Solution Manual For M Economics the Basics 4th Edition By Mike Mandel

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Solution Manual For M Economics the Basics 4th Edition By Mike Mandel Chapter 1 Introduction Answers to End-of-Chapter Problems 1.

Q: Economic activity around the world is mainly organized by: a) internet connections. b) family connections. c) informal arrangements. d) market transactions.

A: d) market for transactions.

Explanation: Today the vast majority of economic activity worldwide is organized by market transactions, which are activities that produce and exchange goods and services that other people are willing to pay for. From poor rice farmers in Cambodia to multi-millionaire investment bankers on Wall Street, the market rules.

2.

Q: In the 10 years since the Great Recession, the labor market and housing market recovered: a) in every country. b) in most areas of the United States, but not everywhere. c) in every part of the United States.

A: b) in most areas of the United States, but not everywhere.

Explanation: Since the Great Recession, most areas in the United States have recovered.

During the recovery phase, not all parts of the country experienced growth at the same time.

2.

Q: Technological change a) moves faster in some industries than others. b) is found equally in all parts of the economy. c) moves fastest in the energy sector. d) never benefits the economy.

A: a) moves faster in some industries than others.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Explanation: Technological change is uneven, moving much faster in some industries than others. Although information technology has evolved rapidly in recent decades, the pace of change in energy technologies has been much slower.

4.

Q: One benefit of globalization is a) higher prices for most consumers. b) lower prices for most consumers. c) less international communication between businesses. d) a lower standard of living for most people.

A: b) lower prices for most consumers.

Explanation: For a rich country like the United States, a big benefit of foreign trade is access to cheaper goods and services.

5.

Q: Many people have mixed feelings about financial markets because financial markets a) can experience violent swings. b) can work only in a centrally planned economy. c) only hurt the economy. d) always go down.

A: a) can experience violent swings.

Explanation: Most people justifiably have mixed feelings about financial markets, which can experience violent swings. For Americans who have a lot of their retirement money in the stock market, these downturns can seem devastating. Over the long run— say, 20 years—the stock market has historically almost always gone up. But in the short run it is subject to wide swings that can create large fortunes or steal hard-earned investments.

6.

Q: For each of the following, indicate whether it is more likely to be the result of economic competition or government intervention. a) Protection against unsafe drugs. b) Rapid innovation. c) Help for poor families. d) Strong economic growth.

A: a) government intervention; b) economic competition; c) government intervention; d) economic competition Explanation: a) Government intervention represents the actions taken by government to affect the economy. b) Economic competition is the effort by people and businesses to achieve a desirable outcome given what everyone else is doing. c) Government intervention represents the actions taken by government to affect the economy. d) Economic competition provides stimulus for cost-savings, new efficiencies, and innovation that results in economic growth.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

7.

Q: At its extreme, a laissez-faire approach to the economy means no government regulation at all. Let‘s suppose we got rid of the rule that you need a medical degree to practice medicine. One disadvantage of such a change would be a) more time spent in waiting rooms. b) fewer doctors. c) a higher price for most medical care. d) a lower quality for most medical care.

A: d) a lower quality for most medical care.

Explanation: Without a medical degree and its associated education and training, there would be no assurance of the quality of medical services delivered. Consumers would have to determine skill through trial and error, which could result in increased fatalities.

8.

Q: One indicator of prosperity is gross domestic product. Gross domestic product measures the economy by a) adding up annual household income. b) looking only at household consumption. c) counting the dollar value of the total output of a national economy over a year. d) measuring annual wages and benefits.

A: c) counting the dollar value of the total output of a national economy over a year.

Explanation: There are plenty of ways to measure an economy. One key indicator is known as the gross domestic product (GDP), which is the dollar value of the total output of a national economy over a year.

9.

Q: If the government safety net were to disappear, which of the following outcomes would be likely to occur? a) Elderly Americans would live longer. b) Poor families would be able to buy more food. c) The income and wealth gap between rich and poor would narrow. d) The U.S. government would spend less on health care.

A: b and d.

Explanation: The safety net makes an enormous difference in the well-being of low-income households. The Supplemental Nutrition Assistance Program (SNAP), for example, provided low-cost food to roughly 47 million Americans in 2014, with the average person getting $1,500 in benefits. Medicaid helped about 72 million low-income people with medical payments in 2016. And the earned income tax credit—a tax program designed to help low-income wage earners—gave an average benefit of over $2,500 to 27 million U.S. tax filers.

10.

Q: Disagreements among economists are a) unusual. b) limited to health care and education. c) frequent when considering the appropriate degree of government intervention.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

d) rare when considering new technologies.

A: c) frequent when considering the appropriate degree of government intervention.

Explanation: In some areas of economics there is little disagreement. However, plenty of important policy questions divide economists when it comes to the right amount of government intervention in the economy.

11.

Q: Is the following statement true or false? Reputable economists agree that the response to the Great Recession was the appropriate level of intervention. (LO1-5) A: False.

Explanation: Reputable economists disagree about whether the government‘s response to the Great Recession was too big, too small, or just right. There is debate over how big the government‘s role should be in health, education, and retirement. Likewise, there is no consensus among economists — or anyone else, for that matter—about how best to improve the educational system. An important ongoing controversy concerns the right level of federal taxes.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Chapter 1 Introduction

Answers to APPENDIX Problems 1.

Q: The following graph plots the number of unemployed workers in the United States from 2000 to 2018. What is the number of unemployed workers in 2007? a) 4 million b) 7 million c) 9 million d) 14 million

A: b) 7 million Explanation: Reviewing the graph, and focusing on 2017, the bar reaches the height of 7 million.

2.

Q: Which year in the graph shows the largest number of unemployed workers? Which year shows the lowest number of unemployed workers?

A: 2010; 2000.

Explanation: Reviewing the graph and comparing the bars, the bar for the year 2000 is the lowest of these, and the bar for the year 2010 is the highest. There were 5.5 million unemployed workers in the year 2000 and 14.8 million unemployed workers in 2010.

3.

Q: The following table reports on the average price of a gallon of unleaded gasoline in the United States, rounded to the nearest 10 cents.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Average Price of a Gallon of Unleaded Gasoline (To the nearest 10 cents) 2004 1.90 2005 2.30 2006 2.60 2007 2.80 2008 3.30 2009 2.40 2010 2.80 2011 3.50 2012 3.60 2013 3.50 2014 3.40 2015 2.40 2016 2.10 2017 2.40 2018 2.70 a) Plot the points to make a line graph. b) From 2004 to 2008, is the line upward-sloping or downward-sloping? c) From 2016 to 2018, is the line upward-sloping or downward-sloping? d) In what year is the price of gasoline the highest?

A:

a) b) Upward-sloping c) Upward sloping 6

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

d) 2012 Explanation: From 2004 to 2008, the line is upward-sloping.

From 2016 to 2018, the line is upward-sloping.

2012 was the highest price of gasoline.

4.

Q: At a (hypothetical) minor league baseball stadium, the team owner has tried four different prices for tickets and has found that attendance per game varies, according to the table shown at right. Graph this data, with attendance on the horizontal axis and ticket price on the vertical axis.

Is this graph upward- or downward-sloping?

Attendance per Gam (in Thousands) 5 10 15 20

Ticket Price $15 10 5 3

A: The graph is downward-sloping.

Explanation: There is an inverse relationship between the price per ticket and attendance. This graph is downward-sloping.

Chapter 2 7

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Demand and Supply: The Basics of the Market Economy Answers to End-of-Chapter Problems 1.

Q: Which of the following is an example of a seller in a market? a) A clothing store selling a blue dress. b) A student paying tuition. c) A department store hiring a cashier. d) An airplane passenger buying a ticket.

A: a) A clothing store selling a blue dress.

Explanation: Buyers in markets purchase goods or services and pay for them. Sellers in markets offer goods or services for purchase at some price.

2.

Q: Which of the following is an example of a buyer in a market? a) An airline offering low fares for seats on a flight. b) A student paying for a haircut. c) A restaurant selling a meal. d) An amusement park selling admissions to a ride.

A: b) A student paying for a haircut.

Explanation: Buyers in markets purchase goods or services and pay for them. Sellers in markets offer goods or services for purchase at some price 3.

Q: Which of the following is an example of a global market? a) The market for haircuts in New York City. b) The market for dry cleaning in St. Louis. c) The market for homes in Dallas. d) The market for crude oil.

A: d) The market for crude oil.

Explanation: Global markets have operations in multiple countries. They allow buyers and sellers to be anywhere in the world. Global markets are often the province of globespanning companies called multinationals.

4.

Q: The typical price at which a good or service sells in a market is the: a) sale price. b) market price. c) negotiated price. d) volume discount.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

A: b) market price Explanation: The market price is the typical price at which a good or service sells in a market. A sale price, for example, is intentionally set below the market price to stimulate purchases. Negotiated prices are determined by individual buyers and sellers on a caseby-case basis. A volume discount is a lower price for making a large purchase.

5.

Q: When a person becomes unwilling to consume more of a good even at a zero price, he or she has reached: a) the market price. b) ceteris paribus. c) satiation. d) the sale price.

A: c) satiation.

Explanation: You reach satiation at the point where the value to you of consuming any more of the good disappears even if the price is zero.

6.

Q: The demand curve is the graphical representation of the: a) opportunity cost. b) sale price. c) supply schedule. d) demand schedule.

A: d) demand schedule.

Explanation: The demand curve is the graphical representation of the demand schedule.

