NOTES FOR SOLUTIONS
Problems and Applications
2. 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 frontier.
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.
4. a. A: 40 lawns mowed; 0 washed cars
B: 0 lawns mowed, 40 washed cars
C: 20 lawns mowed; 20 washed cars
D: 25 lawns mowed; 25 washed cars
b. The production possibilities frontier is shown in Figure 8. Points A, B, and D are
on the frontier, while point C is inside the frontier.
c. Larry is equally productive at both tasks. Moe is more productive at washing cars,
while Curly is more productive at mowing lawns.
d. Allocation C is inefficient. More washed cars and mowed lawns can be produced
by simply reallocating the time of the three individuals.
5. a. A worker’s decision about how many hours to work is related to microeconomics.
b. The effect of government spending on the unemployment rate is related to
c. The impact of new technology in the market for DVD recorders is related to
d. The relationship between education and economic growth is related to
e. The optimal choice of output for a firm that produces electric heaters is related to
6. a. The statement that an increase in the minimum wage will increase teenage unemployment
is a positive statement. It deals with how the economy is, not how it should be.
Economists can examine data and determine if the statement is true; thus it is a
b. The statement that the government should raise the tax on tobacco to reduce the quantity of
cigarettes sold is a normative statement. It states an opinion about something
that should be done, not how the world is.
c. The statement that an increase in the growth rate of the money supply will lead to a rise in the
price level is a positive statement. Economists have studied the relationship
between the growth rate of money and the inflation rate and have found the
statement to be true. So the statement reflects how the world is, and is thus a
d. The statement that an increase in the interest rate will cause a decline in investment is a
positive statement. Economists have found an inverse relationship between the
interest rate and investment. So the statement describes how the world is.
Therefore, it is a positive statement.
e. The statement that the government should provide health care to anyone who does not have
health insurance is a normative statement. It does not describe the world as it is,
but states how the world should be. Thus, it is normative.