1 - netINS



1. Positive Statements are statements that are of fact; it is either a true or a false statement. Normative statements are opinions or what “should be”. Normative statements are neither true nor false.

5. a) Fallacy of Composition – When someone associates something true for one person with what is true for the entire economy. Example: A video store goes out of business therefore all video stores will go out of business because no one wants to rent movies.

b) Post-hoc Fallacy – A new Wal*Mart is put up in a town. After the building is finished a huge tornado tears through the town demolishing buildings. It would be a post-hoc fallacy if you associated the new Wal*Mart with the tornado.

c) Other-Conditions Fallacy – The Other-Conditions Fallacy associates two events occurring together in the past with those events always occurring together in the future. It would be an Other-Conditions Fallacy if someone said, “Iowa has always won the Big Ten if they start the season 4-0, therefore if they start the season 4-0 the will win the Big Ten.”

d) Misleading Comparison – Occurs when 2 or more things are compared in a way that doesn’t correctly reflect their differences. Example: Gas prices are higher now than they have ever been. When you adjust for inflation, the 70’s had even higher gas prices.

e) Selection Bias – Selecting non-typical evidence to skew or bias opinions. Example: You want to see how many college football stadiums sell out each year so you look at the top 25 to see how many sell out.

8. No, that is a Fallacy of Composition. Just because the average college graduate makes more, doesn’t mean anyone could graduate from college and make more. If everyone went to college, no one would make more.

13. a) If college students pick classes that are useful in their future profession, they will be more prepared and skilled for their future. If they are more prepared and skilled for the future, they will be more successful in their jobs. If they are more successful, they will make more money.

c) How much you punish people will affect whether or not people are scared to be involved in crime. If you don’t punish people, they will do crime. If you do punish them, they will be deterred. The more you punish people, the less crime there will be.

Are the following statements positive, normative or a combination? Explain.

a. The U.S. should raise tariffs to reduce the trade deficit with Japan

1. Normative: It explains what should happen. It says should in the statement.

b. American auto production would be boosted by an increase in tariffs of foreign imports.

1. Positive: The statement is either true or false. It doesn’t suggest what should happen, it says what would happen.

c. The popularity of Japanese auto widened the U.S. trade deficit with Japan.

1. Positive: It is a statement of fact. It can be tested true or false.

d. The increasing popularity of SUVs has increased our dependence on foreign oil, a tax needs to be imposed to reduce our consumption of oil.

1. Combination: The first part is a positive statement about our reliance on foreign oil, it is true or false. The last part is a “should” because they are suggesting a tax needs to be imposed.

Chapter 3

1. Kristen and Anna live in the beach town of Santa Monica. They own a small business that makes wristbands and potholders. The following table lists how much they can each produce per hour.

OUTPUT PER HOUR

Kristen Anna

Wristbands 15 12

Potholders 3 2

a. What is the opportunity cost of a potholder for Kristen? For Anna? Who has comparative advantage in the production of potholders? Why?

1. The opportunity cost of a potholder for Kristin is 5 Wristbands. For Anna it is 6 wristbands. Kristin has a comparative advantage in producing potholders because her opportunity cost is less. She only has to give up 5 wristbands to make a potholder where Anna has to give up 6.

b. Who has comparative advantage in production of wristbands? \

1. Anna has a comparative advantage in wristbands. She only has to give up 1 potholder per 6 wristbands where Kristen has to give up a potholder per 5 wristbands.

c. Assume they each work 10 hours per week. Draw each person’s PPF if they work separately (i.e. pretend they each have their own shop.)

d. If Kristen devotes half of their time each week producing potholders and the other half wristbands, how many of each would she have produced? What if Anna did the same thing? How many wristbands were produced in total? Potholders?

1. Kristen will have produced 15 potholders and 75 wristbands. Anna will have produced 10 potholders and 60 wristbands. 135 wristbands and 25 potholders would be made.

e. Suppose that Kristen spends 7 hours on potholders and 3 hours on wristbands and Anna spends all of her time making wristbands. How many of each would be produced?

There would be 21 potholders and 165 wristbands.

f. Where there gains from cooperating? Why?

The gains from cooperating were increased productivity due to comparative advantage. Since Kristen had a comparative advantage in producing potholders, it was more productive to have her make those. At the same time, Anna had a comparative advantage in wristbands and it was more productive to have her produce them. The output difference was 4 potholders for 30 wristbands which is better than either of their individual differences.

2. The PPF shows scarcity because it illustrates the greatest output of combinations of different goods and services an economy can achieve with limited resources. If you have to use a scarce good to produce one thing, you cannot produce as much of another. The PPF illustrates technical efficiency by showing the best output possibilities. If output is on the PPF it is technically efficient because there is maximum output for the limited input resources. It also illustrates opportunity costs because it shows in order to produce some products you have to give up others because of limited resources (scarcity).

5.

12. a) Setting up 2 new displays. ½ of 1 section of inventory taken in the store.

b) 5/6 of a new display. 1 and 1/5 of a section of inventory taken in the store.

c) Mitch has the comparative advantage because his opportunity cost is less. Lisa has a comparative advantage because her opportunity cost is less.

18. Taxes cause economic inefficiency because it reduces the limited resources even more. There is a limited amount of money in the economy and taxes reduce the power of that making our economic output not efficient.

Eric Escher

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