It shows the various quantities consumers are willing and able to purchase at various prices.

7.

Q: Sam lives in a small town with only one restaurant. The restaurant, run by an eccentric old gentleman, offers a dinner menu on which every dish is the same price. Each month he posts the price of the meal in the window. The following table lists the number of times Sam goes out to dinner during the month, according to the posted price of the dinner: Price per Meal (Dollars)

Quantity Demanded (Number of Times Sam Eats at the Restaurant in the Month) 24 12 8 6

$6.00 $12.00 $18.00 $24.00 9

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

$30.00 $36.00

4 2

a) Plot the demand curve for meals. b) How many times per month does Sam eat at the restaurant if the price per meal is $18?

A: a)

b) Sam will eat at the restaurant 8 times during the month.

Explanation: a) The demand curve for restaurant meals is a downward-sloping diagonal curve between points (2, $36) and (24, $6). b) The demand curve shows the various quantities consumers are willing and able to buy at various prices. When the price is $18, the quantity demanded will be 8 restaurant meals per month.

8.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Q: All other things being equal, when the price of a good increases, the quantity supplied typically: a) stays the same. b) decreases. c) increases.

A: c) increases.

Explanation: All other things being equal, when the price of a good increases, the quantity supplied typically increases. A higher price is attractive to producers.

9.

Q: In a small town there's only one construction company that builds new homes. The following table lists the number of new homes built in a year at different selling prices: Quantity Supplied (Number of New Sales Price of a New Home (Dollars) Homes Built in a Year) $150,000 2 $200,000 10 $250,000 16 $300,000 20 $350,000 23 a) Plot the supply curve for the new homes. b) How many homes are built if the price is $250,000 per home?

A: a)

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

b) 16 homes.

Explanation: a) The supply curve for new homes is an upward-sloping curve between points (2, $150,000) and (23, $350,000). The supply curve shows the various quantities producers are willing and able to supply at various prices. b) When the price is $250,000, the quantity supplied will be 16 homes.

10.

Q: The first true smartphone, the iPhone, was introduced in 2007. Since then, billions of smartphones have been sold globally. Which of the following statements is true? a) The rise of the smartphone did not lead to any new markets. b) The rise of the smartphone created many new markets, including the market for smartphone applications (apps). c) The only new market created is the market for smartphones. d) The price of smartphones is lower than the price of the phones they replace.

A: b) The rise of the smartphone created many new markets, including the market for smartphone applications (apps).

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Explanation: The rise of the smartphone created many new markets, including the market for iPhone applications (apps). Other related markets may still emerge.

Chapter 3 Market Equilibrium and Shifts Answers to End-of-Chapter Problems 1.

Q: The market for new automobiles has excess demand if: a) potential buyers don‘t have to wait for the car they want. b) car dealers have more autos than they can sell at the market price. c) car dealers temporarily run out of autos to sell at the market price.

A: c) car dealers temporarily run out of autos to sell at the market price.

Explanation: When car dealers have fewer autos than they can sell at the market price, the quantity demanded is greater than the quantity supplied at the market price.

2.

Q: The following table reports the (hypothetical) market supply and demand schedules for smartphones.

Price per phone (Dollars) $100 $250 $400 $550 $700 $850

Quantity Demanded (Millions) 7 5 4 3 2 1

Quantity Supplied (Millions) 0 1 2 3 4 5

a) Plot the supply and demand curves. b) When the price per phone is $400, what is the quantity demanded? What is the quantity supplied? Is the market in excess supply, excess demand, or equilibrium? c) When the price per phone is $700, what is the quantity demanded? What is the quantity supplied? Is the market in excess supply excess demand, or equilibrium? d) Label the equilibrium point. What is the equilibrium price for the phone market?

What is the equilibrium quantity?

A: a)

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

b) Quantity demanded: 4 million; Quantity supplied: 2 million; Excess demand c) Quantity demanded: 2 million: Quantity supplied: 4 million; Excess supply d) Equilibrium price: $550; Equilibrium quantity: 3 million Explanation: a)

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

b) At a price of $400, the quantity demanded is 4 million smartphones. The quantity supplied at this price is 2 million phones. There is excess demand since quantity demanded exceeds quantity supplied. c) At a price of $700, the quantity demanded is 2 million smartphones. The quantity supplied at this price is 4 million phones. There is excess supply since quantity supplied exceeds quantity demanded. d) The equilibrium price is $550 because at this price the quantity demand and quantity supplied are equal. The equilibrium quantity is 3 million smartphones.

3.

Q: In December 2013, the new versions of the Microsoft Xbox and Sony Playstation 4 game consoles were in short supply. Many retailers ran out of stock, and especially around the holiday season, parents ran from store to store hoping to find a new game console to give their kids as a present. a) At the time, was the game console market facing a situation of excess demand, excess supply, or equilibrium? b) The list price for the Playstation 4 unit was $400. Was the equilibrium price higher than, lower than, or equal to $400?

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

c) Sony sold 4.2 million Playstation 4 units in the United States in 2013. Was the equilibrium quantity higher than, lower than, or equal to 4.2 million?

A: a) Excess demand b) Higher than $400 c) Higher than 4.2 million Explanation: a) At the time, since the console was in short supply, the market for Microsoft Xboxes and Sony Playstation 4s was facing a situation of excess demand. b) The equilibrium price was higher than the list price of $400 because the quantity demanded exceeded the quantity supplied. c) Because the quantity demanded exceeded the quantity supplied, and the quantity supplied was 4.2 million, the equilibrium quantity was higher than 4.2 million.

4.

Q: The following graph represents the market for yachts.

a) Label the supply and demand curves. b) Label the market equilibrium. c) Suppose there is a sudden increase in the demand for yachts because there are more billionaires in emerging markets. Show how the demand curve shifts, and label the new market equilibrium.

A: a)

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

b) P2 c) P1 Explanation: a) The upward-sloping red line is the supply curve. The downward-sloping blue curve is the demand curve. b) Equilibrium is established when the quantity demanded and the quantity supplied are equal (where the two curves intersect). The corresponding price and quantity are the equilibrium price and quantity. This occurs at P2. c) A demand increase means there is a larger quantity demanded at each given price, or a rightward shift of the demand curve. The new market equilibrium price would be the higher price at P1, where the supply and demand curves intersect.

5.

Q: A sudden discovery of an enormous gold mine in Florida would mean a: a) rightward shift in the supply curve for gold. b) rightward shift in the demand curve for gold. c) leftward shift in the supply curve for gold. d) leftward shift in the demand curve for gold.

A: a) rightward shift in the supply curve for gold.

Explanation: A sudden discovery of an enormous gold mine in Florida would mean a rightward shift of the supply curve since more gold would be available.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

6.

Q: In a shorefront tourist town, a hurricane washes away the beach. All of the town's hotels, however, are still intact, but the beach that was an added value to vacationers is no longer available. a) Does the supply curve for hotel rooms shift to the left, shift to the right, or stay in the same place? Explain your answer. b) Does the demand curve for hotel rooms shift to the left, shift to the right, or stay in the same place? Explain your answer. c) After the hurricane, what happens to the equilibrium price and quantity of hotel rooms? d) Suppose the neighboring town still has its beach. After the hurricane, what happens to the market for hotel rooms in that town?

A: a) Stay in the same place b) Shift to the left c) Decrease d) Shift to the right Explanation: a) The supply curve for hotel rooms stays in the same place because the number of hotels that are available to be rented has not changed. b) The demand curve for hotel rooms would shift to the left because potential customers are no longer as willing to stay in this tourist town because there is no longer a beach.

This makes these hotel rooms less valuable, which decreases demand for them. c) Since the demand has shifted to the left, there is movement down the supply curve.

As a result, the equilibrium price and quantity of hotel rooms both fall. d) After the hurricane, nothing happens to the supply curve for hotel rooms, since nothing has happened to affect the availability of hotel rooms in the neighboring town. However, since now there are fewer towns with beaches, the fact that the neighboring town still has a beach makes the rooms there relatively more valuable.

People are more willing to stay there than they previously were, regardless of the price. This shifts the demand curve for the hotel rooms in this town to the right, which increases both equilibrium price and equilibrium quantity.

7.

Q: Here are some examples of new technologies and the markets they affect. Identify whether each of these is a supply or demand shift, and describe its impact on equilibrium price and quantity.

Technological Change

Affected Market

Supply or Demand Shift?

A new way to cheaply generate

Market for electricity

?

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Impact on Equilibrium Price and Quantity ?

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

electricity from sunlight A new car engine that gets much better gas mileage A new additive for milk that improves its taste

Market for gasoline

?

?

Market for milk

?

?

A:

Technological Change

Supply or Demand Shift?

Affected Market

Impact on Equilibrium Price and Quantity

A new way to cheaply generate electricity from sunlight

Market for electricity

Supply shift (increase)

Equilibrium price falls; equilibrium quantity rises.

A new car engine that gets much better gas mileage

Market for gasoline

Demand shift (decrease)

Equilibrium price falls; equilibrium quantity falls.

A new additive for Market for milk Equilibrium price Demand shift (increase) milk that improves its rises; equilibrium taste quantity rises.

Explanation: A new method of producing a good or service at a lower cost will typically cause a shift of the supply curve. A rightward supply shift will typically decrease the equilibrium price and increase the equilibrium quantity. A new technology which reduces the quantity of a good or service needed from previous levels will typically cause a shift of the demand curve. A leftward demand shift will typically decrease the equilibrium price and quantity.

