Macroeconomics, 2nd Edition Solution Manual

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Chapter 01 - Economics and Life1-1CHAPTER 1ECONOMICS AND LIFEChapter OverviewEconomists approach problems differently from many other people. A basic principle of humanbehavior underlies economics—the idea that people typically make choices to achieve theirgoals in the most effective way possible, subject to the constraints they face.In this chapter we have introduced the basic concepts economists use, as well as four questionsthey ask to break down problems. Throughout this book, you will see these concepts andquestions over and over again:1.Scarcity:What are the wants and constraints of those involved?2.Opportunity cost:What are the trade-offs?3.Incentives:How will others respond?4.Efficiency:Why isn’t someone already doing it?In later chapters, as we progress to more complicated problems, try using these four questionsto break down problems into manageable pieces. Then you can tackle those smaller piecesusing the four fundamental concepts presented in this chapter.Learning ObjectivesLO 1.1: Explain the economic concept of scarcity.LO 1.2: Explain the economic concepts of opportunity cost and marginal decision making.LO 1.3: Explain the economic concept of incentives.LO 1.4: Explain the economic concept of efficiency.LO 1.5: Distinguish between correlation and causation.LO 1.6: List the characteristics of a good economic model.LO 1.7: Distinguish between positive and normative analysis.Chapter OutlineOPENING STORY: MAKING AN IMPACT WITH SMALL LOANSThe Basic Insights of EconomicsScarcity(LO 1.1)Opportunity Cost and Marginal Decision Making(LO 1.2)BOX FEATURE: WHAT DO YOU THINK? – THE OPPORTUNITY COST OF A LIFEIncentives(LO 1.3)Efficiency(LO 1.4)An Economist’s Problem-Solving ToolboxCorrelation and Causation(LO 1.5)

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Chapter 01 - Economics and Life1-2BOX FEATURE: FROM ANOTHER ANGLE – DOES ICE CREAM CAUSE POLIO?Models(LO 1.6)BOX FEATURE: REAL LIFE – TESTING MODELS AGAINST HISTORYPositive and Normative Analysis(LO 1.7)BOX FEATURE: WHAT DO YOU THINK? – THE COST OF COLLEGE CASHBeyond the LectureClass Discussion: Scarcity (LO 1.1)Have students review this recent TED talk by Peter Diamandis. Peter highlights the impact ofhuman ingenuity on scarcity and argues that we should be optimistic about the use oftechnology to address problems in the future. This is a great springboard for discussion.1.Do students think that technology will continue to improve living standards and mitigatethe problems associated with scarcity?2.Despite the fact that technology advancements have greatly improved quality of life andconsumption for most people, will we ever eliminate scarcity?Writing Assignment: Opportunity Cost and Marginal Decision Making (LO 1.2)Have students review this article by Russell Roberts on opportunity cost. It highlights somebasic examples that are familiar to students. Require students to write a brief essay on theopportunity costs associated with decisions in their lives, decisions that firm’s make, orgovernment decisions. This can be used as a catalyst for class discussion as well.Class Discussion: Opportunity Cost and Marginal Decision Making (LO 1.2)Your class that you teach is most likely 50 or 75 minutes in length. Poll the students (perhapsinformally, or using software such as Poll Anywhere or clickers) and ask them what they wouldbe doing during this hour if they were not in class. Some possible answers may include sleeping(especially for an early AM class), working out, studying for another course, watching TV,eating, or many others. This is a great introduction to opportunity cost – the cost of attendingclass is giving up the next best alternative of your time. Questions to ask include:1.Is your opportunity cost the same as other students’ opportunity cost?2.Does the fact that you chose to attend class today mean that sitting in this economicslecture is the best use of your time during this hour?Class Discussion: Incentives (LO 1.3)In order to highlight the importance of incentives, consider discussing Chapter 3 ofFreakonomicsby Steven Levitt and Stephen Dubner with your students. The chapter providesinsight into the career of an individual who is involved in the illegal drug market. You could alsoask students to review this Los Angeles Times commentary on the chapter, also written byLevitt and Dubner.1.Ask students to consider why an individual would be willing to endure the risksassociated with the illegal drug market given the relatively low pay and poor workingconditions that many workers endure. Students really enjoy this interesting discussion.

