Quiz 1: The Economic Approach


a) The decrease in temperature will decrease a person's desire to go swimming as the weather will be relatively colder now. Hence, the incentive for one to want to swim is weak in this case. b) The change in the timings of the lecture from 11:00 A.M to 7:30 A.M will see a decrease in a student's desire to attend the introductory economics lectures. It is because the opportunity cost of skipping introductory lectures is low, however, the opportunity cost of waking up in the morning and going for lectures in the morning is high in terms of the forgone leisure of sleeping some more. Hence, the incentive to attend the lectures will be less in this case. c) It is highly likely that one will refer the book less with a decrease in the number of direct questions being asked from the book, because the certainty to score high is less. Hence, in this case also the incentive is weak. d) It will decrease the purchase of steaks because the beef has become costlier and an individual will buy its substitutes instead. e) An increase in the rent will increase one's desire to construct more rental apartments because higher rents mean higher profits in constructing apartments.

The statement is incorrect. Each good is scarce in relation to human wants and so the provisions of goods, like education, healthcare, and highways involve a cost. Although these goods are socially important and are in the nature of merit goods, the economic principles do not require that these goods be provided for free. If the government decides to provide these goods for free, then it will have to levy a higher tax on the citizens to finance these goods for free. This in turn misallocates the resources on one hand, and on the other, affects the ability to work, save and invest with the economic outcome becoming inefficient. Therefore, the government should not provide these goods for free.

a) When there are scarce resources to produce goods, the best way to ration in a market economy is through the pricing method. Pricing method involves buying goods by paying a price for the scarce goods. Those who can pay the price get the goods, whereas those who cannot pay, do not get the goods. It is this difference which gives rise to competition among individuals as well as acts as an incentive. As a result, individuals work in income-generating activities so as to be able to buy goods. With the increase in competition and with individuals working in income-generating activities, the demand increases, and the supply also increases to meet the increased demand. b) Grades are rationed on the basis of quality and performance in a class by conducting examinations. This acts like an incentive and influences student behavior by motivating them to compete with fellow-students and perform well in class as well as in examinations so as to get higher grades. If the highest grade is given on the basis of how much a teacher likes a student, then it will see a decline in the competition among students. Most of the students will now adopt the policy of pleasing the teacher to get high grades rather than working hard.

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