A new feature of a good or service which increases its perceived value from previous levels will typically cause a shift of the demand curve. A rightward demand shift will typically increase the equilibrium price and quantity. If a popular new method for selling a good or service is developed it will typically cause a shift of the demand curve for the existing good or service. A leftward demand shift will typically decrease the equilibrium price and quantity.

8.

Q: The following table reports spending on food in 2017 by households with incomes of less than $70,000 and by households with incomes greater than $150,000. ―Food eaten at home‖ refers mainly to food that is purchased at supermarkets and brought home. ―Food eaten away from home‖ refers mainly to food eaten at restaurants, though it also includes college dining rooms and similar situations.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Average Spending on Food Eaten at Home Average Spending on Food Eaten Away from Home

Households with Incomes Less Than $70,000 $3,400

Households with Incomes Greater Than $150,000 $7,000

$2,200

$7,300

a) How much do households with incomes of less than $70,000 spend on food eaten at home? Do they spend more on food at home or food away from home? b) How much do households with incomes greater than $150,000 spend on food eaten away from home? Do they spend more on food at home or food away from home? c) From this table, would you conclude that food eaten away from home is a normal good, a luxury good, or an inferior good? Is food eaten at home a normal good, a luxury good, or an inferior good? Explain your answers.

A: a) $3,400; at home a) $7,300; away from home b) luxury good; normal good Explanation: a) Households with incomes less than $70,000 per year spend $3,400 per year on food eaten at home. They spend more on food eaten at home b) Households with incomes greater than $150,000 per year spend $7,300 on food eaten away from home. They spend more on food eaten away from home. c) Food eaten away from home is definitely not an inferior good, since as income goes up, households spend more on it. The average income for households in the first column is $70,000 and the average income for households in the second column is $150,000.

The households in the second column spend almost four times as much on food eaten away from home even though their income is only a little over two times as high, making food eaten away from home a luxury good.

Food eaten at home is a normal good. The reasoning from above does not necessarily apply since households in the second column spend $7,000 / $3,400 = 2.05 times as much on it while their incomes are at least $150,000 / $70,000 = 2.14 times as high. This means that spending on food eaten at home increases at most just about in step with income, making it a normal good. Spending on food eaten at home does not increase sharply enough to make it a luxury good, and it cannot be an inferior good since wealthier households spend more on it than do poorer households.

9.

Q: In the early days of the internet, relatively few Americans had online access. Now more than three-quarters of Americans have access to the Internet. That suggests Internet access turned from: a) a normal good into a luxury good.

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b) a luxury good into an inferior good. c) a luxury good into a normal good.

A: c) a luxury good into a normal good.

Explanation: Internet access was initially expensive and not widely available. Over time as income increased, access increased as access became a normal good.

10.

Q: The store down the street increases the price of bananas by $2 per pound. As a result, most customers switch to buying candy instead. This is an example of what? a) Inelastic supply. b) Inelastic demand. c) Elastic demand. d) Elastic supply.

A: c) Elastic demand.

Explanation: The store down the street increases the price of bananas by $2 per pound.

As a result, most customers switch to buying candy instead. This is an example of elastic demand because customers switched away.

11.

Q: If the quantity supplied doesn‘t change very much, even if the price doubles, then: a) supply is inelastic. b) supply is elastic. c) demand is inelastic. d) demand is elastic.

A: a) supply is inelastic.

Explanation: If supply is inelastic, then the quantity supplied doesn‘t change much even if the price changes a lot. Elastic supply implies that a small price change has a big impact on quantity supplied.

Chapter 4 How Businesses Work Answers to End-of-Chapter Problems 1.

Q: A business has revenues of $40 million per month and costs of $28 million per month.

Its monthly profits are: a) $12 million. b) $36 million. c) $68 million. d) $144 million.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

A: a) $12 million.

Explanation: Profit is the difference between revenues and costs. Monthly profits are $40 million - $28 million = $12 million.

2.

Q: Some hospitals and private universities are nonprofit organizations. This means: a) their costs exceed their revenues. b) they do not seek to maximize their profits. c) they try to maximize revenues. d) they do not try to minimize costs.

A: b) they do not seek to maximize their profits.

Explanation: Nonprofit organizations, such as private universities and hospitals, also supply goods and services. Governments provide services, such as police and education.

And most child care activities are still done by parents or other household members; most families are not run 3.

Q: In 2017, Exelon Generation, an electric utility with nuclear power plants across the country, produced 219 gigawatt-hours of electricity (a gigawatt-hour is a unit of electricity able to power about 700,000 homes). The company had 15,000 U.S. employees. What is the average product of Exelon Generation?

A: 14.6 ± .01 gigawatt-hrs. per week Explanation: Average product (of labor) is defined as total output divided by total labor.

In other words, the output per hour or output per worker. Therefore, at American Electric Power, the average product of labor is 207 million megawatt-hours divided by 18,500 employees: 207,000,000 / 18,500 ≈ 11,190 megawatt-hours of electricity per worker.

(The exact answer is 11,189.1892.)

4.

Q: A medical office does MRI (magnetic resonance imaging) scans on patients. It has two MRI machines. Each scan requires a technician to run the MRI machine. The following is the production function for the office, which shows how many patients the technicians can scan.

Number of Number of Scans Marginal Product Average Product Technicians Completed per Day 1 5 ? ?

2 10 ?

5 3 14 ? ?

4 17 3 ?

5 20 ? ? a) Fill in the table with the appropriate marginal product and average product for each level of hiring. b) Graph the production function.

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c) Suppose the office buys a new type of MRI machine that that can do one extra scan per day. Show graphically what will happen to the production function.

A: a) The table, completed, should look like the one below: Number of Technicians 1 2 3 4 5

Number of Scans Completed per Day 5 10 14 17 20

Marginal Product 5 5 4 3 3

Average Product 5 5 4.67 4.25 4

b) A production function tells you, given the inputs, what the output is going to be. The output should be on the vertical axis and input on the horizontal axis. The production function should look like the one below.

The MRI production function for a medical office.

c) If the new type of MRI machine can perform scans faster, one would expect the production function, which shows the level of output for each given level of input, to increase. Therefore, the entire production function should shift upward, as shown below.

(The specific size of the upward shift may vary, but a correct graph will increase the number of scans completed for each possible number of technicians.)

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The MRI production function for a medical office with two types of MRI machines.

5.

Q: In the previous problem, suppose that the price of the labor input (the MRI technician) is $200 per day in wages and benefits. Suppose also that the capital input (the MRI machines) has a price of $150 per day for each machine, on a long-term lease. a) To do 10 scans in a day, how many technicians are needed? b) What is the labor cost of doing 10 scans in a day? c) What is the total cost of doing 10 scans per day (assuming there are two MRI machines in the office)? d) What is the variable cost of doing 17 scans in a day? e) What is the fixed cost of doing 17 scans in a day?

A: a) 2; b) $400; c) $700; d) $800; e) $300 Explanation: a) To do 10 scans per day, two technicians are required. b) The labor cost of doing 10 scans per day is 2 × $200 = $400. c) The total cost of doing 10 scans per day is the sum of the labor cost ($400 from above) and the capital cost (2 × $150 = $300). The total cost of doing 10 scans per day is $400 + $300 = $700. d) The variable cost of doing 17 scans per day is equal to the labor costs. The amount of labor being used can be changed from day to day, but the MRI machines are on a oneyear lease, so these do not constitute a variable, or short-term, cost. Therefore, the variable cost of doing 17 scans per day is the number of workers needed to perform 17 scans (4) times the compensation to each worker ($200): 4 × $200 = $800. e) Since the MRI machines are on a one-year lease, they are a fixed cost. Regardless of the level of production, the office currently has only two MRI machines. So the fixed cost of performing 17 scans in a day is still 2 × $150 = $300.

6.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Q: Think about a Starbucks coffee shop. Identify whether each of the following inputs is a fixed cost or a variable cost. a) An espresso machine. b) Electricity to run the machine. c) The lease on the store. d) Workers.

A: a) fixed cost; b) variable cost; c) fixed cost; d) variable cost Explanation: Fixed or long-term costs are more difficult to change and take longer to have an effect. Variable or short-term costs are those that can be quickly raised or lowered immediately.

7.

Q: A local handyman offers to install new windows in your home. The following is his cost function.

Number of Windows 0 1 2 3 4 5 6

Cost (Dollars) 200 300 400 500 650 850 1,100

Marginal Cost (Dollars) ? ? ? ? ? ?

a) Fill in the marginal cost column in the table. b) Graph the cost curve. c) What is the fixed cost of window installation?

A: a) The marginal cost is the added expense of producing one more unit of output.

The table, completed, should look like the one below: Number of Windows 0 1 2 3 4 5 6

Cost (Dollars) 200 300 400 500 650 850 1,100

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Marginal Cost (Dollars) 100 100 100 150 200 250

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

b) The horizontal axis measures output, and the vertical axis measures marginal cost. The cost curve graph should look like this:

c)

The fixed cost is the cost shown when the output is zero. In this case, the fixed cost is $200.

8.

Q: All other things being equal, a business making shirts would choose not to expand when a) marginal revenue per shirt equals $7, and marginal cost per shirt equals $10. b) marginal revenue per shirt equals $20, and marginal cost per shirt equals $10. c) marginal revenue per shirt equals $11, and marginal cost per shirt equals $10.

A: a) marginal revenue per shirt equals $7, and marginal cost per shirt equals $10.

