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Chapter 1: Q 3 (page 14)
Does the phrase 鈥渦nlimited wants and limited resources鈥� apply to both a low-income household and a middle-income household? Can the same phrase be applied to a very high-income household?
The phrase can be allowed to all the three households low-income, middle-income, and very high-income.
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Explain, in your own words, the rationality assumption, and contrast it with the assumption of bounded rationality proposed by adherents of behavioral economics.
For each of the following approaches that an economist might follow in examining a decision-making process, identify whether the approach relies on the rationality assumption or on the assumption of bounded rationality:
(a) An economic study of the number of online searches that individuals conduct before selecting a particular item to purchase online presumes that people are interested only in their own satisfaction, pursue their ultimate objectives, and consider every relevant option.
(b) An economist seeking to predict the effect that an increase in a state's sales tax rate will have on consumers' purchases of goods and services resumes that people are limited in their ability to process information about how the sales-tax-rate increase will influence the after-tax prices those consumers will pay.
(c) To evaluate the impact of an increase in the range of choices that an individual confronts when deciding among devices for accessing the Internet, an economic researcher makes the assumption that the individual is unable to take into account every new Internet-access option available to her.
Define economics. Explain briefly how the economic way of thinking鈥攊n terms of rational, self-interested people responding to incentives鈥攔elates to each of the following situations.
(a) A student deciding whether to purchase a textbook for a particular class.
(b) Government officials seeking more funding for mass transit through higher taxes.
(c) A municipality taxing hotel guests to obtain funding for a new sports stadium.
Based on your answer to Problems 1鈥�12, categorize each of the following conclusions as being the result of positive analysis or normative analysis.
(a) A higher minimum wage will reduce employment opportunities for minimum wage workers.
(b) Increasing the earnings of minimum wage employees is desirable, and raising the minimum wage is the best way to accomplish this.
(c) Everyone should enjoy open access to health care at no explicit charge.
(d) Heath care subsidies will increase the consumption of health care.
Explain why economics is a science.
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