Solution ManualFoundations of
Business 7th Edition by William M. Pride, All
chapter 1 - 47
,Chapter 1
End of Chapter Questions
Quiz Yourself
1. Scarcity implies that the allocation decision chosen by society can
a) not make more of any one good.
b) always make more of any good.
c) typically make more of one good but at the expense of making less of
another.
d) always make more of all goods simultaneously.
Explanation: Scarcity implies that choices involve trade-offs.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Gradeable: automatic Learning
Objective: 01-01
Topic: Economics and Opportunity Cost
2. A production possibilities frontier is a simple model of
a) allocating scarce inputs to the production of alternative outputs.
a) price and production/consumption in a market.
b) the cost of producing goods.
c) the number of inputs required to produce varying levels of output. Explanation:
The production possibilities frontier shows the quantity of two goods that can be
produced. It implies that scarcity requires that choices be made as to how to use
resources.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Gradeable: automatic Learning
Objective: 01-01
Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
,3. The underlying reason that there are unattainable points on a production possibilities
frontier is that there
a. is government.
b. are always choices that must be made.
c. are scarce resources within a fixed level of technology.
d. is unemployment of resources.
Explanation: The points outside the production possibilities frontier are unattainable. This
means that currently available resources and technology are insufficient to produce amounts
greater than those illustrated on the frontier. On a graph, everything beyond the frontier is
unattainable.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy Gradeable:
automatic Learning Objective:
01-01
Topic: Modeling Opportunity Cost Using the Production Possibilities Frontier
4. The underlying reason production possibilities frontiers are likely to be bowed out
(rather than linear) is because
a. choices have consequences.
b. there are always opportunity costs.
c. some resources and people can be better used producing one good rather
than another.
d. there is always some level of unemployment.
Explanation: If the production possibilities frontier is not a line but is bowed out away from
the origin, then opportunity cost is increasing. The reason for this is that as we add more
resources to the production of, for example, pizza, we are using fewer resources to produce
soda. Compounding that problem, at each stage as we take the resources away from soda
and put them into pizza, we are moving workers who are worse at pizza production and
better at soda production than those moved in the previous stage. This means that the
increase in pizza production is diminishing and the loss in soda production is increasing. An
economist would call this an example of increasing opportunity cost. If the production
possibilities frontier is a straight line that is not bowed out away from the origin, then
opportunity cost is constant.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy Gradeable:
automatic Learning Objective:
01-02
Topic: Attributes of the Production Possibilities Frontier
,5. Suppose you were modeling the impact of the introduction of computer automation
into manufacturing on a production possibilities frontier (PPF) with two manufactured
goods on their respective axes. It would be more likely that the result would be .
a) generalized growth with the PPF moving both up and to the right.
b) specialized growth with the PPF moving both up and to the right.
c) generalized growth with the PPF just moving up and not to the right.
d) specialized growth with the PPF just moving up and not to the right. Explanation:
Computer automation is a general improvement in technology so it would improve all
manufacturing. As a result, it would result in generalized growth and move the PPF both
up and to the right.
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy Gradeable:
automatic Learning Objective:
01-03 Topic: Economic
Growth
6. The optimization assumption suggests that people make
a. irrational decisions.
b. unpredictable decisions.
c. decisions to make themselves as well off as possible.
d. decisions without thinking very hard.
Explanation: The optimization assumption suggests that the person in question is trying to
maximize some objective. Consumers are assumed to be making decisions that maximize
their happiness subject to a scarce amount of money.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy Gradeable:
automatic Learning Objective:
01-01
Topic: Thinking Economically
,7. Imagine an economist ordering donuts one-by-one. When deciding how many donuts to
order they would pick that number where the enjoyment of the equals the
enjoyment they could get from using the money on another good.
a. first donut
b. last/marginal donut
c. average/typical donut
d. total number of donuts
Explanation: The enjoyment of the last slice is the marginal benefit of that slice. If this
enjoyment is more than the enjoyment from some alternative, more will be consumed.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Gradeable: automatic Learning
Objective: 01-04 Topic:
Thinking Economically
8. Of course, all individual students are better off if they earn better grades. If you were to
conclude that all students would be better off if everyone received an A, you would
a. have fallen victim to the fallacy of scarcity.
b. be right.
c. have fallen victim to the fallacy of composition.
d. be mistaking correlation with causation.
Explanation: The fallacy of composition is the mistake in logic that suggests that the total
economic impact of something is always and simply equal to the sum of the individual parts.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Gradeable: automatic Learning
Objective: 01-04 Topic:
Thinking Economically
,9. Imagine you were to conclude, after carefully examining data and using proper
evaluation techniques, that a tax credit for attending college benefits low income earners
more than a tax deduction (of equal total cost to the government) would. You would have
engaged in analysis to reach that conclusion.
a. negative
b. positive
c. normative
d. creative
Explanation: Economists, and social scientists in general, distinguish views of ―the way
things are‖ from ―the way things should be,‖ calling the former positive analysis and the latter
normative analysis. Positive analysis is a form of analysis that seeks to understand the way
things are and why they are that way. Normative analysis is a form of analysis that seeks to
understand the way things should be.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Gradeable: automatic Learning
Objective: 01-04 Topic:
Thinking Economically
,Short Answer Questions
1. For you, what is the opportunity cost of buying a new car?
The opportunity cost of purchasing the new car is what you would have done with
the money (and perhaps shopping time) instead. Perhaps it would be repairing your
existing car. Maybe you would use a bike, public transportation, or Uber and use the
savings to pay your tuition. Whatever the net savings associated with your chosen
alternative to a new car is, and whatever you did with those savings, is the
opportunity cost.