Explanation: A business will keep expanding up to the point that marginal cost is equal to marginal revenue. When marginal revenue per shirt equals $7 and the marginal cost per shirt equals $10 the firm will continue to expand.

9.

Q: Below is the cost function for a bicycle repair shop, including the labor cost for the repair technicians.

Bicycles Repaired per Day (Number) 0 1 2 3

Cost (Dollars)

Marginal Cost (Dollars)

Revenue (Dollars)

Marginal Revenue (Dollars)

30 70 120 180

? ? ?

? ? ? ?

? ? ? ?

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

4 5 6 7 8

250 330 420 520 630

? ? ? ?

110

? ? ? ?

640

? ? ? ?

80

a) Fill in the blanks for marginal cost. Is the marginal cost increasing or decreasing? b) Suppose the market price for repairing a bicycle is $80. Fill in the blanks for the revenue and marginal revenue.

A: a) Marginal cost is increasing. b) The completed table (for parts A & B) should look like the one below.

Bicycles Marginal Marginal Cost Revenue Repaired Cost Revenue (Dollars) (Dollars) per Day (Dollars) (Dollars) (Number) 0 30 0 0 1 70 40 80 80 2 120 50 160 80 3 180 60 240 80 4 250 70 320 80 5 330 80 400 80 6 420 90 480 80 7 520 100 560 80 8 630 110 640 80 10.

Q: Using the table in problem 9, answer the following questions. a) How many bicycles must the store repair per day to maximize profits? (Remember the profit-maximizing rule.) b) Now suppose the market price for repairing a bicycle goes up to $100. How many bicycles will the shop repair?

A: a) 5; b) 7 Explanation: a) A profit-maximizing business will increase production as long as marginal revenue exceeds marginal cost. Therefore, this bicycle shop increases its profit by repairing additional bicycles until it repairs the 5th bicycle. At this point, repairing additional bicycles involves marginal cost greater than the marginal revenue. This firm should repair 5 bicycles per day. The profit here is negative, because cost ($410) is greater than revenue ($400). The bicycle repair shop is losing $10 per day. However, the cost of producing zero units is $100. This must be a fixed cost. Therefore, producing zero units would cause larger losses of $100 per day.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Bicycles Repaired per Day (Number) 0 1 2 3 4 5 6 7 8

Cost (Dollars)

Marginal Cost (Dollars)

Revenue (Dollars)

Marginal Revenue (Dollars)

30 70 120 180 250 330 420 520 630

0 50 50 60 70 80 90 100 110

0 80 160 240 320 400 480 560 640

0 80 80 80 80 80 80 80 80

b) In this case, the marginal revenue would increase to $100, so that the profitmaximizing rule would require that the repair shop repair any bicycles as long as the marginal cost of repairing the bicycle is lower than $100. Therefore, the profitmaximizing number of repairs would increase to 7 bicycles. Total profits would be $100 per day.

Bicycles Repaired per Day (Number) 0 1 2 3 4 5 6 7 8

Cost (Dollars)

Marginal Cost (Dollars)

Revenue (Dollars)

Marginal Revenue (Dollars)

100 150 200 260 330 410 500 600 710

0 50 50 60 70 80 90 100 110

0 100 200 300 400 500 600 700 800

0 100 100 100 100 100 100 100 100

Chapter 5 Competition and Market Power Answers to End-of-Chapter Problems

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1.

Q: Answer the following questions. a) Are standardized products easy to compare, hard to compare, or high priced? b) Are markets with one or two sellers more likely to be perfectly competitive, less likely to be perfectly competitive, or more likely to be innovative? c) In a perfectly competitive market, do buyers and sellers need information about prices so they can identify cheaters, gain market power, or find the current market price?

A: a) easy to compare; b) less likely to be perfectly competitive; c) find the current market price Explanation: a) Standardized products are easy to compare because of the standardization. b) Markets with one or two sellers are less likely to be perfectly competitive because there are fewer competitors to be concerned with. c) Buyers and sellers in a perfectly competitive market need information about prices so they can find the best deal as they shop around for a product. This is a competitive force.

2.

Q: Consider the following products. For each one, identify whether the market has one, few, or many sellers. a) Lettuce in the grocery store. b) Plane tickets from New York to Seattle. c) Tickets to a professional football game in your town. d) Passenger train service. e) Smartphones.

A: a) many sellers; b) many sellers; c) few sellers; d) few sellers; e) many sellers Explanation: a) Lettuce in the grocery store — This is a market with easy entry and exit and there will be many sellers. b) Plane tickets from New York to Seattle — There are many providers of air service for this coast to coast trip. c) Tickets to a professional football game in your town — There will likely be few sellers of these tickets: the ticket office at the stadium and one or more electronic ticket vendors. d) Passenger train service — There will be few sellers of passenger train service in any one town or city. e) Smart phones has many sellers — Most retail establishments such as Target, Best Buy, Staples sell smart phones.

3.

Q: The following table shows the cost function for a business producing beach chairs.

Quantity of Total Cost Beach Chairs (Dollars) Marginal Cost (Dollars) Produced(Number) 0 $3 1 $13 ?

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

a) F i l l

2 3 4

$24 $36 $49 $63

? ? ? ?

in the column for marginal cost. b) Assume the business is operating under conditions of perfect competition. If the market price is $14 per chair, how many chairs does the business produce? What is the total profit of the business? c) If the market price is $13 per chair, how many chairs does the business produce?

What is the total profit of the business?

A: a) see table below; b) 5 chairs, $7; c) 4 chairs, $3 Explanation: a) Quantity of Total Cost Beach Chairs (Dollars) Marginal Cost (Dollars) Produced(Number) 0 $3 1 $13 $10 2 $24 $11 3 $36 $12 4 $49 $13 5 $63 $14 b) If the market price is $14 per chair, the business will produce 5 chairs. The total profit of the business is total revenue minus total cost = ($14 × 5) - $63 = $7 c) If the market price is $13 per chair, the business will produce 4 chairs. The total profit of the business is total revenue minus total cost = ($13 × 4) - $49 = $3.

4.

Q: The following table shows the maximum amount five potential buyers are willing to pay for a car.

Maximum Amount He or She Would Pay for the Car Buyer 1 $40,000 Buyer 2 $35,000 Buyer 3 $30,000 Buyer 4 $25,000 Buyer 5 $20,000 a) What is the quantity demanded if cars sell for $30,000 each? b) Under conditions of perfect competition, how many cars are bought if the marginal cost of producing a car is $25,000? c) How many cars are bought if the marginal cost of producing a car falls to $20,000?

A: a) 3; b) 4; c) 5 Explanation: 30

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

a) If cars sell for $30,000 each there will be 3 cars demanded since Buyers 3, 4, and 5 would be willing to pay $30,000 or more. b) Under conditions of perfect competition, if the marginal cost of producing a car is $25,000 there will be 4 cars bought since Buyers 1, 2, 3, and 4 would be willing to pay $25,000 or more. c) If the marginal cost of producing a car falls to $20,000, there will be 5 cars bought since all buyers would be willing to pay $20,000 or more.

5.

Q: There are 15 hair salons in town, and the local haircut market is operating under conditions of perfect competition. a) What happens to the market supply curve in the short run if one of the hair salons goes out of business? Show your answer on a graph. b) What happens to the price of haircuts sold? Show your answer on a graph. c) What happens to the number of haircuts sold? Show your answer on a graph.

A: a) shift to the left

b) increase

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

c) decrease

Explanation: a) In the short-run, since a hair salon left the market, the market supply will shift to the left. b) In the short-run, the leftward shift of the supply curve will cause the price of haircuts to increase. c) In the short-run, the leftward shift of the supply curve will cause the number of haircuts to decrease.

6.

Q: Someone wants to open a new restaurant in town. Identify which of the following would be a barrier to entry. Explain. a) None of the available property in town is zoned for business use. b) The price of tablecloths has risen. c) Consumers buy only from businesses they know. d) The town requires all businesses to pay a hefty annual permit fee. e) The town requires new businesses to pay a hefty permit fee.

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A: a) barrier to entry; b) not a barrier to entry; c) not a barrier to entry; d) not a barrier to entry; e) barrier to entry Explanation: a) Yes. This would be a barrier to entry. In order for this person to open up a restaurant, some land would have to be rezoned for commercial use. b) No. This is not a barrier to entry in as much as it affects all potential entrants as well as all firms already in the market (assuming they have to regularly replace tablecloths). Costs will have gone up, but access to tablecloths has not changed. c) No. This may make it harder to earn a profit, but this does not prevent the firm from entering the market. Any potential entrant is just as able to enter the market as he or she would be in the case where consumers did not have this preference. d) No. Since this applies to all firms, it is not necessarily a barrier to entry. All firms face this cost, so all firms still remain equal in their ability to enter the market and run a restaurant in this town. e) Yes. Since this applies only to new firms, it causes firms to differ in their ability to be in the market. Those who are not already in the market have a much harder time running a restaurant in this market than do those who are already running restaurants.

7.

Q: You are running a restaurant under conditions of monopolistic competition. For each of the following situations, explain whether the demand curve you face shifts right, shifts left, or stays the same. a) Another restaurant opens across the street. b) You advertise in the local newspaper. c) You develop a tasty new dish that appeals to the local population.

A: a) demand shifts left; b) demand shifts right; c) demand shifts right Explanation: a) This shifts the demand curve for food at my restaurant to the left; demand decreases. b) If successful, this shifts the demand curve for food at my restaurant to the right; demand increases. c) If my new dish appeals to the tastes of buyers in my locale, then this will shift the demand curve for food at my restaurant to the right; demand increases.

