Check Yourself Solutions for Chapter 22 through Chapter 25

Chapter 22-1

1. Workers sometimes fear that if they work harder under a piece rate system, they will work themselves out of a job. Lincoln’s policy of guaranteed employment reassures workers that productivity will always work to their advantage, not to their detriment.

2. It is sometimes said that the word “tips” stands for “To Insure Prompt Service.” Certainly, the idea is that restaurant customers will give bigger tips the better the service, thus giving waiters an incentive to be attentive. Thus, we would predict that waiters would be less attentive in Europe where the tip is typically automatic than in America where it usually is not.

Chapter 22-2

1. Professors have an incentive to be known as hard graders because this reputation will keep away all but the serious students and maybe also all but the brightest students. Grading on a curve would encourage the usual diverse spectrum of students, from serious to indifferent and from smart to struggling.

2. In a tournament, one worker’s gain is another’s loss. Sometimes tournaments can encourage too much competition by discouraging cooperation. If a firm wants its sales staff to work together to land sales, for example, then it would not want a strong tournament scheme. Professors who want their students to work together on projects should not grade on a curve.

Chapter 22-3

1. A famous paper in economics calculated that, on average, $10 spent on gifts was worth only $8 to the gift recipients. In other words, when your Uncle gives you $10 in cash, you get $10 worth of utility, but when your Uncle gives you a $10 pair of socks, on average, you get only $8 worth of utility. Thus, according to the author of the study, Joel Waldfogel, Christmas wastes billions of dollars. Even though most people understand this idea when it is explained to them, we don’t see a big shift to giving cash. Why not? Perhaps gift giving is valuable precisely because it is challenging. If you spend $10 giving something to someone that they value for $50, this shows how much you must really understand and care for them. Or perhaps we want the gift giver to buy something for us that we would not have bought for ourselves. Or perhaps people give gifts to signal something about themselves. Giving someone a CD of Bach sonatas says something about you that a gift of $15 does not. Understanding the answer to this question may tell us a lot about social life. See Waldfogel, Joel. 1993, December. The deadweight loss of Christmas. The American Economic Review 83(5): 1328–1336.

   B-17

2. Maybe. Maybe not. If we pay for grades, some people worry that this will stifle the love of learning and perhaps send the message that getting good grades is like a job that the student is free to quit at any time. A number of experiments are currently under way testing these ideas.

Chapter 23-1

Chapter 23-2

1. Investing in the stocks of other countries helps to diversify your investments because the economies of other countries do not always rise and fall at the same time as the U.S. economy. If all economies tended to rise and fall together, there would not be any large benefits in diversifying across countries.

2. If many people dream of owning a football or baseball team, it is likely that the rewards to owning one go beyond monetary rewards. Thus, the monetary return on these assets is likely to be relatively low.

Chapter 23-3

Chapter 24-1

Chapter 24-2

Chapter 25-1

1. 
2. 

3. No, the relative price of pizza has not changed.

Chapter 25-2

1. Indifference curves can never cross because each consumption bundle must correspond to a unique total utility level.

2. Indifference curves must have a negative slope because more is better.