are recommendedto help teach some of the concepts in this chapter:Game #107—Objective: To illustrate a production process subject to diminishing returns and illustrate theconstruction of a production possibilities frontier.Games #117— Objective: To illustrate the impact of specialization of resources on the construction of aproduction possibilities frontier.ANSWERS TO:"You're the Economist” and “Global Economics:” “Analyze the Issue"FEDEX WASN'T AN OVERNIGHT SUCCESSDraw a production possibilities curve for an economy producing only pizzas and computers. Explain howFred Smith and other entrepreneurs affect the curve.Suppose the economy produces only pizzas and computers at point A on the production possibilitiescurve PPC1.Holding all other factors constant, the impact of an entrepreneur is to shift the curveoutward to PPC2.The reason is that the entrepreneur provides a new way to produce more outputwith the same resources and technology. In the case of Fred Smith, overnight mail service speededup the delivery of vital parts and communications needed to operate businesses. As a result, theeconomy can move from point A to point B and produce more pizzas and computers in the sameperiod of time.

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