1. Allocation mechanisms (tradition, market, command); property rights (private, state, communal); incentives (material, moral, coercive); and the extent to which decision making is centralized or decentralized are the big four criteria.
2. This question harkens to the Economic Calculation debate between Mises and Lange and the results of our in-class experiment. Can central planners really take into account all the varied preferences of many consumers? How do central planners know how much any particular individual values a commodity? Such information is necessary in order to "plan" the "right amount" of any commodity.
3. We did this one in class.
4. During war time resources must be mobilized very quickly for a common purpose. Perhaps markets are not very good at quickly mobilizing resources to one common purpose--after all, markets are very decentralized, and tend to cater to individual preferences. Not everybody might support the war effort under a free market approach.
5. We did this one in class.
6. GDP measures the market value of all final goods and services produced within a country's border (no matter who owns the productive resources). GNP measures the market value of all final goods and services produced by a nation's citizens (no matter where they live).
7. In order to make it appear that my country's income distribution is equally distributed, I would report labor income (not wealth, since it is more unequally distributed) for a household (not individual, since it is more unequally distributed) after taxes (since before tax income is more unequally distributed) but including transfer payments (like various welfare payments). I would compare my country's income distribution with a country that has a very uneven income distribution.
8. Do you think we can ever get everyone to agree on the same criteria? Do we all interpret the data in the same way?
9. The answer is in your textbook.
10. This is for you to ponder.
11. We briefly addressed this in class.
12. Profit is the incentive to engage in an activity. Profit helps guide resources between different types of activities. For example, if the auto industry is earning negative profits and the truck industry is earning positive profits, then resources will flow from the auto industry to the truck industry.
13. Prices help guide resources also. Prices signal the relative scarcity of a product. If there is a shortage of a product, then price will tend to rise (thereby encouraging producers to produce more and consumer to buy less). If there is a surplus of a product, then price will tend to fall (thereby encouraging producers to produce less and consumers to buy more).
14. Let me suggest the postal service as one. What about libraries? What else can you think of?
15. See #10 above.
16. Milk Market
a) P = 175; Q = 12.5
b) CS = 781.25; PS = 781.25
c) Qd= 20; Qs= 5; a shortage exists; the sum of CS + PS = 1000, which is
lower than part (b).
d) Qd= 10; Qs= 15; a surplus exists; the sum of CS + PS = 625, which is
lower than part (b).
17. We did this one as homework.
18. This is straight out of the notes and book.
19. Mises argued that prices were not "rational" under socialism since their was no private ownership of resources. Prices did not reflect real costs of production and real consumer preferences. Lange argued that prices could be set by an iterative process so as to mimic the workings of a market. He also argued that planning could avoid the pitfalls associated with a market capitalist economy
20. A soft budget constaint occurs when state owned enterprises receive operating subsidies from the government. Such enterprises face very little incentive to minimize their costs since they know the state will always bail them out in tough times.
21. Check your book.
22.
23. See the summary at the end of Chapter 4.
24. See the summary at the end of Chapter 4.
25.
26. In part it depends on how effectively the funds raised through zakat are redirected to the those in need. Like any tax system, the impact on income inequality depends on the income-generating incentives of the system. If the system simply encourages free riders, then lower income individuals may not have incentives to improve their job skills in the long run.
27. We did this one in class.
28.