Microeconomics solutions
Chapter 1
Preliminaries
Questions for Review
1. It is often said that a good theory is one that can be refuted by an empirical, data-oriented study. Explain why a theory that cannot be evaluated empirically is not a good theory.
A theory is useful only if it succeeds in explaining and predicting the phenomena it was intended to explain. If a theory cannot be evaluated or tested by comparing its predictions to known facts and data, then we have no idea whether the theory is valid. If we cannot validate the theory, we cannot have any confidence in its predictions, and it is of little use.
2. Which of the following two statements involves positive economic analysis and which normative?
How do the two kinds of analysis differ?
a. Gasoline rationing (allocating to each individual a maximum amount of gasoline that can be purchased each year) is poor social policy because it interferes with the workings of the competitive market system.
Positive economic analysis is concerned with explaining what is and predicting what will be.
Normative economic analysis describes what ought to be. Statement (a) is primarily normative because it makes the normative assertion (i.e., a value judgment) that gasoline rationing is “poor social policy.” There is also a positive element to statement (a), because it claims that gasoline rationing “interferes with the workings of the competitive market system.” This is a prediction that a constraint placed on demand will change the market equilibrium.
b. Gasoline rationing is a policy under which more people are made worse off than are made better off.
Statement (b) is positive because it predicts how gasoline rationing affects people without making a value judgment about the desirability of the rationing policy.
3. Suppose the price of regular-octane gasoline were 20 cents per gallon higher in New Jersey than in Oklahoma. Do you think there would be an opportunity for arbitrage (i.e., that firms could buy gas in
Preliminaries
Questions for Review
1. It is often said that a good theory is one that can be refuted by an empirical, data-oriented study. Explain why a theory that cannot be evaluated empirically is not a good theory.
A theory is useful only if it succeeds in explaining and predicting the phenomena it was intended to explain. If a theory cannot be evaluated or tested by comparing its predictions to known facts and data, then we have no idea whether the theory is valid. If we cannot validate the theory, we cannot have any confidence in its predictions, and it is of little use.
2. Which of the following two statements involves positive economic analysis and which normative?
How do the two kinds of analysis differ?
a. Gasoline rationing (allocating to each individual a maximum amount of gasoline that can be purchased each year) is poor social policy because it interferes with the workings of the competitive market system.
Positive economic analysis is concerned with explaining what is and predicting what will be.
Normative economic analysis describes what ought to be. Statement (a) is primarily normative because it makes the normative assertion (i.e., a value judgment) that gasoline rationing is “poor social policy.” There is also a positive element to statement (a), because it claims that gasoline rationing “interferes with the workings of the competitive market system.” This is a prediction that a constraint placed on demand will change the market equilibrium.
b. Gasoline rationing is a policy under which more people are made worse off than are made better off.
Statement (b) is positive because it predicts how gasoline rationing affects people without making a value judgment about the desirability of the rationing policy.
3. Suppose the price of regular-octane gasoline were 20 cents per gallon higher in New Jersey than in Oklahoma. Do you think there would be an opportunity for arbitrage (i.e., that firms could buy gas in