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Chapter 01 - Economics and Life1-32.How does this market compare to other markets? There are surprising similarities anddifferences between legal markets and the black market.Clicker QuestionsThere are three main purposes to clicker questions. First, they are a great way to do a quickand instant “on demand” test of student understanding of the material. You can covermaterial, and instantly get feedback on student comprehension. You can see whether you needto explain certain topics again, or move on to the next subject. Second, they are a greatmethod to break up the class and take a moment away from lecture. It gets the studentsactively involved. Finally, certain clicker questions can be framed in a “discussion” manner, inwhich you can invite students to talk about the possible right answer with their peers. You caninstruct students to convince their classmate of a right or wrong answer.1. What is the result of scarcity of goods and services?[LO 1.1]A. People can have all the goods they desire at any priceB. Only government can provide enough goods for the peopleC. People may experience povertyD.Any economic system must have a method to allocate goods and servicesFeedback: With scarcity, we don’t have enough goods to freely be given to everyone to satisfyall wants. Thus, a method to allocate goods must be used. This could include prices, or othermethods. Note that poverty isn’t a direct result of scarcity – scarcity affects all people, bothrich and poor.2. “Children eat more ice cream in the summer. Children are more likely to drown in thesummer. We can conclude that ice cream consumption causes drowning.” The previousstatement is an example of____________.[LO 1.5]A. Normative economic statementsB. Negative incentives resulting in undesirable outcomesC. Confusing correlation with causationD.Opportunity cost creating tradeoffs3. Which of the following do you think is most likely necessary to create a good economicmodel?[LO 1.6]A. Identical to the real world and no simplificationsB. Changing assumptions until all problems are eliminated in the modelC. Finding a lot of experts who agree with my opinions before building the modelD.A set of well-defined variables with data that we wish to study

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Chapter 01 - Economics and Life1-4Feedback: Remember that models by definition are a simplification of reality. We can’t have amodel that is identical to the real world economy. It would require billions of variables, trillionsof data points, and multiple supercomputers to analyze the data!4. Which of the following is an incentive your instructor could provide to get more students toattend class?[LO 1.3]A. Giving extra credit to students who attend more than 90% of classesB. Handing out candy to students who attendC. Failing students who miss a class without a University-approved excuseD.All of the aboveFeedback: Remember that incentives can be positive or negative. We don’t want to ask whichincentives we would personally agree with. We just want to ask if the incentive would changebehavior.5. A rational person should only do an activity as long as[LO 1.2]A. The marginal benefits are greater than the marginal costsB. There are no costs to the activityC. It can earn them moneyD.The opportunity costs of doing the activity are lowFeedback: People do activities even if opportunity costs are high. One example is going tocollege and not working for four years during your time as a student!Solutions to End-of-Chapter Questions and ProblemsReview Questions1.Suppose you are shopping for new clothes to wear to job interviews, but you’re on a tightbudget. In this situation, what are your wants and constraints? What does it mean to behaverationally in the face of scarcity?[LO 1.1]Answer:If you are deciding what to buy for a job interview, your want is to buy clothingthat looks clean and professional, so you can present the best possible impression topotential employers. Your constraint is the amount of money you can spend on thisclothing. A person behaving rationally would buy the nicest clothes they could afford.2.You are a student with a demanding schedule of classes. You also work part time and yoursupervisor allows you to determine your schedule. In this situation, what is your scarceresource? How do you decide how many hours to work?[LO 1.1]

