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Chapter 1: Q 2 (page 13)
Under the rationality assumption, could a woman potentially take into account her family's welfare as well as her own when considering having another child? Explain your reasoning.
Yes, it can be considered as the rationality assumption takes into consideration every possible choice.
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During her years of college, Dominique discovered that her three favorite subjects were astronomy, chemistry, and political science. She chose to major in astronomy because she had seen data indicating that science majors earn higher-than-average wages and because she liked astronomy better than both chemistry and political science. Upon graduation, however, she learned that average wages in chemistry fields were percent higher than average wages earned by astronomers. Did Dominique's behavior violate the rationality assumption?
Which of the following predictions appear(s) to follow from a model based on the assumption that rational, self-interested individuals respond to
incentives?
(a) For every 10 exam points Myrna must earn in order to pass her economics course and meet her graduation requirements, she will study one additional hour for her economics test next week.
(b) A coin toss will best predict Leonardo’s decision about whether to purchase an expensive business suit or an inexpensive casual outfit to wear next week when he interviews for a high-paying job he is seeking.
(c) Celeste, who uses earnings from her regularly scheduled hours of part-time work to pay for her room and board at college, will decide to buy a newly released DVD this week only if she is able to work two additional hours.
Consider two models for estimating, in advance of an election, the shares of votes that will go to rival candidates. According to one model, pollsters’ surveys of a randomly chosen set of registered voters before an election can be used to forecast the percentage of votes that each candidate will receive. This first model relies on the assumption that unpaid survey respondents will give truthful responses about how they will vote and that they will actually cast a ballot in the election. The other model uses prices of financial assets (legally binding IOUs) issued by the Iowa Electronic Markets, operated by the University of Iowa, to predict electoral outcomes. The final payments received by owners of these assets, which can be bought or sold during the weeks and days preceding an election, depending on the shares of votes the candidates actually end up receiving. This second model assumes that owners of these assets wish to earn the highest possible returns, and it indicates that the market prices of these assets provide an indication of the percentage of votes that each candidate will actually receive on the day of the election.
(a) Which of these two models for forecasting electoral results is more firmly based on the rationality assumption of economics?
(b) How would an economist evaluate which is the better model for forecasting electoral outcomes?
How will the long-run adjustment of Egyptian cotton supply from the elimination of the subsidy likely affect the number of suppliers - that is, Egyptian cotton farmers? Explain.
Consider the following statements, based on a positive economic analysis that assumes that all other things remain constant. For each, list one other thing that might change and thus offset the outcome stated.
(a) Increased demand for laptop computers will drive up their price.
(b) Falling gasoline prices will result in additional vacation travel.
(c) A reduction of income tax rates will result in more people working.
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