Quiz 1: The Economic Approach


It is believed that any rational human being essentially makes a personal cost and benefit comparison before choosing an option and the reason behind such behavior is that human beings respond positively to incentives. In light of this theory we need to analyze how the decisions are influenced under each of the following cases: (a) When there is a fall in temperature from 80 0 to 50 0 ones decision to go to swimming would be affected adversely. A fall in temperature would reduce the pleasure of swimming. (b) A change in the meeting time to introductory economics course to early hour of 7.30 A.M will impacts one's decision to attend lectures in a negative way. The reason for such decision would be the outcome of the fact that attending an introductory class in early morning is more costly in terms of the time and the benefit is less, hence the incentive is negative. (c) A student would decide not to read the text more keenly knowing that the number of exam questions that relate directly to that text has reduced. There would be no reward to the extra effort in terms of questions in exams to the effort of reading the text and hence any incentive. (d) An increase in the price of beef would lead to increase in the cost of steak and hence demand to buy steak would fall. One would prefer to buy less steak as the price rises. (e) An increase in the rental rates of apartments would result in the increase in the demand for additional rental housing units. As the income of rental apartment increases the incentive to build rental apartment increases.

The statement is false. In reality there is no such thing called free as resources are scarce and human demands are unlimited. A scarce resource has various uses and hence have opportunity cost. Construction of infrastructure like healthcare, education and highways needs the employment of scarce resources like land, labor, capital, entrepreneur which otherwise would have been used for the construction of other productive goods for satisfying other demands. A land used for construction of school can also be used for construction of shopping mall, parking plaza or simply for farming agricultural produce. Construction of school means sacrificing other all other uses of the available scarce land.

a)In a market economy where the free interaction of market demand and supply determines the market clearing output and price, price is used to ration scarce resources. Price acts as a signal for the supplier. The greater is the price of a commodity greater is the demand of the good and greater is hence the incentive to produce the commodity. The producer gets the incentive to produce more if price is more since it signals a potential source of economic profit. Commodities are rationed in a market economy in such a way that whoever is able and willing to pay the market clearing price would be able to purchase the good. b)Grades are rationed in economics class in such a way that whoever performs well in the test is able to achieve a higher grade. Grades are hence rationed basis performance in test. This rationing method influences the students in such a way that they are influenced to study more to attain higher grade. Thus grade acts as an incentive to the students who put more effort to attain higher grade. If grades were rationed in such a way that highest grades are given to those whom the teacher like the best then the incentive structure of marks and effort would be destroyed. Students instead of putting efforts in studying would put more effort in lobbying and favor seeking for the teacher.

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