The Micro Economy Today
17th Edition by Bradley Schiller
Complete Chapter Solutions Manual
are included (Ch 1 to 23)
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** All Chapters included
** ABA Teaching Notes
, CHAPTER 1: Economics: The Core Issues
SOLUTIONS MANUAL
Learning Objectives for Chapter 1
After reading this chapter, you should know
LO1-1 What scarcity is.
LO1-2 How scarcity creates opportunity costs.
LO1-3 What the production possibilities curve represents.
LO1-4 The three core economic questions that every society must answer.
LO1-5 How market and government approaches to economic problems differ.
Questions for Discussion
1. What opportunity costs did you incur in reading this chapter? If you read another chapter today, would
your opportunity cost (per chapter) increase? Explain. LO1-2
Answer: Opportunity cost is what you must give up to get the next-best alternative. In this case,
opportunity costs include the things you could have done with your time instead of reading this chapter.
The most desired activity you give up is the value of the opportunity cost.
As you first begin to read, you first give up the alternative activities that have the least value to you. As
you spend more time studying, you begin giving up activities that have increasing value to you. For
example, the first hour of studying may have resulted in you not watching a TV show. The second hour
of studying may result in you not using your PlayStation 5, which you believe offers more satisfaction
than the first TV show that you gave up, and so on.
2. How much time could you spend on homework in a day? How much do you spend? How do you decide?
LO1-2
Answer: You theoretically could spend 24 hours a day doing homework. However, in reality, there is a
limit to the amount of time in which you can effectively complete your homework. Most students spend
substantially less than 24 hours per day because there are competing needs for their time, such as work,
sleep, and social time.
A person decides how much time to spend on homework based on the perceived payoff (an
improvement in learning or an improvement in your course grade) and compares this to the value of
what must be given up to complete the homework. Those activities that are perceived as giving the
most benefit are usually the activities completed first. At some point, the perceived benefit from
completing additional homework is less than the benefit from other activities, and you stop working on
homework.
3. What’s the real cost of a “free lunch,” as mentioned in the discussion of “Opportunity Costs”? LO1-2
Answer: There is no such thing as a “free lunch.” Every time we use scarce resources in one way, we give
up the opportunity to use them in other ways. A free lunch’s opportunity cost is what could be produced
or consumed otherwise with those resources that were used for the lunch.
,4. How might a nation’s production possibilities be affected by the following? LO1-3
a. Discovery of a new oil field.
b. A decrease in immigration.
c. An increase in military spending.
d. More job training.
Answer: In general, a nation’s production possibilities curve will shift due to a change in resources, a
change in the quality of resources, or a change in technology.
a. Discovery of a new oil field is an example of a change in resources, which causes an increase in a
country’s production possibilities. Discovering a new oil field allows a country to have a greater capacity
in the long run, leading to more output.
b. A decrease in immigration is an example of a decrease in resources for a nation. A decrease in
immigration certainly is a decrease in the number of laborers, which would necessarily decrease the
production possibilities. These immigrants also have varying levels of skills and education (human
capital) that also will decrease the production possibilities of a nation.
c. An increase in military spending will, in general, simply move the economy from one point on the
production possibilities curve to a different point on the curve since this is nothing more than a trade-off
in the government spending pattern. If the increase in spending results in new research and
development that improves technology that has civilian applications, then the production possibilities
could potentially increase over time.
d. An increase in job training makes workers more productive. This increased productivity means that
more output can be produced with the existing number of workers, which would increase a nation’s
production possibilities curve.
5. What benefits might we get from Mars exploration? Will those benefits exceed the opportunity costs?
LO1-2
Answer: Students can discuss some of the possible benefits, which include scientific discovery, the
possibility of technical advancements and how these advancements may benefit us on Earth, global
collaboration between countries to complete a mission, the potential for human settlement, business
and job growth in the space industry, potential use of Mars resources in production, etc. Students also
need to explain that any investment in Mars exploration means we cannot use those same resources
(workers, capital) for other uses (i.e., opportunity costs). Students then need to discuss whether those
benefits exceed the opportunity costs.
6. Who would go to college in a completely private (market) college system? How does government
intervention change this FOR WHOM outcome? LO1-4
Answer: Financial aid and guaranteed student loans make college accessible to more people. Many
states also subsidize in-state students with low tuition so that more individuals can afford school. In a
completely private system, without access to adequate funds, many people with the intellectual ability
would not be able to go to college.
7. Why do people around the world have so much faith in free markets (World View “Market Reliance vs.
Government Reliance?”)? LO1-5
, Answer: Market-based incomes based on private property may motivate higher productivity; thus, more
should be produced in total. Incomes and standards of living are higher in market-based economies.
Also, free markets give people more freedom in their choices and ensure property rights over what they
have produced and the incomes they earn.
8. What is the connection between North Korea’s missile program and its hunger problem (World View
“North Korea’s Missile Tests Deepen Hunger Crisis”)? LO1-2
Answer: North Korea is a relatively small country: Its population of 26 million ranks 50th in the world.
Yet North Korea maintains an extremely large army and continues to develop a nuclear weapons
capability. To do so, it must allocate as much as 20 percent of all its resources to feeding, clothing, and
equipping its military forces. As a consequence, there aren’t enough resources available to produce
food. Currently Korea’s farmers can’t feed the country’s population. This is an example of a “guns versus
butter” choice. When North Korea uses more resources for missiles (guns), it necessarily has fewer
resources available to produce food (butter).
9. Explain why there are limits to output and how these limits force economies to make trade-offs. LO1-1
Answer: There’s a limit to the amount of output an economy can produce in a given time period
because available resources and technology are scarce. As long as resources are scarce, their use entails
an opportunity cost, which means an economy can obtain additional quantities of any particular good
only by reducing the potential production of another good. For example, if a country desires to produce
more trucks, a trade-off in the form of a reduction in the production of another good must happen.
10. If climate change was in fact the greatest threat to society, should all our resources be used to combat
it? What percentage of our output should be devoted to the pursuit of a carbon-neutral economy?
LO1-2
Answer: In general, no, not all resources should be used for a single use. One must always remember
the opportunity costs for using a resource. Students’ answers for the second part will vary, but students
should explain their reasoning using the concepts of scarcity, opportunity cost, and trade-offs.
Problems for Chapter 1
1. According to Table 1.1 (or Figure 1.1), calculate the opportunity cost of producing the second 10 trucks
(= trucks 11–20). LO1-2
Answer: 7 tanks
Feedback: A production possibilities curve (PPC) describes the various output combinations that could
be produced in a given time period with available resources and technology.
Opportunity cost is the most desired goods or services that are forgone to obtain something else. In this
case, the opportunity cost to produce more trucks is fewer tanks. To calculate opportunity cost, identify
how many tanks must be given up to produce the additional trucks.
If this economy desires to produce its second 10 trucks, this implies the economy is producing just 10
trucks and wants to now produce 20 trucks. In other words, current production is truck production = 10,
