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Whitney Wesson June 1, 2011 Assignment 1

2. What are the three interrelated features of the economic perspective? The three interrelated
features of the economic perspective consist of scarcity and choice, purposeful behavior,
and marginal analysis: benefits and cost.

3. What do economists mean when they say that “there is no free lunch?” Anything that has
any value that is offered for free still has a cost. The lunch is free from your perspective,
but there is someone who has to bear the cost. Economist refers this sacrifice as an
opportunity cost. In this case the resources that were used to purchase someone’s lunch
could have been put to another use.

Give another example to which this statement applies. As another example, consider a phone
company that offers you a free phone if you sign a 2-year contract with them. The phone in
your perspective is free, but the phone company has to pay for the phone with resources
that could have been used for an alternative use.

11. Explain the importance of the ceteris paribus or “other things equal” assumption. Provide an
example which is given in the book. Economics is concerned with real world behavior, in
which it is impossible to develop theories about economic relationships in lab settings
where the variables of interest could be isolated. Since this is true the ceteris paribus
assumption indicates that the other variables are not changing or affecting the variables of
interest. An example of ceteris paribus is the price of Pepsi and the amount of it purchased.
With all the factors that can influence the amount of Pepsi purchased, only the price varies.
This helps the economist to focus mainly on the relationship between the price of Pepsi and
purchases of Pepsi in isolation. This theory assumes that other variables that might affect
quantity demand are not changing.

30. List the four resource categories and give a brief description of each. Land: land includes
all natural resources used in the production process, including arable land, forest, mineral,
and oil deposits as well as water resources. Labor: labor includes the physical and mental
talents of individuals used in producing goods and services. Capital: capital includes all
manufactured aids in producing consumer goods and services. It includes all factory,
storage, transportation, and distribution facilities, as well as tools and machinery.
Entrepreneurial Ability: The entrepreneur takes the initiative in combining the resources
of land, labor, and capital to produce a good or service, makes the strategic business
decisions that set the course of an enterprise, and is an innovator. Also the entrepreneur is
a risk bearer, and has no guarantee of profit.

40. How are tradeoffs illustrated by the production possibilities curve? Consider the case of
Federal government spending on national defense and spending on social programs. Tradeoffs
are represented by the points lying on the production possibility curve. Each dot shows the
maximum number of outputs that can be produced from given inputs. Consider an
example such as the Federal government spending on national defense and spending on
Whitney Wesson June 1, 2011 Assignment 1

social programs. To spend more on the national defense, funds must be moved from social
programs to the national defense and vice versa. This means that the more spent on
national defense causes less funds to be available to social programs.

50. What do economists mean when they state that investment is spending on “goods for the
future?” When an economist says that investment is spending on ‘goods for the future” they
mean that the resources that are not used for consumption can be devoted to goods or
services that can be used for future production. Examples include investment in education,
machinery, factories, equipment, and tools are types of spending that will be used in
expanding production of consumer goods and services in the future.

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