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Solutions to Questions for homework

Chapters 1 & 2 Questions for homework 
1. Make two statements about pollution, one demonstrating Positive Economics and
one demonstrating Normative Economics.
A. United States workers lose X hours per year because of illness caused by pollution.
B. No matter how much it costs, ten percent of the cars sold in Los Angeles should 
be free of death-causing pollutants by the year 2000.
Files 2 Questions for homework 
1. Give two examples of opportunity cost decisions you have had to make in your 
personal and/or work life. How did the law of increasing costs affect your decision?
A. Should you study or not study
B. Should you buy computer hardware or computer software
C. Students do not spend all of their time studying (or not studying) because at 
some point, the cost (loss of free time) is greater than the benefit (better grades).

2. Use the Production Possibility Frontier to depict full employment, unemployment, 
and slow versus rapid economic growth.  

3. Using the Alternative Production Possibilities data at the end of file 2, what was the opportunity 
cost of the first high tech and the second computer? Why did the cost increase?

A. The first high tech worker cost one entertainer. The second computer costs 2 entertainers.
B. The skills required to make computers are not the same as those required to entertain people. 
The first person moving from entertainment work to making computers was good at making computers
and a poor entertainer. The next people to moved were not as good at making computers so it took two
people to produce an additional computer.

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Chapter  3 Questions for homework

1. Draw the circular flow of money.

Chapter  4 Questions for homework

1. Give examples of E and F that have happened in recent history.

A. Technological efficiency caused supply to increase more than demand in the 
home computer industry. As a result, prices decreased and quantity increased. 

B. Two oil embargoes in the 1970's represented a large decrease in supply.
Demand increases were small and the net effect was a small decrease in quantity 
sold and a large increase in price.

2. How would you expect government involvement in the market for college graduates 
to affect their market price? Has this happened?

A. The demand and supply for a college education has increased because of government actions. 
This has increased the quantity of college graduates. During the 1970's, price (the cost of 
a college degree) increases were lower than inflation because demand increased less than supply 
increased. During the last 10-15 years, price has increased faster than inflation. Demand has 
thus been increasing faster than supply.

B. The increase in the supply of college graduates has caused the expected drop in their wages, 
but not to the extent that the drop in demand for high school and non-high school graduates has lowered their wages.

3. Give examples of inferior and superior goods.

A. Inferior goods: bread, potatoes, beer
B. Superior goods: steak, vacations, expensive wine

4. T F Quantity demanded varies inversely with price, and quantity supplied varies directly with price.

5. T F If the price of a good's complement goes down, the supply of the good will go up.

6. T F A price ceiling keeps prices artificially low, and the market reaction is normally 
an increase in quantity supplied.  

7. Demonstrate what happens to price and quantity for each of the four possible equal 
changes in supply and demand.  

D up and S up equally	D up causes P up and Q up S up causes P down and Q up Result is P same and Q up
D up and S down equally	D up causes P up and Q up S down causes P up and Q down Result is P up and Q same
D down and S up equally	D down causes P down and Q down S up causes P down and Q up Result is P down and Q same
D down and S down	D down causes P down and Q down S down causes P up and Q down Result is P same and Q down