Macroeconomics

Glenn Hubbard, Tony O'Brien

Chapter 1

Economics. Foundations and Models - all with Video Answers

Educators

Section 1

Three Key Economic Ideas

Problem 1

Briefly discuss each of the following economic ideas: People are rational, people respond to economic incentives, and optimal decisions are made at the margin.

Ulysses Ng

Ulysses Ng

Numerade Educator

Problem 2

What is scarcity? Why is scarcity central to the study of economics?

Daniel Cisneros

Daniel Cisneros

Numerade Educator

Problem 3

Do you agree with the following statement: "The problem with economics is that it assumes that consumers and firms always make the correct decisions. But we know that everyone makes mistakes."

Ulysses Ng

Numerade Educator

Problem 4

According to the FBI Bank Crime Statistics, there were nearly $4,000$ bank robberies in the United States in 2014 .The FBI claims that banks have made themselves easy targets by refusing to install clear acrylic partitions, called bandit barriers, that separate bank tellers from the public. According to a special agent with the FBI, "Bandit barriers are a great deterrent. We've talked to guys who rob banks, and as soon as they see a bandit barrier, they go find another bank." Despite this finding, many banks have been reluctant to install these barriers. Wouldn't banks have a strong incentive to install bandit barriers to deter robberies? Why, then, do so many banks not do so?

Daniel Cisneros

Daniel Cisneros

Numerade Educator

Problem 5

The grading system plays an important role in student learning. In their book Effective Grading: A Tool for Learning and Assessment in College, Barbara Walvord and Virginia Anderson state that "grading infuses everything that happens in the classroom." They also argue that grading "needs to be acknowledged and managed from the first moment that an instructor begins planning a class."
a. How could the grading system a teacher uses affect the incentives of students to learn the course material?
b. If teachers put too little weight in the grading scale on a certain part of the course, stuch as readings outside the textbook, how might students respond? pared, having read the upcoming material. How could a teacher design the grading system to motivate students to come to class prepared?

Ulysses Ng

Numerade Educator

Problem 6

The federal government subsidizes some loans to college students. Typically, the more students who participate in these programs and the more they borrow, the higher the cost to the federal government. In 2011 , President Barack Obama convinced Congress to pass these changes to the federal student loan programs: $(1)$ Payments were capped at 10 percent of a borrower's discretionary income; $(2)$ any unpaid balances for people working for government or in the nonprofit sector were forgiven after 10 years; and (3) people working in the private sector had their loans forgiven after 20 years.
a. As a result of these changes in the federal student loan program, would you predict that the total amount that students borrowed under these programs increased or decreased? Briefly explain.
b. As part of his 2016 federal budget proposals, President Obama recommended significant changes to the federal student loan programs. Given your answer to part (a), do you think President Obama was likely to have recommended changes that would increase or changes that would decrease the payments that borrowers would have to make? Briefly explain.
c. How might President Obama and his advisers have failed to correctly forecast the effects of the 2011 changes to the loan programs?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 7

Many universities and corporations offer a health and wellness program that helps their employees improve or maintain their health and get paid (a relatively small amount) for doing so. The programs vary but typically consist of employees completing a health assessment, receiving a program for healthy living, and monitoring their monthly health activities.
a. Why would universities and corporations pay employees to improve or maintain their health?
b. How does health insurance affect the incentive of employees to improve or maintain their health?
c. Would a wellness program increase or decrease the health insurance program increase or decrease the would charge the university or corporation to provide insurance coverage? Briefly explain.

Ulysses Ng

Numerade Educator

Problem 8

Jay Bhattacharya and Kate Bundorf of Stanford University have found evidence that people who are obese and who work for firms that provide health insurance receive lower wages than workers at those firms who are not obese. At firms that do not provide health insurance, obese workers do not receive lower wages than workers who are not obese.
a. Why might firms that provide workers with health insurance pay a lower wage to obese workers than to workers who are not obese?
b. Is Bhattacharya and Bundorf's finding relevant to the question of whether health insurance provides people with an incentive to become obese? Briefly explain.

Daniel Cisneros

Daniel Cisneros

Numerade Educator

Problem 9

McDonald's typically serves breakfast until only $10 : 30$ A.M. on week-days and $11 : 00$ A.M. on weekends. In 2015 , the company began to experiment with serving breakfast all day at various locations in San Diego. Several owners of McDonald's restaurants, however, point out that offering breakfast 24 hours a day presents two logistical problems: (1) Burgers and other meats need to be cooked at a higher temperature than eggs, so it would be difficult for employees to set the grill at the right temperature for employees to (2) scrambled eggs require employees to continually stir, while hamburgers don't require this attention. In addition, some customers might buy the cheaper breakfast rather than the more expensive lunch or dinner meals. If McDonald's made you responsible for making this decision, discuss how you would go about analyzing whether to serve breakfast all day. Would go about analyzing whether to serve breakfast all serve breakfast up to $10 : 30$ A.M. or serve breakfast all day? Would you have to serve the entire breakfast menu all day?

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Problem 10

Late in the semester, a friend tells you, "I was going to drop my psychology course so I could concentrate on my other courses, but I had already put so much time into the course that I decided not to drop it." What do you think of your friend's reasoning? Would it make a difference to your answer if your friend has to pass the psychology course at some point to graduate? Briefly explain.

Daniel Cisneros

Daniel Cisneros

Numerade Educator

Problem 11

In a paper written by Bentley College economists Patricia M. Flynn and Michael A. Quinn, the authors state: We find evidence that Economics is a good choice of major for those aspiring to become a CEO [chief executive officer]. When adjustwith undergraduate degrees in Economics are shown to have had a greater likelihood of becoming an S\&P 500 CEO than any other major. A list of famous economics majors published by Marietta College includes business leaders Elon Musk, Warren Buffett, Donald Trump, David Rockefeller, Ted Turner, Bill Belichick, Diane von Furstenberg, and Sam Walton, as well as Presidents George H.W. Bush, Gerald Ford, and Ronald Reagan and Supreme Court Justice Sandra Day O'Connor. Why might studying economics be particularly good preparation for being the top manager of a corporation or a leader in government?

Ulysses Ng

Numerade Educator