2. Imagine you decided to study all last week for an exam instead of doing anything fun.
What would be the opportunity cost of doing so? Why might the opportunity cost
(defined in terms of fun lost) be expected to increase?
The opportunity cost of studying all week would be the lost fun things you could
have done with that time. If instead of studying all week, you studied during the
times when you had the least opportunities for fun (perhaps weekend mornings and
weekday mornings between classes), you would have preserved the weekend
afternoons and weekday evenings for fun opportunities. The lost fun associated with
the first few hours of morning studying would be low, but the lost fun on the
weekend evenings would be much greater.
3. Suppose you hear a political candidate claim credit or lay blame for an economic
outcome. How can you tell whether the candidate is correct? What would you need to
know?
You need the correct counterfactual (what the result would have been with better
actions). For instance, if you blame President Trump for the COVID-19 recession,
you would have to argue that someone else would have managed the crisis
differently and that the economic consequence would have been less. The key to any
such claim is the legitimacy of the counterfactual.
4. If you get a 25 percent pay increase, you are better off. Explain why some people
would not be better off all employers gave all workers a 25 percent pay increase.
This is an illustration of the fallacy of composition. If everyone received a 25 percent
pay increase, that situation would likely create an increase in prices associated with
the production of the goods those workers made or the services they performed.
That would, in turn, reduce the buying power of the pay increase. It is possible (and
perhaps even likely) that there would be no net gain.
5. Suppose you were to analyze the state of the economy at the moment. You say to your
friends, ―The economy has been growing more slowly in the last 10 years than it did in
the previous 20 years. The government should cut taxes to stimulate the economy.‖
What portion of that statement is ―positive‖ and what portion of that statement is
―normative?‖
The positive portion of the statement is the first sentence. It analyzes what
happened. The second sentence is normative. It suggests a course of action.
Think about This
,What was your opportunity cost of attending college?
The opportunity cost associated with attending college would include what you
would have done had you not attended college: military service, working, traveling,
caring for a loved one, ―finding yourself,‖ or anything else you might have done.
However, it doesn’t include the money you spend on eating (because you have to eat
in either circumstance.)
Think about the most expensive thing you have ever purchased. What could you have done
with the money? Which outcome would have made you better off—what you did or what
you could have done?
Student responses may vary. They may mention purchases such as cars, apartments,
homes, nice furniture, or expensive tech products. Students should note what they
could have done with the money associated with the purchase and compare which
outcome would have made them better off. For example, instead of buying a car, the
student may have been able to pay their tuition, but without the car, they may not
have been able to work. Therefore, the purchase made them better off.
Think about the last time you took a series of tests during a short period of time (high
school or college finals work here). How did you decide how much time to spend on each
subject? How might studying economics help you make that allocation decision in the
future?
The answer to this question depends on whether your goal is to maximize your GPA
or to maximize your GPA subject to the condition that you also earn the required
minimum grades in each of your classes. For instance, you may want to earn the best
GPA possible but you must also earn a B in every class in order to progress. That
goal would mean that you should devote more of your time to a class you are behind
in or struggling to understand. Whatever your goal, you should allocate each hour (or
block or time) to maximize the effect on your goal. That is using marginal thinking to
your advantage. For example, assuming you are on track for the minimum grade in
each class and you have an extra hour (perhaps because a meeting was cancelled) you
should study the subject that will boost your GPA the most.
,Talk about This
Discuss whether you believe people make rational decisions based on the optimization
assumption.
Recall that the optimization assumption is that people act seek to maximize some
objective and that the rationality assumption is that they act in a fashion consistent
with their goal. Some people act on whims that they later regret, while others
consider alternatives thoughtfully and make decisions based on the information they
have. There is a difference between saying ―I made the best decision given the
information I had at the time,‖ and saying ―what was I thinking?‖ The former may
reflect a decision that didn’t turn out well, (perhaps they bought a car and then lost
their job unexpectedly), but the latter may be the result of someone acting
impulsively.
Discuss what kinds of noneconomic trade-offs could be modeled with a production
possibilities frontier?
The trade-off between studying and partying in school is a classic example. GPA
would be on one axis of the production possibilities frontier while fun would be on
the other. With a limited amount of time, there is a limited ability to get the benefits
of either good. A brilliant person may be able to earn a 4.0 GPA with limited
studying, while someone else might not ever be able to earn a 4.0 even if they
studied constantly.
Other examples: exercise of the body vs. exercise of the mind; the allocation of time with
friends vs. time with family
, Chapter 2
Supply and Demand
End of Chapter Questions
Quiz Yourself
1. The supply and demand model examines how prices and quantities are determined
a) in markets.
b) by governments.
c) by consumers only.
d) by producers only.
Explanation: The supply and demand model assumes that there is a market where buyers and
sellers get together to trade.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy Gradeable:
automatic Learning Objective:
02-02
Topic: Supply and Demand Defined
2. A change in the price of lumber will impact
a) the demand for lumber.
b) the supply of lumber.
c) the quantity demanded and quantity supplied of lumber but neither the
supply nor the demand for lumber.
d) both the supply and demand for lumber.
Explanation: Demand shows how much consumers want to buy at all prices. Demand is a
relationship, whereas quantity demanded is a particular point in that relationship.
Quantity supplied is how much firms are willing and able to sell at a particular price during a
particular period of time, whereas supply alone shows how much firms want to sell at all
prices.
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 01 Easy Gradeable:
automatic Learning Objective:
02-01
Topic: Supply and Demand Defined