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Chapter 01 - Economics and Life1-5Answer:Your scarce resource is time. You need both time to study and time to work.Presumably, you want to do well in school and also make money. You will try to balanceyour schedule so that you work as much as possible while still having enough time to studyand do well in school.3.Think about the definition of scarcity that you learned in this chapter. Name three ways thatyou confront scarcity in your own life.[LO 1.1]Answer:People face scarcity in many aspects of their lives. Some people love to travel andexplore new places, so they face scarcity in both time and money that keeps them fromtraveling as often as they would like. Others face scarcity in their professional life, in thatthere are often many worthwhile projects to address, but the available resources arelimited in terms of employees, time, and budget.4.When shopping for your interview clothes, what are some trade-offs you face? What is theopportunity cost of buying new clothes? What are the benefits? How do you balance the two?[LO 1.2]Answer:The money you spend on clothes for a job interview could be spent on other thingsinstead, so it is one opportunity cost. Another opportunity cost is the time you spendshopping, which could be spent preparing for your interview or playing Frisbee. The benefitsinclude looking put-together during the interview, which provides a boost to your jobprospects. You balance the costs and benefits by accepting costs that are less than (or nogreater than) the benefits they provide.5.You have an 8:30 class this morning but you are feeling extremely tired. How do you decidewhether to get some extra sleep or go to class?[LO 1.2]Answer:If you are behaving rationally, you decide by comparing the trade-offs. Theopportunity cost of going to class is missing out on some extra sleep. Depending on whatelse in on your schedule that day (perhaps an important interview), it may make sense tochoose extra sleep over class. The opportunity cost of extra sleep is that you will miss thelecture. If your grade will suffer significantly by your absence, you may want to grab somecoffee and go to class!6.It’s Friday night. You already have a ticket to a concert, which cost you $30. A friend invitesyou to go out for a game of paintball instead. Admission would cost you $25, and you thinkyou’d get $25 worth of enjoyment out of it. Your concert ticket is nonrefundable. What is youropportunity cost (in dollars) of playing paintball?[LO 1.2]Answer:The opportunity cost of going to play paintball is whatever amount of enjoyment(in dollars) you would get out of going to the concert. The thirty dollars you paid for the

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Chapter 01 - Economics and Life1-6concert ticket is not relevant to the decision, as it is a sunk cost and is nonrefundableregardless of what you do.7.Suppose you have two job offers and are considering the trade-offs between them. Job Apays $45,000 per year and includes health insurance and two weeks of paid vacation. Job Bpays $30,000 per year; it includes four weeks of paid vacation but no health insurance.[LO 1.2]a.List the benefits of Job A and the benefits of Job B.b.List the opportunity cost of Job A and the opportunity cost of Job B.Answer:a.The benefits of Job A are the extra pay and health insurance. For Job B, the benefit istwo extra weeks of vacation.b.The opportunity cost of Job A is losing out on the extra two weeks of vacation thatcomes with Job B. For Job B, the opportunity costs are the extra $15,000 in salary alongwith the health insurance.8.Your former neighbor gave you his lawnmower when he moved. You are thinking of usingthis gift to mow lawns in your neighborhood this summer for extra cash. As you think aboutwhat to charge your neighbors and whether this idea is worth your effort, what opportunitycosts do you need to consider?[LO 1.2]Answer:You need to consider the opportunity cost of your time. Your lawn mowingbusiness would need to cover the opportunity cost of what you could earn in anothersummer job. You also need to consider the cost of gasoline for the mower and the value ofthe lawn mower itself. Just because it was a gift does not mean that it has no opportunitycost. The opportunity cost of using the lawnmower for your business is its sale value, if youdecide to sell the gift rather than use it yourself. Your lawn mowing business needs to coverall of these costs (the value of your time in another job, gasoline, and the sale value of thelawnmower) in order for it to be a worthwhile endeavor.9.Think of a few examples of incentives in your daily life. How do you respond to thoseincentives?[LO 1.3]Answer:An incentive is something that causes people to behave in a certain way bychanging the trade-offs they face. No parking signs encourage people not to park in certainplaces and speed limit signs encourage people not to drive too fast. The consequence ineither case is the risk of getting a ticket. The ability to devote a certain percentage ofincome to a 401(k) retirement account each month before paying taxes encourages peopleto save for retirement.10. You supervise a team of salespeople. Your employees already receive a company discount.Suggest a positive incentive and a negative incentive you could use to improve theirproductivity.[LO 1.3]

