Critical Thinking Questions
Think back to a purchase that you made recently. How would you describe your thinking before you made that purchase?
The rules of politics are not always the same as the rules of economics. In discussions of setting budgets for government agencies, there is a strategy called closing the Washington monument. When an agency faces the unwelcome prospect of a budget cut, it may decide to close a high-visibility attraction enjoyed by many people (like the Washington monument). Explain in terms of diminishing marginal utility why the Washington monument strategy is so misleading. Hint If you are really trying to make the best of a budget cut, should you cut the items in your budget with the highest marginal utility or the lowest marginal utility? Does the Washington monument strategy cut the items with the highest marginal utility or the lowest marginal utility?
Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, if it is an inferior good, what must be true of the income elasticity of the other good you buy?
In the labor-leisure choice model, what is the price of leisure?
Think about the backward-bending part of the labor supply curve. Why would someone work less as a result of a higher wage rate?
What would be the substitution effect and the income effect of a wage increase?
Visit the BLS website and determine if education level, race/ethnicity, or gender appear to impact labor versus leisure choices.
What do you think accounts for the wide range of savings rates in different countries?
What assumptions does the model of intertemporal choice make that are not likely true in the real world and would make the model harder to use in practice?