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

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ECN 104
Mikhail Gurvits

Chapter 2 SOLUTIONS TO TEXT PROBLEMSQuick Quizzes1 Economics is like a science because economists devise theories collect data and analyze the data in an attempt to verify or refute their theoriesIn other words economics is based on the scientific method Figure 1 shows the production possibilities frontier for a society that produces food and clothingPoint 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 frontierFigure 1 The effects of a drought are shown in Figure 2The drought reduces the amount of food that can be produced shifting the production possibilities frontier inwardFigure 2 Microeconomics is the study of how households and firms make decisions and how they interact in marketsMacroeconomics is the study of economywide phenomena including inflation unemployment and economic growth2 An example of a positive statement is higher taxes discourage work effort many other answers are possibleThats a positive statement because it describes the effects of higher taxes describing the world as it isAn example of a normative statement is the government should reduce tax ratesThat is a normative statement because its 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 Canadas 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 valuesQuestions for Review1 Economics is like a science because economists use the scientific methodThey devise theories collect data and then analyze these data in an attempt to verify or refute their theories about how the world worksEconomists use theory and observation like other scientists but they are limited in their ability to run controlled experimentsInstead they must rely on natural experiments2 Economists make assumptions to simplify problems without substantially affecting the answerAssumptions can make the world easier to understand3 An economic model cannot describe reality exactly because it would be too complicated to understandA model is a simplification that allows the economist to see what is truly important4 Figure 3 shows a production possibilities frontier between milk and cookies PPFIf a 1disease kills half of the economys cow population less milk production is possible so the PPF shifts inward PPFNote that if the economy produces all cookies so it doesnt 2need any cows then production is unaffectedBut if the economy produces any milk at all then there will be less production possible after the disease hitsFigure 35 The idea of efficiency is that an outcome is efficient if the economy is getting all it can from the scarce resources it has availableIn terms of the production possibilities frontier an efficient point is a point on the frontier such as point A in Figure 4A 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 46 The two subfields in economics are microeconomics and macroeconomicsMicroeconomics is the study of how households and firms make decisions and how they interact in specific marketsMacroeconomics is the study of economywide phenomena
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