1、 Which method of expanding production will increase profit the most?d. In deciding how much to prepare for class, a professor faces a tradeoff between the value of improving the quality of the lecture compared to other things she could do with her time, such as working on additional research.2. When
2、 the benefits of something are psychological, such as going on a vacation, it isnt easy to compare benefits to costs to determine if its worth doing. But there are two ways to think about the benefits. One is to compare the vacation with what you would do in its place. If you didnt go on vacation, w
3、ould you buy something like a new set of golf clubs? Then you can decide if youd rather have the new clubs or the vacation. A second way is to think about how much work you had to do to earn the money to pay for the vacation; then you can decide if the psychological benefits of the vacation were wor
4、th the psychological cost of working.3. If you are thinking of going skiing instead of working at your part-time job, the cost of skiing includes its monetary and time costs, plus the opportunity cost of the wages youre giving up by not working. If the choice is between skiing and going to the libra
5、ry to study, then the cost of skiing is its monetary and time costs plus the cost to you of getting a lower grade in your course.4. If you spend $100 now instead of investing it for a year and earning 5 percent interest, you are giving up the opportunity to spend $105 a year from now. The idea that
6、money has a time value is the basis for the field of finance, the subfield of economics that has to do with prices of financial instruments like stocks and bonds.5. The fact that youve already sunk $5 million isnt relevant to your decision anymore, since that money is gone. What matters now is the c
7、hance to earn profits at the margin. If you spend another $1 million and can generate sales of $3 million, youll earn $2 million in marginal profit, so you should do so. You are right to think that the project has lost a total of $3 million （$6 million in costs and only $3 million in revenue） and yo
8、u shouldnt have started it. Thats true, but if you dont spend the additional $1 million, you wont have any sales and your losses will be $5 million. So what matters is not the total profit, but the profit you can earn at the margin. In fact, youd pay up to $3 million to complete development; any mor
9、e than that, and you wont be increasing profit at the margin.6. Harry suggests looking at whether productivity would rise or fall. Productivity is certainly important, since the more productive workers are, the lower the cost per gallon of potion. Harry wants to look at average cost. But both Harry
10、and Ron are missing the other side of the equationrevenue. A firm wants to maximize its profits, so it needs to examine both costs and revenues. Thus, Hermione is rightits best to examine whether the extra revenue would exceed the extra costs. In addition, Hermione is the only one whos thinking at t
11、he margin.7. a. Since a person gets fewer after-tax Social Security benefits the greater is his or her income, theres an incentive not to save for retirement. If you save a lot, your income will be higher, and you wont get as much after-tax Social Security income as someone who didnt save as much. T
12、he unintended consequence of the taxation of Social Security benefits is to reduce saving; yet the Social Security system arose because of worries that people wouldnt save enough for retirement.b. For the same reason, youll tend not to work （or not work as much） after age 65. The more you work, the
13、lower your after-tax Social Security benefits will be. Thus the taxation of Social Security benefits discourages work effort after age 65.8. a. When welfare recipients who are able to work have their benefits cut off after two years, they have greater incentive to find jobs than if their benefits we
14、re to last forever.b. The loss of benefits means that someone who cant find a job will get no income at all, so the distribution of income will become less equal. But the economy will be more efficient, since welfare recipients have a greater incentive to find jobs. Thus the change in the law is one
15、 that increases efficiency but reduces equity.9. By specializing in each task, you and your roommate can finish the chores more quickly. If you divided each task equally, it would take you more time to cook than it would take your roommate, and it would take him more time to clean than it would take
16、 you. By specializing, you reduce the total time spent on chores.Similarly, countries can specialize and trade, making both better off. For example, suppose it takes Spanish workers less time to make clothes than French workers, and French workers can make wine more efficiently than Spanish workers.
17、 Then Spain and France can both benefit if Spanish workers produce all the clothes and French workers produce all the wine, and they exchange some wine for some clothes.10. a. Being a central planner is tough! To produce the right number of CDs by the right artists and deliver them to the right peop
18、le requires an enormous amount of information. You need to know about production techniques and costs in the CD industry. You need to know each persons musical tastes and which artists they want to hear. If you make the wrong decisions, youll be producing too many CDs by artists that people dont wan
19、t to hear, and not enough by others.b. Your decisions about how many CDs to produce carry over to other decisions. You have to make the right number of CD players for people to use. If you make too many CDs and not enough cassette tapes, people with cassette players will be stuck with CDs they cant
20、play. The probability of making mistakes is very high. You will also be faced with tough choices about the music industry compared to other parts of the economy. If you produce more sports equipment, youll have fewer resources for making CDs. So all decisions about the economy influence your decisio
21、ns about CD production.11. a. Efficiency: The market failure comes from the monopoly by the cable TV firm. b. Equityc. Efficiency: An externality arises because secondhand smoke harms nonsmokers.d. Efficiency: The market failure occurs because of Standard Oils monopoly power. e. Equityf. Efficiency:
22、 Theres an externality because of accidents caused by drunk drivers.12. a. If everyone were guaranteed the best health care possible, much more of our nations output would be devoted to medical care than is now the case. Would that be efficient? If you think that currently doctors form a monopoly an
23、d restrict health care to keep their incomes high, you might think efficiency would increase by providing more health care. But more likely, if the government mandated increased spending on health care, the economy would be less efficient because it would give people more health care than they would
24、 choose to pay for. From the point of view of equity, if poor people are less likely to have adequate health care, providing more health care would represent an improvement. Each person would have a more even slice of the economic pie, though the pie would consist of more health care and less of oth
25、er goods. b. When workers are laid off, equity considerations argue for the unemployment benefits system to provide them with some income until they can find new jobs. After all, no one plans to be laid off, so unemployment benefits are a form of insurance. But theres an efficiency problemwhy work i
26、f you can get income for doing nothing? The economy isnt operating efficiently if people remain unemployed for a long time, and unemployment benefits encourage unemployment. Thus, theres a tradeoff between equity and efficiency. The more generous are unemployment benefits, the less income is lost by
27、 an unemployed person, but the more that person is encouraged to remain unemployed. So greater equity reduces efficiency.13. Since average income in the United States has roughly doubled every 35 years, we are likely to have a better standard of living than our parents, and a much better standard of
28、 living than our grandparents. This is mainly the result of increased productivity, so that an hour of work produces more goods and services than it used to. Thus incomes have continuously risen over time, as has the standard of living.14. If Americans save more and it leads to more spending on fact
29、ories, there will be an increase in production and productivity, since the same number of workers will have more equipment to work with. The benefits from higher productivity will go to both the workers, who will get paid more since theyre producing more, and the factory owners, who will get a return on their investments. Theres no such thing as a free lunch, though, because when people save more, theyre giving up spending. They get higher incomes at the cost of buying fewer goods.15. a.
