3 3 points total Identify the nature of the pitfall to sound

3. (3 points total) Identify the nature of the “pitfall” to sound economic reasoning represented by the following circumstances: a) (1 point) You are attending a concert and recognize that you will have a better view of proceedings if you stand—hence if everybody stood…everybody would have a better view. b) (2 points) You observe that consumption of beer and ice cream peak during the summer months and conclude that increased consumption of ice cream results in higher beer consumption.

4. (2points total) a) (1 point) You earn $50,000 per year. Your boss is impressed with your work performance and offers you a ten percent raise. What is your new annual income? b) (1point) A week later your boss receives news of the loss of a major client’s business and informs you that your income will be cut by ten percent. What is your new income?

Solution

a. In this case the pitfall is the fallacy of composition. It is the mistaken belief that what is good for one person would be good for everyone.

b. The pitfall in this observation is fallacy of causation. Just because the consumption of ice cream and beer is increasing simulateneously, it does not mean that one is the cause of another.

4. a When the income is $50,000 per year and there is a ten percent raise in income. The new income becomes

$50,000(1+0.1)

=$55000

When there is a 10% decrease in this income, the new income becomes

$55,000(1-0.1)

=$49,500