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Chapter 1 - The nature and method of Economics


Chapter 1 Key Questions McConnell and Brue 14th Edition

Chapter 1 Key Questions

1-1   Use the economic perspective to explain why someone who is normally a light eater at a standard restaurant may become somewhat of a glutton at a buffet-style restaurant which charges a single price for all you can eat.

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1-5   Explain in detail the interrelationships between economic facts theory and policy. Critically evaluate this statement: "The trouble with economic theory is that it is not practical. It is detached from the real world."

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1-7   Indicate whether each of the following statements applies to microeconomics or macroeconomics:

        a. The unemployment rate in the United States was 4.9 percent in August 1997.
        b. The Alpo dogfood plant in Bowser Iowa laid off 15 workers last month.
        c. An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise.
        d. Our national output adjusted for inflation grew by 2 percent in 1995.
        e. Last week Wells Fargo Bank lowered its interest rate on business loans by one-half of 1 percentage point.
        f. The consumer price index rose by 2.3 percent in 1997.

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1-8   Identify each of the following as either a positive or a normative statement:

        a. The high temperature today was 89 degrees.
        b. It was too hot today.
        c. The general price level rose by 4.4 percent last year.
        d. Inflation eroded living standards last year and should be reduced by government policies.

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Answers:

1-1

This behavior can be explained in terms of marginal costs and marginal benefits.  At a standard restaurant items are priced individually - they have a positive marginal cost.  If you order more it will cost you more.  You order until the marginal benefit from the extra food no longer exceeds the marginal cost.  At a buffet you pay a flat fee no matter how much you eat.   Once the fee is paid additional food items have a zero marginal cost.  You therefore continue to eat until your marginal benefit becomes zero.

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1-5

Economic theory consists of factually supported generalizations about economic behavior. Economists use two methods to obtain sound theory: induction and deduction. In deduction the economist starts with a hypothesis and tests it for accuracy by gathering and examining facts. In induction the economist starts by gathering facts and then examines their relationships so as to extract a cause and effect pattern: a theory. Regardless of how derived economic theory enables policymakers to formulate economic policy relevant to real-world goals and problems.

As for the quotation the opposite is true; any theory not supported by facts is not a good theory. Good economic theory is empirically grounded; it is based on facts and so is highly practical.

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1-7

(a) (d) and (f) are macro; (b) (c) and (e) are micro.

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1-8

(a) and (c) are positive; (b) and (d) are normative.

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