Suppose that Darnell, an economist from an AM talk radio program, and Eleanor, an economist from a school of industrial relations, are arguing over government bailouts. The following dialogue shows an excerpt from their debate:

Eleanor: Thanks to recent financial crises, the concept of bailouts is a hot topic for debate among everyone these days.

Darnell: Indeed, it's gotten crazy! A government bailout of severely distressed financial firms is unnecessary because free markets will properly price assets.

Eleanor: I don't know about that. Without a bailout of severely distressed financial firms, the economy will experience a deep recession.

The disagreement between these economists is most likely due to (differences in scientific judgments / differences in perception versus reality / differences in values).

Despite such differences, with which proposition are two economists chosen at random most likely to agree?

a. Business managers ought to be more concerned with minimizing costs than with maximizing profit.

b. Central banks should focus more on maintaining low unemployment than on maintaining low inflation.

c. Employers should not be restricted from outsourcing work to foreign nations.

Darnell: I don't agree with them. Government bailout of financially distressed firms is not necessary at all. The free market (capitalist) economy will adjust itself. It will properly price assets according to the prevailing condition in the economy. Hence, demanders will gain for now by bringing the market prices down and suppliers will sell at that price. With the way money circulates, the demanders - who are presently at gain - will have reasonable savings and that will translate to investment and some of these distressed companies will see funds to borrow and then production will boom again.

[Let me cut in here and bring in my answer from the 3 options - answer (A)]

If the market is left to readjust itself and producers(business men) see funds to borrow, BUSINESS MANAGERS OUGHT TO BE MORE CONCERNED WITH MINIMIZING COST THAN WITH MAXIMIZING PROFITS.

Economics is all about management. Even if the government was to pour out funds for bailout. The firms should forget about making profit (like the amounts they used to). They can let their marginal cost equate marginal revenue. For this trying time, they will have to endure until a period of boom draws near.

Eleanor: Without a bailout of these distressed firms, the economy will suffer a deep recession.

A recession is a period of low income, low production, low demand, low savings, low export earnings (foreign exchange), and low Gross Domestic Product.

Like I already answered above; even if the government was to bailout those companies, they should be more concerned with achieving minimum possible costs of production.

If the government doesn't give the bailout, the economy is already in recession as it stands so there might not be much more difference if it falls a little more and if it is a free market economy, the forces of demand and supply might be effective in readjusting and resuscitating the economy!

akindeleot akindeleot · Answer 2 · 2020-04-20T08:55:16+02:00

Answer:

a)

The disagreement between these economists is most likely due to differences in perception versus reality.

b)

b. Central banks should focus more on maintaining low unemployment than on maintaining low inflation.

Explanation:

a) This is because Darnell is talking from fact that free markets always regulate asset prices (which is one perception) and Eleanor does not know about it. Eleanor only knows (the other realistic effect) that without a bailout of severely distressed financial firms, the economy will experience a deep recession.

b) Two economists chosen at random will most likely agree that Central banks should focus more on maintaining low unemployment than on maintaining low inflation, because economically, high employment rate is a more sustainable solution to inflation.