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Chapter 01 - Economics and Life1-7Answer:For a positive incentive, you could offer a reward such as a bonus, a gift certificate,or an extra discount on company merchandise to the most productive employee of themonth. For a negative incentive, you could announce that employees who fail to meettargets will lose their company discount.11. Your boss decides to pair workers in teams and offer bonuses to the most productive team.Why might your boss offer team bonuses instead of individual bonuses?[LO 1.3]Answer:Your boss is creating a reward system for a project that requires group effort. Evenif you are not motivated to compete for an individual bonus, you are likely to feelresponsibility to your teammate and make a greater effort to be productive. Your teammatecan encourage, pressure, and/or help you to achieve greater productivity.12. Think of a public policy—a local or national law, tax, or public service—that offers anincentive for a particular behavior. Explain what the incentive is, who is offering it, and whatthey are trying encourage or discourage. Does the incentive work?[LO 1.3]Answer:The U.S. government places a subsidy on growing corn. This provides an incentivefor farmers to plant corn on more of their land instead of alternative crops. The governmentis trying to encourage the production of domestic corn so that the United States canproduce corn-based ethanol more cheaply.13. Why do individuals or firms usually provide the goods and services people want?[LO 1.4]Answer:If firms didn’t produce goods that people want, no one would buy their goods.These firms would lose money and go out of business, and would be replaced by firms thatdid produce goods that customers want.14. You may have seen TV advertisements for products or programs that claim to teach asurefire way to make millions on the stock market. Apply theWhy isn’t someone already doingit?test to this situation. Do you believe the ads? Why or why not?[LO 1.4]Answer:Guessing which stocks are going to perform well and which are going to tank is ahard if not impossible task, which makes it very hard to make millions in the stock market.You should not believe the ads for that reason. (If there really was a surefire way to makemillions, you can bet everyone would already be doing it!)15. Describe an innovation in technology, business, or culture that had a major economicimpact in your lifetime.[LO 1.4]Answer:The Internet has completely changed the way people do business. While writingthis textbook, we have collaborated with people all over the country, sharing documentsonline that we once would have had to send through the mail.

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Chapter 01 - Economics and Life1-816. Why do people confuse correlation with causation?[LO 1.5]Answer:Correlation means that two events occur together. Since the two often occurtogether, people often believe that one causes the other, but this is not always true. Peopleonce thought that ice cream caused polio, for example. The real relationship was thatpeople ate more ice cream in the summer, and this also happened to be the time of yearthat the polio virus spread more rapidly.17. Name two things that are positively correlated and two things that are negativelycorrelated.[LO 1.5]Answer:Events that are positively correlated tend to occur together, or move in the samedirection. For example, more people tend to carry an umbrella when the risk of rain is high.When one event increases at the same time a related event decreases, then the two eventsare negatively correlated. According to auto insurers, good grades and the risk of getting ina car accident are negatively correlated. (People with higher grades tend to be saferdrivers.)18. Why is it important for a good economic model to predict cause and effect?[LO 1.6]Answer:A good model must predict cause and effect so that it can explain something aboutwhat we have observed and can help us anticipate what will happen in future observations.19. Why is it important for a good economic model to make clear assumptions?[LO 1.6]Answer:A good model must make clear assumptions so we know when the model will do agood job at explaining or predicting our observations and when it will not.20. Describe an economic model you know. What does the model predict about cause andeffect?[LO 1.6]Answer:As mentioned in this chapter, the model of demand that you will explore inChapter 3 predicts that a rise in price will cause a decrease in the quantity of a goodconsumers want to buy and a decrease in price will cause an increase in the quantity of agood consumers want to buy. Think about your own willingness to purchase goods. Formost goods, you want to purchase more when the price falls and less when the price goesup. The model does a good job at predicting cause and effect.21. Describe an economic model you know. What assumptions does the model make? Are theassumptions reasonable?[LO 1.6]Answer:In predicting that price increases will cause consumers to purchase less of a good,the model of demand assumes that consumers behave rationally, respond to incentives,and are aware of other alternatives to consuming the good whose price has gone up. These

