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Textbook Solutions Term 1 (2,4,21,5,6,7,8).pdf


Department
Economics
Course Code
ECN 104
Professor
Mikhail Gurvits

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(Chapter 2) SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
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 frontier).
Figure 1
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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Figure 2
Microeconomics is the study of how households and firms make decisions and how they
interact in markets. Macroeconomics is the study of economy-wide 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.

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4. Figure 3 shows a production possibilities frontier between milk and cookies (
PPF
1). If a
disease kills half of the economy's cow population, less milk production is possible, so the
PPF
shifts inward (
PPF
2). Note 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.
Figure 3
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 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.
Figure 4
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 economy-wide phenomena.
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