HOMEWORK ASSIGNMENT MOHAMMAD DAOUD HABIBZAI SECTION#2 ID#20084

Chapter I

Question 1:
Describe some of the tradeoffs faced by the following:

a. A family deciding whether to buy a new car

Solution: The real cost of the new car is the cost of the familys opportunity cost in terms of what
they must give up. A family deciding whether to buy a new car may face tradeoffs between the cost
of the car and other things they might want to buy. For example, buying a new car may mean that the
family must give up wedding of one of its members. Or the father gives up going on Hajj Pilgrimage.
Or a family give up going on a 3 year vacation.

b. A member of Congress decides how much to spend on national parks

Solution: For a member of congress to decide how much to spend on national parks faces tradeoffs
between the cost of the national parks and other spendings. If more money goes to the national
parks less money will remain for investment in other areas of development. Or instead of spending
more on the national parks the quality of education and health care could be enhanced.
c. A company president deciding whether to open a new factory
Solution: For a company president deciding whether to open a new factor faces tradeoffs between
whether the newly established factory be more profitable than other alternative such as expanding
the current structure or upgrading the equipment or hiring more professional personnel.
d. A professor deciding how much to prepare for class
Solution: A professor deciding how much to prepare for class may face a trade off between
improving the quality of his lecture and spending time other things such as talking with the family or
conducting other research.

Question 4:
You win $100 in a basketball pool. You have a choice between spending the money now or putting it away for a year
in a bank account that pays 5 percent interest. What is the opportunity cost of spending the $100 now?
Solution: If you spend $100 now instead of saving it for 5% interest, you will lose the opportunity to
spend $105.

Question 5:
The company that you manage has invested $5 million in developing a new product, but the development is not quite
finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the
expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the
product, should you go ahead and do so? What is the most that you should pay to complete the development?

Solution: You have already lost $5 million. What you have now is the chance to earn profit at the
margin. If you are earning a marginal profit is better than losing all the money. If you spend another
$1 million and can generate sales of $3 million, you will earn $2 million in marginal profit, so you
should do so. If you dont spend an additional $1 million you lose $5 million that you have already
spent without completing the product. If this one million complete the product you may lose $2
million, however, if you dont spend additional $1 million you will lose $5 million so you should do
so.

Question15:
Suppose that when everyone wakes up tomorrow, they discover that the government has given them an additional
amount of money equal to the amount they already had. Explain what effect this doubling of the money supply will
likely have on the following:

a. The total amount spent on goods and services

Solution:
b. The quantity of goods and services purchased if prices are sticky

c. The prices of goods and services if prices can adjust

HOMEWORK ASSIGNMENT MOHAMMAD DAOUD HABIBZAI SECTION#2 ID#20084

Chapter II

Question 5:

5. The first principle of economics discussed in Chapter 1 is that people face tradeoffs. Use a production
possibilities frontier to illustrate societys tradeoff between a clean environment and high incomes. What do
you suppose determines the shape and position of the frontier? So what happens to the frontier if engineers
develop an automobile engine with almost no emissions.

Solution: The PPF2 shape and position of the frontier

depend on Cleanliness of how costly it is to maintain a clean
PPF1
environment the product of the environmental
industry. Environement 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 PPF1 to PPF2
shown in the figure.

Quantity of Industrial
Inputs

Question 7: Classify each of the following statements as positive or normative. Explain.

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 the 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 statement.

c. The statement that the Federal Reserve should reduce the rate of growth of money is a
normative statement. It states an opinion about something that should be done, not how the
world is.

d. The statement that society ought to require welfare recipients to look for jobs is a normative
statement. It doesn't state a fact about how the world is. Instead, it is a statement of how the
world should be and is thus a normative statement.

e. The statement that lower tax rates encourage more work and more saving is a positive statement. Economists
have studied the relationship between tax rates and work, as well as the relationship between tax rates and
saving. They have found a negative relationship in both cases. So the statement reflects how the world is, and
is thus a positive statement.
HOMEWORK ASSIGNMENT MOHAMMAD DAOUD HABIBZAI SECTION#2 ID#20084

Question 8:
Classify each of the statements in Table 2-2 as positive, normative, or ambiguous. Explain.

Two of the statements in Table 2 are clearly normative. They are: "5. If the federal budget is to be
balanced, it should be done over the business cycle rather than yearly" and "9. The government
should restructure the welfare system along the lines of a 'negative income tax.'" Both are
suggestions of changes that should be made, rather than statements of fact, so they are clearly
normative statements.
The other statements in the table are positive. All the statements concern how the world is, not how
the world should be. Note that in all cases, even though they are statements of fact, fewer than 100
percent of economists agree with them. You could say that positive statements are statements of
fact about how the world is, but not everyone agrees about what the facts are.

PROPOSITION (AND PERCENTAGE OF ECONOMISTS WHO AGREE)

1. A ceiling on rents reduces the quantity and quality of housing available.
(93%)
2. Tariffs and import quotas usually reduce general economic welfare. (93%)
3. Flexible and floating exchange rates offer an effective international monetary
arrangement. (90%)
4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a
significant stimulative impact on a less than fully employed economy. (90%)
5. If the federal budget is to be balanced, it should be done over the business
cycle rather than yearly. (85%)
6. Cash payments increase the welfare of recipients to a greater degree than do
transfers-in-kind of equal cash value. (84%)
7. A large federal budget deficit has an adverse effect on the economy. (83%)
8. Aminimum wage increases unemployment among young and unskilled
workers. (79%)
9. The government should restructure the welfare system along the lines of a
negative income tax. (79%)
10. Effluent taxes and marketable pollution permits represent a better approach
to pollution control than imposition of pollution ceilings. (78%)
SOURCE: Richard M. Alston, J. R. Kearl, and Michael B. Vaughn, Is There Consensus among Economists
in the 1990s? American Economic Review (May 1992): 203209.

Question 9:
If you were president, would you be more interested in your economic advisers positive views or their normative
views? Why?

As the president, you'd be interested in both the positive and normative views of economists, but
you'd probably be most interested in their positive views. Economists are on your staff to provide
their expertise about how the economy works. They know many facts about the economy and the
interaction of different sectors. So you would be most likely to call on them about questions of fact
positive analysis. Since you are the president, you are the one who has to make the normative
statements as to what should be done, with an eye to the political consequences. The normative
statements made by economists represent their own views, not necessarily your views or the
electorates views.