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Chapter 01 - Economics and Life1-9are reasonable assumptions. For most goods, consumers are aware of their preferences andavailable alternatives. And consumers can usually be relied upon to act rationally enough tospend their resources on the best bundle of goods they can afford.22. What is the difference between disagreeing about a positive statement and disagreeingabout a normative statement?[LO 1.7]Answer:A positive statement is something that is supposed by fact, whereas a normativestatement is a value judgment. So disagreeing with a normative statement means youdisagree with someone’s opinion. Disagreeing with a positive statement means disputingthe truth of fact.23. Would a good economic model be more likely to address a positive statement or anormative statement? Why?[LO 1.7]Answer:A good model predicts cause and effect and can be tested with evidence. Thus,positive statements are more likely to be addressed by a good model.24. Write a positive statement and a normative statement about your favorite hobby.[LO 1.7]Answer:Positive statements are based on fact: For example, "Cultures around the worlduse food to convey social values."Normative statements are based on opinion: For example, "Food is the best way tounderstand the social values of a culture."Problems and Applications1.Think about how and why goods and resources are scarce. Goods and resources can bescarce for reasons that are inherent to their nature at all times, that are temporary or seasonal,or that are artificially created. Separate the goods listed below into two groups; indicate which(if any) are artificially scarce (AS) and which (if any) are inherently scarce (IS).[LO 1.1]a.air of any qualityb.landc.patented goodsd.original Picasso paintingsAnswer:Goods and resources can be inherently scarce at all times if there is a limited orfinite supply of the resource, or artificially scarce when access to the resource is restricted.a.Not scarce. Air (of any quality) is abundant and need not be rationed through prices orsome other allocation mechanismb.Inherently scarce. Land is finite in supply; land is available for development, but no newland can be created.

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Chapter 01 - Economics and Life1-10c.Artificially scarce. Patented goods are scarce by law; only the patent holder may supplythese goodsd.Inherently scarce. Original Picasso paintings are finite; no new Picasso’s can be createdbeyond those that currently exist2. You are looking for a new apartment in Manhattan. Your income is $4,000 per month, andyou know that you should not spend more than 25 percent of your income on rent. You havecome across the listings for one-bedroom apartments shown in Table 1P-1. You are indifferentabout location, and transportation costs are the same to each neighborhood.[LO 1.1]a. Which apartments fall within your budget? (Check all that apply.)b. Suppose that you adhere to the 25 percent guideline but also receive a $1,000 cost-of-livingsupplement because you are living and working in Manhattan. Which apartments fall withinyour budget now?Answer:a.Delancey. Your income and income guidelines represent a constraint on the choicesavailable. Under these guidelines, 25 percent of your monthly income is $1,000. So the onlyapartment you can afford within your budget is Delancey, at $950. All others areunattainable to you.b.Chelsea and Delancey. The $1,000 monthly cost-of-living supplement expands your setof living options. Your income is now effectively $5,000 per month, so you can afford anyapartment that costs $1,250 or less (25% of $5,000). These choices now include Chelsea($1,200) and Delancey ($950).3.Suppose the price of a sweater is $15. Julia’s benefit from purchasing each additionalsweater is given in the Table 1P-2. Julia gets the most benefit from the first sweater and lessbenefit from each additional sweater. If Julia is behaving rationally, how many sweaters will shepurchase?[LO 1.2]

