MICRO, CHAPTER 2 – SOLUTIONS TO TEXT PROBLEMS
1. Economics is like a science because economists devise theories, collect data, and analyze the data in an attempt to
verify or refute their theories. In other words, economics is based on the scientific method.
Figure 1 shows the production possibilities frontier for a society that produces food and clothing. Point A is an efficient
point (on the frontier), point B is an inefficient point (inside the frontier), and point C is an infeasible point (outside the
The effects of a drought are shown in Figure 2. The drought reduces the amount of food that can be produced, shifting
the production possibilities frontier inward.
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Microeconomics is the study of how households and firms make decisions and how they interact in markets.
Macroeconomics is the study of economywide phenomena, including inflation, unemployment, and economic growth.
2. An example of a positive statement is “higher taxes discourage work effort” (many other answers are possible). That’s
a positive statement because it describes the effects of higher taxes, describing the world as it is. An example of a
normative statement is “the government should reduce tax rates.” That is a normative statement because it’s a claim
about how the world should be.
Parts of the government that regularly rely on advice from economists are Finance Canada in designing tax policy,
Industry Canada in designing and enforcing Canada’s antimonopoly laws, and International Trade Canada in helping to
negotiate trade agreements with other countries.
3. Economic advisers to the prime minister might disagree about a question of policy because of differing scientific
judgments or differences in values.
Questions for Review
1. Economics is like a science because economists use the scientific method. They devise theories, collect data, and
then analyze these data in an attempt to verify or refute their theories about how the world works. Economists use
theory and observation like other scientists, but they are limited in their ability to run controlled experiments. Instead,
they must rely on natural experiments.
2. Economists make assumptions to simplify problems without substantially affecting the answer. Assumptions can make
the world easier to understand.
3. An economic model cannot describe reality exactly because it would be too complicated to understand. A model is a
simplification that allows the economist to see what is truly important.
4. Figure 3 shows a production possibilities frontier between milk and cookies (PPF ). I1 a disease kills half of the
economy's cow population, less milk production is possible, so the PPF shifts inward (PPF ). Not2 that if the
economy produces all cookies, so it doesn't need any cows, then production is unaffected. But if the economy
produces any milk at all, then there will be less production possible after the disease hits.
5. The idea of efficiency is that an outcome is efficient if the economy is getting all it can from the scarce resources it has
available. In terms of the production possibilities frontier, an efficient point is a point on the frontier, such as point A in 3
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Figure 4. A point inside the frontier, such as point B, is inefficient since more of one good could be produced without
reducing the production of another good.
6. The two subfields in economics are microeconomics and macroeconomics. Microeconomics is the study of how
households and firms make decisions and how they interact in specific markets. Macroeconomics is the study of
7. Positive statements are descriptive and make a claim about how the world is, while normative statements are
prescriptive and make a claim about how the world ought to be. Here is an example. Positive: A rapid growth rate of
money is the cause of inflation. Normative: The government should keep the growth rate of money low.
8. The Bank of Canada sets Canada’s monetary policy. It employs more than 200 economists to analyze financial
markets and macroeconomic developments.
9. Economists sometimes offer conflicting advice to policymakers for two reasons:
(1) economists may disagree about the validity of alternative positive theories about how the world works; and (2)
economists may have different values and, therefore, different normative views about what public policy should try to
Problems and Applications
1. Many answers are possible.
2. a. Steel is a fairly uniform commodity, though some firms produce steel of inferior quality.
b. Novels are each unique, so they are quite distinguishable.
c. Wheat produced by one farmer is completely indistinguishable from wheat produced by another.
d. Fast food is more distinguishable than steel or wheat, but certainly not as much as novels. 4
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3. See Figure 5, where the four transactions are shown.
4. a. Figure 6 shows a production possibilities frontier between guns and butter. It is bowed out because when
most of the economy’s resources are being used to produce butter, the frontier is steep and when most of the
economy’s resources are being used to produce guns, the frontier is very flat. When the economy is
producing a lot of guns, workers and machines best suited to making butter are being used to make guns, so
each unit of guns given up yields a large increase in the production of butter. Thus, the production
possibilities frontier is flat. When the economy is producing a lot of butter, workers and machines best suited
to making guns are being used to make butter, so each unit of guns given up yields a small increase in the
production of butter. Thus, the production possibilities frontier is steep.
b. Point A is impossible for the economy to achieve; it is outside the production possibilities frontier. Point B is
feasible but inefficient because it’s inside the production possibilities frontier.