Tutorial Answers (Week 1) 2.

According to the question, you have to compare the benefits (psychological benefits) to the costs (airfare, hotel and forgone wages). However, benefits of something are psychological, such as going on a vacation is not easy to measure since it might be differs from one individual to another. There are two ways to think about the benefits: a) Compare the vacation with what you would do in its place (relax, peace environment and chance to spend quality time with your family). At the same time, imagine that if you decide not go on vacation, would you buy something like a new set of golf clubs/gadget/branded handbag etc (something that you can see and you fell satisfied). Then you can decide if you would rather have the new golf clubs/gadget/handbag or the vacation. b) A second way is to think about how hard you had to work to earn the money to pay for the vacation. You can then decide if the psychological benefits of the vacation were worth the psychological cost of working. Attention: As I mentioned in the class, this question basically the application of Principle 1, 2,3 & 4. So make sure you understand the concepts of trade-off, opportunity cost, people think at margin and people react to incentives. Is trade-off and opportunity cost is the same thing? If not, how to differentiate it? Please refer to this link so that you understand these concepts clearly: http://www.reffonomics.com/TRB/chapter1/opportunitycost.swf.

10. We know that market are usually a good way to organize economic activity (Principle 6). Capitalism/market power has a central assumption that property rights encourage their holders to develop property, generate wealth & and efficiently allocate resources based on the operations of the markets. However, if a nation/country has corruption problems (police and court system) so it will fail to enforce individual property rights (refer to your note on Principle 7), including the rights over the goods and services produced by households and firms. If this happen, firms will not choose to produce products and individuals will choose not to work if there is no guarantee that they will receive payment for their efforts. Therefore, these countries end up with a lower standard of living (because there are less supply of goods & services in the economy).

15. Target: To reduce the rate of inflation. As you already learnt in Macroeconomics, the cause of inflation is when there are increase in money supply (Ms)/government print too much money. So in order to reduce the inflation, policymaker needs to reduce the Ms. When Ms decrease, households will also reduce their spending which also means that less demand of goods and services in the economy. This will cause firms to lower their price (so that households will buy their product) but at the same time firms also need to reduce their supply of goods/ services because lower return in terms of their profits. This will lead to the increase in cost of production for the firms and firms need to fire/sack some of their workers. So at the end it will lead to increase in unemployment rate in the short run (remember the relationship between inflation rate and unemployment rate are generally in negative correlation). Thus at the end the policymaker faces a trade-off between the benefits of lower inflation compared to the cost of higher unemployment. So as a policymaker that wants to decide whether to reduce inflation rate or not, the policymaker needs to know: a) What cause inflation and unemployment? b) What determines the trade-off between inflation and unemployment? c) Policymaker also needs to understand how households and firms will adjust to a decrease in the Ms. How much will spending decline and how much will firms lower their outputs?