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Chapter 01 - Economics and Life1-11Answer:Julia will purchase all of the sweaters for which the marginal benefit is greater thanthe marginal cost. If the price of a sweater is $15, this is the marginal cost, as eachadditional sweater will cost $15. For the first four sweaters, the marginal benefit exceedsthe marginal cost, so Julia will purchase four sweaters. For the fifth sweater, the marginalcost of $15 exceeds the marginal benefit.Marginal BenefitMarginal Cost1stsweater$50$152ndsweater$35$153rdsweater$30$154thsweater$23$155thsweater$12$156thsweater$8$154.Sweaters sell for $15 at the crafts fair. Allie knits sweaters; her marginal costs are given inthe Table 1P-3. Allie’s costs increase with each additional sweater. If Allie is behaving rationally,how many sweaters will she sell?[LO 1.2]Answer:Allie will sell all of the sweaters for which the marginal benefit is greater than themarginal cost. If the price of a sweater is $15, this is the marginal benefit, as Allie willreceive $15 for each additional sweater she sells. For the first 3 sweaters, the marginalbenefit exceeds the marginal cost, so Allie will sell 3 sweaters.

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Chapter 01 - Economics and Life1-12Marginal Cost1stsweater$52ndsweater$83rdsweater$124thsweater$185thsweater$256thsweater$325.Last year, you estimated you would earn $5 million in sales revenues from developing a newproduct. So far, you have spent $3 million developing the product, but it is not yet complete.Meanwhile, this year you have new sales projections that show expected revenues from thenew product will actually be only $4 million. How much should you be willing to spend tocomplete the product development?[LO 1.2]a.$0.b.Up to $1 million.c.Up to $4 million.d.Whatever it takes.Answer:You should spend up to $4 million. The $3 million you have spent already is a sunkcost and cannot be recovered. Therefore, the $3 million you have spent is irrelevant to thedecision of how much to spend going forward. This year, the relevant decision is: How muchare you willing to spend to have $4 million in revenue? If you had known that productdevelopment may cost you more than you will gain in revenues, you should not havestarted this project. But at this point, by thinking on the margin, you can see that you shouldbe willing to move forward as long as the costs of going forward are not greater than thebenefits of going forward ($4 million).6.Consider the following examples. For each one, say whether the incentive is positive ornegative.[LO 1.3]a. Bosses who offer time-and-a-half for working on national holidays.b. Mandatory minimum sentencing for drug offenses.c. Fines for littering.d. Parents who offer their children extra allowance money for good grades.Answer:a.Positive.b.Negative.c.Negative.d.Positive.7.Consider the following events that change prices as described in Table 1P-4. For each one,say whether the opportunity cost of consuming the affected good increases or decreases.[LO1.3]

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Chapter 01 - Economics and Life1-13Answer:a.Decreases.e.Increases.f.Increases.g.Decreases.8.Your best friend has an idea for a drive-through bar. Indicate the best explanation for whyothers have not taken advantage of her idea: true innovation, market failure, governmentintervention, or unprofitablity.[LO 1.4]Answer:Government intervention.In most places, drive-thru bars are (wisely) illegal.9.Your best friend has an idea for a long-distance car service to drive people across thecountry. Indicate the best explanation for why others have not taken advantage of her idea:true innova-tion, market failure, intervention, or unprofitablity.[LO 1.4]Answer:Unprofitable.There are alternatives for customers that can be cheaper than carservice. For example, buses can offer cheaper prices than a car service could. While a car isless costly to operate than a bus, a bus can more than make up the difference in operationcost by accommodating many more passengers.10. Determine whether each of the following questionable statements is best explained bycoincidence, an omitted variable, or reverse causation.[LO 1.5]a.In cities that have more police, crime rates are higher.b.Many retired people live in states where everyone uses air conditioning during the summer.c.More people come down with the flu during the Winter Olympics than during the SummerOlympics.d.For the last five years, Punxsutawney Phil has seen his shadow on Groundhog Day, andspring has come late.Answer:a.Reverse causation: Cities with higher crime rates will tend to have larger policedepartments.