8.

Q: A small business makes 1970s-style lava lamps (do an online search if you don‘t know what these are). There aren‘t many competitors. The business can sell the first few lamps for $30 each, but the business owners have found that they need to reduce the price if they want to sell more.

Number Total of Lava Lamps Sold Price Marginal Revenue Revenue 10 $30 ?

20 $25 ? ?

30 $23 ? ?

40 $21 ? ?

50 $19 ? ?

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

a) Fill in the table with the revenue and marginal revenue for each level of output.

(Marginal revenue is calculated here as the change in revenue divided by the change in quantity sold.) b) Suppose the marginal cost of making each lamp is $14. How many lamps should the business make to get the highest profit?

A: a) Number of Lava Lamps Sold 10 20 30 40 50

Price $30 $25 $23 $21 $19

Total Revenue $300 $500 $690 $840 $950

Marginal Revenue $20 $19 $15 $11

b) 40 lamps Explanation: a) See completed table b) If the marginal cost of producing a lava lamp is $14, then this firm should sell 40 lamps. Beyond 40 lamps, marginal revenue falls below $14, which would mean that producing lava lamps beyond the 40th lamp would cause profits to fall.

9.

Q: The following table shows the maximum amount five potential car buyers are willing to pay for each level of sales. Suppose that the cars are being sold by a car dealer operating as a monopoly (perhaps because there are no other car dealers in the market).

Maximum Amount He or She Would Pay for the Car Buyer 1 $40,000 Buyer 2 $35,000 Buyer 3 $30,000 Buyer 4 $25,000 Buyer 5 $20,000 a) What is the revenue if the price of the car is $30,000? b) If the marginal cost of each car is $20,000, how many cars will the monopolistic car dealer want to sell? What will the price be? c) How many cars will be sold in perfect competition?

A: a) $90,000; b) 3, $30,000; c) 5 Explanation: a) The revenue will equal the cars sold (buyers 1, 2 and 3) times $30,000, or $90,000. b) The monopolistic firm will want to sell where the MR = MC. The MC is $20,000.

The MR is $20,000 when there are 3 buyers at a price of $30,000.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

c) In perfect competition the price will equal the MC of $20,000. At this price, 5 cars will be sold.

Maximum Amount He Total Revenue = Marginal Revenue for a or She Would Pay for Price × Number of Buyers Monopolist the Car Buyer 1 $40,000 $40,000 × 1 = $40,000 $40,000 Buyer 2 $35,000 $35,000 × 2 = $70,000 $30,000 Buyer 3 $30,000 $30,000 × 3 = $90,000 $20,000 Buyer 4 $25,000 $25,000 × 4 = $100,000 $10,000 Buyer 5 $20,000 $20,000 × 5 = $100,000 0 10.

Q: In January 2019, Google performed almost 93 percent of all online searches worldwide. a) Clearly, Google is the choice of many people for searching. If Google started charging consumers for each search, would demand for its services go down a lot or a little? b) Does Google have market power in the market for searches, as defined in this chapter? c) Google does charge advertisers for placing their ads next to related searches. For example, if you search for ―Toyota,‖ you will see car-related ads. Do you think Google has market power in the market for online search advertising? Explain.

A: a) go down, but by how much is indeterminate; b) No, because they have not raised the price to provide the needed evidence; c) No, because there are many other advertising outlets.

Explanation: a) If demand is inelastic—that is, if buyers don‘t react much to price changes—then the monopolist can raise the price high above the competitive level. Suppose on an island only one store sells food. This store can push prices up a lot because there are no alternatives for food buyers. But in a monopolistic market in which demand is elastic, consumers will significantly reduce their purchases when the price increases. In this case, since Google had almost 93 percent of all online searches, demand could be inelastic. However, other search engines are good substitutes, so demand may be more elastic. b) Google has a large share of the market and in that sense it is the dominant firm and has market power. Since the chapter defines market power as ―the ability to raise prices above the level that perfect competition would produce—by restricting the quantity supplied,‖ it is not clear from this definition that Google has market power since they have not raised their price. c) The market for advertising includes many other types of sellers, so Google cannot be considered to have market power in the market for advertising.

11.

Q: In general, as markets have: a) more competition, production rises, and costs fall over the long run.

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b) less competition, production falls, and costs fall over the long run. c) more competition, production falls, and costs fall over the long run. d) less competition, production rises, and costs rise over the long run.

A: a) more competition, production rises, and costs fall over the long run.

Explanation: In general, markets that are closer to perfect competition perform better than markets where suppliers have more market power. As markets have more competition, production rises and costs fall over the long run.

Chapter 6 Government and the Economy

Answers to End-of-Chapter Problems 1.

Q: Which of the following measure the relative importance of government in the economy? a) The number of cars per person. b) Government employment as a share of total employment. c) Energy use per person. d) Government spending as a share of GDP. e) Total taxes collected.

A: b and d Explanation: Government spending as a share of GDP and government employment as a share of total employment are both correct; both indicate the proportion of the economy influenced by the government.

2.

Q: Which of the following programs were part of the New Deal? a) National Public Radio. b) Medicare. c) Social Security. d) Federal minimum wage. e) Environmental Protection Agency.

A: c and d Explanation: a) National Public Radio dates back to the 1920‘s—prior to the New Deal; it is still in effect today. b) Medicare was the result of legislation from the1960's—30 years after the New Deal; it is still in effect today. c) Social Security legislation was part of the New Deal; it is still in effect today. d) The Federal minimum wage legislation was part of the New Deal; it is still in effect today.

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e) The Environmental Protection Agency dates back to the beginning of the 1970's almost 40 years after the New Deal; it is still in effect today.

3.

Q: Which of the following actions are examples of deregulation? Which are examples of increased regulation? a) In 1996, Congress passed legislation, the Health Insurance Portability and Accountability Act (HIPAA), requiring health care providers to protect the privacy of patient information. b) In 2010, Congress passed legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, imposing more rules on financial corporations. c) In 1999, Congress passed legislation, the Financial Services Modernization Act, allowing banks, among other things, to sell insurance.

A: a) increased regulations; b) increased regulation; c) deregulation Explanation: a) This is an example of increased regulation. Health care providers are affected because they may need more personnel—or at the very least increased training for existing personnel—to ensure that they remain in compliance with HIPAA. Consumers presumably get a better product: health care services with greater guarantees of protected personal privacy. However, by raising costs for health care providers, it is likely that health care customers will face higher prices. b) This is an example of increased regulation. Corporations are affected because they need to take additional steps to make sure that they comply with the laws. Consumers are affected because they can have more accurate information about firms before they invest or purchase. Because these regulations presumably increase costs for corporations, prices might rise for the consumers. c) This is an example of deregulation. Banks, previously not allowed to sell insurance, are now allowed to do so. By increasing competition in the insurance market, this deregulation will lower prices for insurance consumers, because insurance firms previously in the market will have to lower their prices to compete with the new sellers. If banks are not very good at selling insurance, or they do so haphazardly or irresponsibly, it could be that some consumers are worse off because they purchase a product of lower quality, albeit at a lower price.

4.

Q: Which of the following is an example of a command-and-control approach? a) Requiring trucking companies to only buy new trucks that are low-pollution. b) Charging a fee for use of a park. c) Raising taxes to pay for a new bridge. d) Offering low-interest loans to students.

A: a) Requiring trucking companies to only buy new trucks that are low-pollution.

Explanation: The command-and-control approach to social and economic goals directly specifies certain market outcomes and activities to achieve desirable goals. This approach allows for the fast and direct application of resources to social and economic issues and can play an essential role in globalization, technological change and shaping the financial 37

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

markets. Offsetting these benefits are the incentive problems, rent-seeking behavior, corruption, potential for large inflexible government organizations and inefficiencies from taxation that this approach can suffer from.

Requiring trucking companies to only buy new trucks that are low-polluting is an example of a command-and-control approach. The other examples provide incentives, but do not directly specify certain market outcomes and activities to achieve desirable goals.

5.

Q: The local government needs to replace all its traffic signals. Two companies are competing for this business. Company A spends $100,000 on buying a new, more efficient machine to make traffic signals. Company B spends $100,000 on campaign contributions for the city council. a) If Company B wins the contract, is this an example of perfect competition, market power, rent-seeking behavior, or monopoly? b) Is Company B likely to charge a higher or a lower price for the traffic signals than Company A? c) Would the taxpayers of the town prefer that Company A or Company B win the contract? Would the city council prefer that Company A or Company B win the contract?

A: a) rent-seeking behavior; b) higher; c) Company A, Company B Explanation: a) Rent-seeking behavior is the activity of firms that is aimed at influencing the government to gain some benefit. If Company B wins the contract, then this is clearly an example of rent-seeking. Rather than winning the contract by providing a better product at a better price, Company B will have won the contract simply by getting the government decision-makers on its side. b) Company B is likely to charge a higher price than Company A. If Company B intended to charge a lower price than Company A for the traffic signals, then the campaign contributions were a waste of money; Company B could have won the contract simply by putting in a better bid (given that Company A did not engage in rent-seeking). c) This outcome is not desirable for the economy or for the taxpayers of the town.

Resources were spent on securing the contract for Company B, but the taxpayers did not get anything in return for these resources. If the contract had been awarded based on merit alone, these resources would not have been wasted and the taxpayers would have gotten better quality at a better price. The waste of resources is bad for the economy; the forgone better quality and better price is bad for the taxpayers.

