2 THINKING LIKE AN ECONOMIST
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
d. Fast food is more distinguishable than steel or wheat, but certainly not as much as
3. See Figure 5, where the four transactions are shown.
15 16 ✦ Chapter 2/Thinking Like an Economist
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
c. The Hawks might choose a point like H, with many guns and not much butter. The
Doves might choose a point like D, with a lot of butter and few guns.
d. If both Hawks and Doves reduced their desired quantity of guns by the same amount,
the Hawks would get a bigger peace dividend because the production possibilities
frontier is much steeper at point H than at point D. As a result, the reduction of a given
number of guns, starting at point H, leads to a much larger increase in the quantity of
butter produced than when starting at point D. Chapter 2/Thinking Like an Economist ✦ 17
5. See Figure 7. The shape and position of the frontier depend on how costly it is to maintain a
clean environmentthe productivity of the environmental industry. Gains in environmental
productivity, such as the development of a no-emission auto engine, lead to shifts of the
production-possibilities frontier, like the shift from P1F to PP2 shown in the figure.
6. a. A family's decision about how much income to save is microeconomics.
b. The effect of government regulations on auto emissions is microeconomics.
c. The impact of higher saving on economic growth is macroeconomics.
d. A firm's decision about how many workers to hire is microeconomics.
e. The relationship between the inflation rate and changes in the quantity of money is
7. a. The statement that society faces a short-run tradeoff between inflation and
unemployment is a positive statement. It deals with how the economy is, not how it
should be. Since economists have examined data and found that there is a short-run
negative relationship between inflation and unemployment, the statement is a fact, thus
it is a positive statement.
b. The statement that a reduction in the rate of growth of money will reduce the rate of
inflation is a positive statement. Economists have found that money growth and inflation
are very closely related. The statement thus tells how the world is, and so it is a positive
c. The statement that the Bank of Canada should reduce the rate of growth of money is a