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Chapter 01 - Economics and Life1-14b.Omitted variable: Having a large number of retired people live in a state does not causeeveryone to use their air conditioner. Retired people tend to move to warmer states andliving in a warm-weather state causes everyone to use air conditioning in the summer.c.Correlation without causation: The Winter Olympics do not cause the flu. The flu seasonfalls during Winter months, which increases the incidence of flu cases at the WinterOlympics vs. the Summer.d.Coincidence: There is no plausible cause-and-effect relationship here.11. For each of the pairs below, determine whether they are positively correlated, negativelycorrelated, or uncorrelated.[LO 1.5]a.Time spent studying and test scores.b.Vaccination and illness.c.Soft drink preference and music preference.d.Income and education.Answer:Two items are positively correlated if both variables increase at the same time, or if bothvariables decrease at the same time. Two items are negatively correlated if one isincreasing while the other is decreasing, or vice versa.a. Positively correlated. More time spent studying tends to lead to higher test scores.b. Negatively correlated. More vaccinations result in less illness.c. Uncorrelated. These preferences are not related in any predictable way.d. Positively correlated. People who earn higher income tend to have higher levels ofeducation.12. Each statement below is part of an economic model. Indicate whether the statement is aprediction of cause and effect or an assumption.[LO 1.6]a.People behave rationally.b.If the price of a good falls, people will consume more of that good.c.Mass starvation will occur as population outgrows the food supply.d.Firms want to maximize profits.Answer:a.Assumption. This is an assumption about how people behave.b.Prediction of cause and effect. This is a prediction of cause and effect because thedecline in the price of the good will tend to cause people to consume more of the good,all else the same. One event leads to another.c.Prediction of cause and effect. This is a prediction of cause and effect because ifpopulation growth results in the demand for food exceeding the available supply offood, then mass starvation may occur. One event leads to another.d.Assumption. This is an assumption about how firms behave.

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Chapter 01 - Economics and Life1-1513. From the list below, select the characteristics that describe a good economic model.[LO1.6]a.Includes every detail of a given situation.b.Predicts that A causes B.c.Makes approximately accurate assumptions.d.Fits the real world perfectly.e.Predicts things that are usually true.Answer:A good model should predict cause and effect (b), describe the world accurately(c), and state its assumptions clearly (e). Economists test their models by observing whathappens in the world and collecting data that can be used to support or reject their models.14. Determine whether each of the following statements is positive or normative. (Rememberthat a positive statement isn’t necessarilycorrect; it just makes a factual claim rather than amoral judgment.)[LO 1.7]a.People who pay their bills on time are less likely than others to get into debt.b.Hard work is a virtue.c.Everyone should pay his or her bills on time.d.China has a bigger population than any other country in the world.e.China’s One-Child Policy (which limits families to one child each) helped to spur thecountry’s rapid economic growth.f.Lower taxes are good for the country.Answer:A statement that makes a factual claim about how the world actually works iscalled apositivestatement. A statement that makes a claim about how the world should beis called anormativestatement. Economics is a field in which people frequently confusepositive statements with normative statements. However, you do not have to adopt aparticular moral or political point of view to use economic concepts and models.a.Positive.b.Normative.c.Normative.d.Positive.e.Positive.f.Normative.15. You just received your midterm exam results and your professor wrote the following note:“You received a 70 on this exam, the average score. If you want to improve your grade, youshould study more.” Evaluate your professor’s note.[LO 1.7]a.Is the first sentence positive or normative?b.Is the second sentence positive or normative?Answer:A statement that makes a factual claim about how the world actually works iscalled apositivestatement. A statement that makes a claim about how the world should beis called anormativestatement. Economics is a field in which people frequently confuse

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