6.

Q: Suppose the government taxes food according to its fat content. That is, the more fat a food contains, the higher the tax on it. a) Would this taxation raise or lower the prices consumers pay for fatty foods (including the tax)? Draw a graph to illustrate your answer. b) Would this tax raise or lower the amounts of fatty foods consumers buy?

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c) What effect would this tax have on the prices of nonfatty foods? (Hint: What happens to the demand schedule for nonfatty foods?)

A: a) Raise; In this case the price consumers pay is shown by point A, and the price producers receive is shown by point B in the graph below.

b) decrease c) raise Explanation: a) This would raise the price that consumers pay for fatty foods. With a tax, buyers pay more, and sellers receive less. The tax reduces the equilibrium quantity in the market. b) Because the prices of fatty foods would increase more than the prices of low-fat foods, consumers would likely substitute away from fatty foods and towards low-fat foods. This would cause a decrease in the amount of fatty foods that consumers buy. c) The prices of nonfatty foods would also increase. Fatty foods and nonfatty foods are substitutes. So, when the price of fatty foods increases, consumers decide that they will buy more nonfatty foods at every given price, which is an increase in demand, or a rightward shift of the demand curve. This causes an increase in both equilibrium price and equilibrium quantity of nonfatty foods.

7.

Q: Suppose the government decided to tax e-mail messages, text messages, and instant messages—say, at 5 cents per message. The money would be used to cut the income tax and sales tax on other goods and services. a) Suppose a student sends 10 e-mail messages, 15 text messages, and 25 instant messages each day. How much tax would be paid? b) Would a tax of 5 cents per message reduce your use of messaging? c) What effect do you think a tax on messages would have on the amount of spam sent on the internet? Is this a desirable outcome?

A: a) $2.50 per day; b) A tax of 5 cents per message can be expected to reduce the use of messaging; c) A tax on messages would reduce the amount of spam sent on the Internet.

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Explanation: a) If a student sends 10 emails per day, 15 text messages per day, and 25 instant messages per day, this student sends 50 messages per day. The total tax paid would be 50 × $0.05 = $2.50 per day. b) It should be expected that this tax would discourage at least some messaging.

Presumably, less important messages would not be sent. c) If spammers have to pay 5 cents for each spam message they send out, then they will only send spam messages if they expect to earn 5 cents or more in return. (Currently, spamming is basically free, so the expected return can be very low and it is still a smart business decision.) This regulation would seriously reduce the amount of spam messages sent.

8.

Q: Which of these government actions is justified by public goods, externalities, regulation, or redistribution? (More than one reason might apply in each case.) Explain your answers. a) New York City bans smoking in restaurants. b) Congress renews the food stamp program, which gives poor people access to groceries at a discount. c) Local governments open libraries that are available to anyone.

A: a) externality and regulation; b) externality and redistribution; c) externality and public goods Explanation: a) This is primarily justified by the negative externality of smoking. Smoking in restaurants and bars causes health problems and a generally unclean environment.

Obviously, by banning smoking, this negative externality is eliminated. One could also note that this is a type of market regulation. In other words, rather than just discouraging smoking or charging restaurants a fee to allow smoking, this ban eliminates the possibility of some restaurants choosing to offer a smoking environment to those customers who may want such an environment; the ban places a restriction on the way restaurants and bars conduct business and the services they offer. b) The primary justification for this program would be redistribution. Because this program is funded through taxation, it is paid for by those who pay taxes. Tax receipts come disproportionately from income earners with high incomes. These people who essentially fund the food stamp program do not benefit from the program, so income is redistributed from the wealthy to the poor. A secondary justification could be that poverty causes a negative externality. People who cannot afford food sometimes become desperate, and poverty can lead to crime. Or one could argue that the thought that some members of society (especially children or the elderly) are going without necessary nutrition is unsettling to many people. Either way, the food stamp program helps to eliminate some of the negative externalities associated with poverty. c) The primary justification for libraries would be that they are public goods. Since private firms will find it difficult to earn a profit by providing free access to books and reference materials, the private market is unlikely to provide libraries, so it falls 40

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

on government (or charitable organizations) to provide this service. It could also be argued that learning—which is fostered by a library system—has positive externalities associated with it, and that these externalities (like a more educated, informed electorate, for example) are increased when the government provides libraries.

9.

Q: Communities sometimes take on large amounts of debt to build a new baseball or football stadium. The expectation is that a professional sports team can help create new jobs, give an area more visibility, and attract new businesses. a) Is this example of government action—taking on debt to pay for a sports stadium—an example of a public good, an externality, regulation, or redistribution? b) Using the concepts in this chapter, explain why government funding of a new sports stadium might not produce the desired results.

A: a) an externality; b) The government may be inefficient in the construction of stadiums; The construction of stadiums might be subject to rent-seeking behavior; The debt will require future increases in taxes which will cause their own inefficiencies.

Explanation: a) By taking on debt to fund the building of a stadium, the government is promoting a positive externality. The stadium does not just benefit the team owners or the players; it benefits all of the people in the community who see their own incomes go up through new jobs, increased sales, etc. b) There are several reasons government funding of a new stadium might produce desired results. One reason is that this way of funding the construction of stadiums might be subject to rent-seeking behavior. That is, sports teams might lobby for new stadiums, and convince local governments to provide them whether the actual benefits will be great enough to justify their being built. A second reason might be simply that government may be inefficient in the construction of stadiums because it is not guided by profit maximization. Therefore, a local government might spend more on the stadium than is actually required. Yet another reason would be that this debt is going to require future increases in taxes, and these taxes will cause their own inefficiencies. "The stadium might not be used very much." is the only option that is NOT a potential reason.

10.

Q: In 2019, New York City adopted congestion pricing, meaning that cars and trucks entering a specific highly congested area of Manhattan would have to pay an extra charge—perhaps more than $10 for each car. The charge will take effect in 2021. a) Does this proposal rely on the idea of public goods, externalities, regulation, or redistribution? b) Show the effect of the congestion tax on a supply–demand diagram. c) Whom would it hurt, and whom would it help? d) Under what conditions is a congestion tax a good idea?

A: a) externalities; b) Under this proposal, the number of travelers who use this section of the road is shown by Point A. The quantity of travelers is reduced. See graph below.

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Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

c) The proposal would benefit those who can pay and hurt low income drivers. d) A congestion tax is a good idea when lost earnings from congestion are greater than the gains of having more vehicular freedom.

Explanation: There can be negative network externalities. If you decide to drive on a crowded highway during rush hour, the additional congestion you create may slow down other cars on the highway. This can be a big deal. If a road is close to capacity, then just a few additional cars can sharply slow down traffic and turn an orderly flow of cars into a traffic jam. One important purpose of government is to convince people and businesses to do fewer of the things that create negative externalities and more of the things that create positive externalities. Some highways impose higher tolls during rush hour as a way of persuading drivers to use the road at a less congested time. In effect, the higher tolls represent the extra costs each driver imposes on other vehicles. a) This proposal relies on the idea of negative network externalities. b) The congestion tax would increase the marginal cost of driving, shift the supply line to the left and result in a decrease in the number of people driving on this section of road. c) This would be hardest for low income drivers. It would benefit all drivers that can pay the toll since the delays of congestion would be reduced. d) The congestion tax a good idea when the lost earnings from congestion are greater than the gains of having more vehicular freedom.

Chapter 6 Government and the Economy

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Answers to Appendix Problems 1.

Q: Diminishing marginal utility means that: a) marginal utility falls as consumption increases. b) marginal utility gets smaller over time. c) utility falls as consumption increases. d) utility gets smaller over time.

A: a) marginal utility falls as consumption increases.

Explanation: The concept of diminishing marginal utility is the tendency for marginal utility to decline as consumption increases. That‘s typical for most goods and services: the more of a good you consume, the less the added benefit from increasing your consumption.

2.

Q: In the following table, the first column is the number of baseball games you attend in a month. The second column is the utility you get from attending these games.

Number of Baseball Games Attended in the Month Total Utility Marginal Utility 0

0

1

20

?

2

40

?

3

60

?

4 70 ? a) Fill in the third column with the marginal utility of each additional game. b) Is this a situation of diminishing marginal utility? Explain. c) Would you expect everyone to have the same utility function for baseball games?

Why or why not?

A: a) Number of Baseball Games Attended in the Month Total Utility Marginal Utility 0

0

1

20

20

2

40

20

3

60

20

4 70 b) Yes, because the marginal utility eventually falls.

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c) No, because some people like baseball more than others.

Explanation: a) See table above. b) Yes, generally. For the first three games attended, utility is not diminishing. However, utility is eventually diminishing, as can be seen by the fact that the fourth game provides less marginal utility than does the third. c) No. Some people do not enjoy watching baseball because they never played it or because they do not understand the rules. Other people have a great love for baseball, and they receive more utility from attending a baseball game than do other people.

3.

Q: You have $10 to spend on desserts for a week. You need to split it between cookies, which are $1each, and ice cream cones, which are $2 each. a) What is the maximum number of ice cream cones you can buy in a week? b) If you buy four cookies, how many ice cream cones can you buy? c) Suppose the price of ice cream cones drops to $1. Write down all the combinations of cookies d) and cones that now meet your budget constraint.

