Chapter 1: Q 2 (page 14)
Some people claim that the “economic way of thinking” does not apply to issues such as health care. Explain how economics does apply to this issue by developing a “model” of an individual’s choices.
We develop the model by considering both the economic and the social behaviors involved in it.
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Distinguish between Normative and Positive Economics.
Suppose that the government has raised by $10 a per-carat tax rate it imposes on diamonds in an effort to influence the production of these particular goods by each of the firms that produce them and purchases by individual consumers. Would we apply microeconomic or macroeconomic analysis to analyze this policy action?
Consider two models for estimating, in advance of an election, the shares of votes that will go to rival candidates. According to one model, pollsters’ surveys of a randomly chosen set of registered voters before an election can be used to forecast the percentage of votes that each candidate will receive. This first model relies on the assumption that unpaid survey respondents will give truthful responses about how they will vote and that they will actually cast a ballot in the election. The other model uses prices of financial assets (legally binding IOUs) issued by the Iowa Electronic Markets, operated by the University of Iowa, to predict electoral outcomes. The final payments received by owners of these assets, which can be bought or sold during the weeks and days preceding an election, depending on the shares of votes the candidates actually end up receiving. This second model assumes that owners of these assets wish to earn the highest possible returns, and it indicates that the market prices of these assets provide an indication of the percentage of votes that each candidate will actually receive on the day of the election.
(a) Which of these two models for forecasting electoral results is more firmly based on the rationality assumption of economics?
(b) How would an economist evaluate which is the better model for forecasting electoral outcomes?
Suppose that the U.S. federal government has borrowed \(500 billion to expand its total spending on goods and services across the entire economy in an effort to boost by \)500 billion the aggregate production by the nation's firms. Would we apply microeconomic or macroeconomic analysis to analyze this policy action?
Calculate the slope of the function you graphed in Problem A-6.
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