A: a) 5; b) 3; c) Cookies Ice Cream Cones 0 10 1 9 2 8 3 7 4 6 5 5 6 4 7 3 8 2 9 1 10 0 Explanation: a) The maximum number of ice cream cones that can be bought in a week is $10/$2 = 5 ice cream cones. b) If four cookies are bought, that takes up 4 × $1 = $4 of income, which leaves $10 – $4 = $6 left to be spent on ice cream cones. With this money, $6/$2 = 3 ice cream cones can be purchased. c) If the price of an ice cream cone falls to $1, there are 11 different combinations of cookies and ice cream cones that meet the budget constraint.

4.

Q: Suppose the price elasticity of demand for sports cars is 2. When the price is $40,000 per car, a local dealer sells 50 cars over a year. a) If the price per car rises to $44,000, what is the percentage change in the price? b) What is the percentage change in sports car sales, given the elasticity?

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c) What is the new sales level for sports cars? d) What was the original revenue of the auto dealership from sports car sales? What is the new revenue? Did the price increase reduce or increase revenue?

A: a) 10%; b) -20%; c) 40 cars; d) $2 million; $1.76 million; reduced Explanation: a) If the price rises to $44,000, the percentage change is ($44,000 – $40,000) / ($40,000) = $4,000 / $40,000 = 0.10 or 10%. b) Since the price elasticity of demand is 2, this means that the change in quantity will be 2 times as big as a change in price that causes it. Therefore, the 10% change in price will lead to a 20% decrease in sports car sales. c) Twenty percent of 50 cars is 0.20 × 50 = 10. Therefore the new level of sales will be 50 – 10 = 40 sports cars per year. d) The original revenue for the dealership was $40,000 × 50 = $2 million per year. The new revenue for the dealership is $44,000 × 40 = $1.76 million per year. The price increase reduced revenue.

5.

Q: The price of homes affects the number of new homes built—the higher the price rises, the more new homes are built. Economic literature suggests that a reasonable value for the price elasticity of supply for home construction is 3, so a 1 percent price increase generates a 3 percent increase in new home construction. a) Suppose the average price of homes in a town is $300,000, and 200 new homes are constructed in the town each year. Now suppose the average price of homes goes up to $330,000. What is the new rate of home construction per year? b) Instead of rising, suppose the average price of homes in the town falls from $300,000 to $270,000. What is the new rate of home construction per year?

A: a) 260 homes per year; b) 140 homes per year Explanation: a) The increase in price from $300,000 to $330,000 represents an increase of $30,000 which is a $30,000 / $300,000 = 0.10 = 10% increase. Since the elasticity of supply is 3, the change in quantity supplied will be 3 times greater than the change in price. So the number of new homes constructed will increase by 3 × 10% = 30%. If 200 new homes are constructed each year at a price of $300,000, then 200 × 130% = 260 new homes will be constructed when the average price is $330,000. b) The decrease in price from $300,000 to $270,000 represents a decrease of $30,000 which is a $30,000 / $300,000 = 0.10 = 10% decrease. Just like Part a, the change in quantity supplied will be 3 times greater, or 30%. Thirty percent of 200 is 60, so the decrease will be 60 homes per year. In other words, at an average price of $270,000 only 200 – 60 = 140 new homes will be constructed each year.

6.

Q: A town decides to impose a new tax of 30 percent on food sold in its area. a) Suppose the town is in the middle of the desert, so there are no other places nearby for people to buy food. Is the burden of the tax more likely to fall on food stores or food purchasers? Is this the result of inelastic demand, elastic supply, elastic demand, or inelastic supply? Explain your answer.

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b) Now suppose the town is in the middle of a densely populated region of the country, so it‘s easy for food shoppers to go to stores in other towns. Is the burden of the tax more likely to fall on food stores or food purchasers? Is this the result of elastic demand, elastic supply, inelastic demand, or inelastic supply? Explain your answer.

A: a) Food purchasers since demand is less elastic than supply; b) food stores since supply is less elastic than demand Explanation: a) Since the town is in the middle of the desert and consumers do not have other food stores nearby, it is likely that the price elasticity of demand will be very low.

However, supply elasticity is not necessarily that low because a food retailer could easily become a retailer of other kinds of goods. Since demand is likely to be less elastic than supply, the burden of this tax will fall more on buyers than on sellers. b) Even though sellers can still choose to sell something else, or simply move to another town, it is harder for sellers to do this than it is for buyers simply to drive or walk to the next town. Therefore, demand is going to be more elastic than is supply, so it is more likely that the burden of this tax would fall on sellers than on buyers.

7.

Q: Economists disagree about the magnitude of elasticity of labor supply. The labor market is a key part of the economy. Workers choose how many hours they will work, or even if they are going to take a job at all, depending on the wage they can get. The elasticity of labor supply tells us how much labor supply responds to changes in the wage. Some argue that it is quite low; others say that the elasticity of labor supply is much greater than 1.

This debate has important policy consequences. Let‘s consider what happens when the government imposes a tax on wages, so there is a gap between the wage paid by employers and the wage received by workers. a) Suppose the elasticity of labor supply is very low at the current level of employment.

Does this tax have more effect on the wage received by workers, or on the quantity of labor supplied? b) Now suppose the elasticity of labor supply is high at the current level of employment.

Does this tax have more of an effect on the wage received by workers, or on the quantity of labor supplied? c) Suppose you are a politician deciding whether to raise revenues by increasing taxes on high-income workers. Would you prefer that their supply of labor is elastic or inelastic? Explain.

A: a) more effect on the wage received than the quantity of labor supplied; b) more effect on the quantity of labor supplied than on the wage; c) inelastic since there would be a smaller reduction in the quantity of labor supplied.

Explanation: a) When the elasticity of labor supply is low, the labor supply curve is relatively steep.

A tax would shift the labor demand downward by the amount of the tax. Since the labor supply is relatively steep, the downward shift of the labor demand would have a greater effect on the wage than on the quantity of labor supplied.

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b) When the elasticity of labor supply is high, the labor supply curve is relatively flat. A tax would shift the labor demand downward by the amount of the tax. Since the labor supply is relatively flat, the downward shift of the labor demand would have a greater effect on the quantity of labor supplied wage than on the wage. c) You would prefer that their supply of labor is inelastic since this implies their choice to provide labor services is less sensitive the changes in the wage. Therefore a wage tax would result in a smaller reduction in labor provided and a larger pool of tax revenue.

Chapter 7 The First Step into Macroeconomics Answers to End-of-Chapter Problems 1.

Q: Which of these is a reason we might want to measure the size of the economy? a) To track the magnitude of recessions. b) To estimate the productive capacity of the country in case of war. c) To measure the happiness of people. d) To estimate the height of buildings. e) To compare living standards in different countries A: c) To measure the happiness of people.

Explanation: The three reasons to measure the size of the economy that are specifically mentioned in the textbook are to identify economic problems, diagnose their causes, and figure out the right policy fixes. An example of using GDP information to determine the economy‘s ability to produce tanks and airplanes needed for fighting a war is featured in the book as well. Measuring the happiness of people is not a reason to measure the size of the economy.

2.

Q: Suppose we have a small economy that produces only two goods: pineapples and commercial airplanes. a) Here are the quantities produced and the prices for pineapples and commercial airplanes. What is the GDP of this country?

Pineapples Commercial Airplanes

Amount Produced 40,000,000 lbs 10 airplanes

47

Prices $1.00 per lb $10 million per airplane

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

b) Suppose five additional planes were produced and sold overseas. Does that change GDP, and if so, how?

A: a) $140 million; b) This will not change GDP, but changes the category under which the spending is counted.

Explanation: a) The GDP would be the sum of the products of the quantity and price given for each good. The dollar value of pineapples produced is 40,000,000 × $1.00 = $40,000,000.

The dollar value of commercial airplanes produced is 10 × $10,000,000 = $100,000,000. Therefore, GDP is $40,000,000 + $100,000,000 = $140,000,000. b) It does not change GDP. GDP measures the dollar value of production, and whether these goods are sold in the U.S. or abroad (or, in fact, whether they are sold at all) does not affect the fact that they were produced. What does change is the category under which the spending is counted. If these goods were sold domestically, they would show up under consumption spending (or nonresidential investment or government spending). If they are sold abroad, they would show up as part of net exports.

3.

Q: Indicate whether each of the following transactions is a part of final goods and services or an intermediate input. If it is part of final goods and services, indicate which GDP component it belongs to: personal consumption, nonresidential investment, residential investment, government purchases of goods and services, inventory investment, or net exports. a) A restaurant purchases chopped meat to use in hamburgers. b) A restaurant buys new chairs for its dining room. c) A family on vacation in the United States rents a car. d) The local school district pays the salary of a first-grade teacher.

A: a) Intermediate input; does not apply; b) Final good; Nonresidential investment; c) Final good; Personal consumption; d) Final service; Government Purchases of goods and services.

Explanation: Goods and services are bought by their ultimate users and are counted in GDP. Intermediate inputs include any goods and services bought by a business that are completely used up in production in less than a year. To avoid double-counting, intermediate inputs are not included in GDP.

4.

Q: Consider a private detective agency that does investigations for hire. In which category of GDP, if any, does each of the following spy expenditures belong, assuming that all purchases take place in the United States? a) Purchases of miniature cameras for use in investigations.

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b) Purchases of Diet Coke for the agency cafeteria. c) The purchase of a new cell phone for the head of the agency. d) The purchase of a full set of James Bond movies for personal use by one of the agency‘s employees.

A: a) Gross private domestic investment; b) Gross private domestic investment; c) Gross private domestic investment; d) Personal consumption expenditures Explanation: Gross private domestic investment includes 3 types of investment: nonresidential investment: which are expenditures by firms for machines, tools and equipment; residential investment which includes expenditures by households and firms on apartments and buildings; and the change in inventories in a given period. a) Gross private domestic investment; the product is for business use b) Gross private domestic investment; the product is for business use c) Gross private domestic investment; the product is for business use d) Personal consumption; the product is for personal use 5.

Q: Indicate whether each of the following events causes GDP to increase, decrease, or stay the same, all other things remaining equal. a) Consumers pay for fewer haircuts, and use the extra money to buy laptop computers that are made in China. b) Toyota builds a new car plant in the United States, and a same-size car plant run by Ford closes. c) Apple hires engineers and programmers in the United States to help design the next generation of iPads. d) Toyota builds a new car plant in the United States and reduces imports of its cars from Japan.

A: a) GDP decreases; b) GDP stays the same; c) GDP increases; d) GDP increase Explanation: GDP is the sum of personal consumption, nonresidential and residential investment, change in private inventories, government consumption and investment, and net exports. Keep in mind that when foreign-based companies make investments in the U.S. (like building factories in the U.S.), it is counted in the U.S. GDP. a) GDP would decrease. In this example, less is being produced domestically, although spending remains the same. As far as the categories of measurement are concerned, personal consumption would remain unchanged, but net exports would decrease. b) GDP would stay the same. The building of the Toyota plant is new nonresidential investment. The increase in the production of cars from the new Toyota plant cancels out the decrease in the production of cars from the Ford plant. c) GDP would increase, because these workers would produce output. d) GDP would increase, because of the increase in nonresidential investment. If consumers purchase the same number of cars, but they are produced domestically rather than overseas, this would not affect GDP. However, the construction of the new plant is new investment, so GDP increases.

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6.

Q: Government outlays for Social Security can be reported in which of the following categories of GDP? a) Personal consumption b) Government consumption and investment c) Nonresidential investment d) Residential investment A: a and d Explanation: Government social benefits are typically used to fund personal consumption by individuals, or perhaps residential investment. Social Security provides cash that can be used for food and other goods, or to pay for rent or even home renovations.

7.

Q: Which of the following is not included in GDP? a) The value of the time of a stay-at-home parent. b) The purchase of a ticket to a Lady Gaga performance. c) The salary of a public school teacher. d) A new cell phone.

A: a) The value of the time of a stay-at-home parent Explanation: GDP focuses primarily on the market economy—the part of the economy in which people get paid for the work they do. However, it does not cover the nonmarket economy, in which people may work just as hard but not get paid. For example, a stay-athome parent is not given credit in the national income accounts for all the time and effort that go into raising children, cleaning house, and cooking food.

8.

Q: The rise of fast-food restaurants, such as McDonald‘s, made it easier for families to go out to eat rather than preparing their food at home. All other things being equal, the shift of food preparation from the home to the fast-food restaurant had the effect of: a) lowering GDP. b) raising GDP. c) not changing GDP. A: b) raising GDP. Explanation: GDP focuses primarily on the market economy—the part of the economy in which people get paid for the work they do. However, it does not cover the nonmarket economy, in which people may work just as hard but not get paid. For example, food prepared at home is not given credit in the national income accounts, but food purchased 50

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at a restaurant is counted in GDP. If consumers like the convenience of fast-food restaurants, GDP would increase.

9.

Q: The following table gives the gross domestic product (in dollars), adjusting for different price levels in different countries.

Country

GDP per capita in 2018 (thousands of dollars per person)

United States Mexico India

62.5 20.6 7.8

Source: International Monetary Fund, October 2018.

a) Calculate Mexico‘s GDP per capita as a percentage of U.S. GDP per capita. b) Calculate India‘s GDP per capita as a percentage of U.S. GDP per capita.

A: a) 33.0%; b) 12.5% Explanation: a) Mexico's GDP per capita as a percentage of US GDP per capita = 20.6/62.5=33% b) India's GDP per capita as a percentage of US GDP per capita = 7.8/62.5=12.5%

Chapter 8 Inflation Answers to End-of-Chapter Problems 1.

Q: Which of the following statements is not true? a) When the average price level rises, the price of all goods and services goes up. b) Owners‘ equivalent rent of primary residence is the biggest part of the market basket in the consumer price index. c) The market basket for the CPI represents the expenditures of a typical person. d) The CPI tracks the average price level.

A: a) When the average price level rises, the price of all goods and services goes up.

Explanation: At any moment in time, consumers will see the prices of some goods and services rise while the prices of other items fall.

2.

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Q: The following table gives the value of the consumer price index for 2009 through 2018.

Year 2009

Consumer Price Index 214.5

2010

218.1

2011

224.9

2012

229.6

2013

233.0

2014

236.7

2015

237.0

2016

240.0

2017

245.1

2018

251.1

a) Use the data in the table to calculate the inflation rate in 2013. b) Use the data in the table to calculate the inflation rate in 2017. c) What was the percentage increase of the average price level from 2009 to 2018?

A: a) 1.48%; b) 2.13%; c) 17.06% Explanation: a) The inflation rate in 2013 was 1.48%. b) The inflation rate in 2017 was 2.13%. c) The average price level increased by ((251.1-214.5)/214.5) × 100 = 17.06% from 2009-2018 3.

Q: The following table reports the average prices of gasoline and apples, as well as the consumer price index for three years.

Red Delicious Apples (Price per Pound) $0.83 $0.95 $1.36

Gasoline (Price per Gallon) 1995 2005 2015

$1.15 $2.30 $2.45

Consumer Price Index (1982−1984 = 100) 152.4 195.3 237.0

a) What was the percentage increase in the price of gasoline from 1995 to 2005?

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b) Did the relative price of gasoline rise or fall from 1995 to 2005? (Remember that the relative price of a product rises if its percentage increase in price is bigger than the percentage increase in the CPI.) c) Did the relative price of gasoline rise or fall from 2005 to 2015? d) Did the relative price of apples rise or fall from 1995 to 2005?

A: a) 113%; b) Rise; c) Fall; d) Rise Explanation: a) The percentage increase in the price of gasoline from 1995 to 2005 was (($2.30 – $1.15) / $1.15) × 100 = 113%. b) From 1995 to 2005, the price of gasoline increased by (($2.45 - $1.15) / $1.15) × 100 = 113%, but the consumer price index increased by ((195.3 - 152.4) / 152.4) × 100 = 28.15%. This means that the relative price of gasoline rose during this period. c) From 2005 to 2015, the price of gasoline increased by (($2.45 - $2.30) / $2.30) × 100 = 6.52%, but the consumer price index increased by ((237.0 - 195.3) / 195.3) × 100 = 21.35%. This means that the relative price of gasoline fell over this period. d) From 1995 to 2005, the price of apples increased by (($1.36 - $0.83) / $0.83) × 100 = 68.86%, but the consumer price index increased by ((195.3 - 152.4) / 152.4) × 100 = 28.15%. This means that the relative price of apples rose over this period.

4.

Q: Say whether each of the following represents a pure price change or an improvement in quality. a) The price of a home goes up. b) The price of a home goes up after a complete renovation. c) The latest model of a car is more expensive than the previous model, but it also has more features. d) The price of a peach rises.

A: a) A pure price change; b) An improvement in quality; c) An improvement in quality; d) A pure price change.

Explanation: A pure price change is simply a change in price without any change in the quality or nature of a product. An improvement in quality is a change in the nature of a good or service that increases its value for buyers.

5.

Q: Suppose you are a Social Security recipient. In 2018, you receive $600 per month in Social Security benefits. In October of that year, the Social Security Administration announces that the cost-of-living adjustment for 2019 will be 2.8 percent, roughly matching the overall inflation rate. a) How much will your 2019 monthly benefits be? b) In real terms, do your benefits go up, go down, or stay the same?

A: a) $616.80; b) stay the same.

Explanation: a) Monthly benefits will be 102.8% of $600, or (1.028 × $600) = $616.80.

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b) Because cost-of-living adjustments are made based on inflation rates, monthly benefits, in real terms, will not have changed. If for some reason the COLA were to be less than inflation, then benefits would fall in real terms, and vice versa.

6.

Q: One of the biggest decisions most of us have to make is which industry to look for work in. Compensation matters, but it also matters whether pay is rising or falling. The following table gives the annual average pay in five major industries for 2007 and 2017 (the figures include the pay of all workers, including top managers).

Average Annual Wages and Salaries (Dollars)* Industry 2007 2017 Manufacturers 55,239 69,437 Retail trade 30,695 36,891 88,771 109,600 Finance and insurance 93,843 119,263 Computer systems design and programming Hospitals 52,006 66,994 *Per full-time worker Source: Bureau of Economic Analysis.

a) Calculate the percentage increase in pay for each industry from 2007 to 2017. b) What was the real percentage increase in pay for each industry from 2007 to 2017, using the rule of thumb that the real percentage increase is roughly the nominal percentage increase minus the inflation rate? (The CPI in 2007 was 207.3, and the CPI in 2017 was 245.1.) c) Which industry had the biggest increase in real wages?

A: a) The % increases were as follows: Manufacturers, 25.70% Retail trade, 20.19% Finance and insurance, 23.46% Computer systems design and programming, 27.09% Hospitals, 28.82% b) The real % increases Manufacturers, 7.47% Retail trade, 1.96% Finance and insurance, 5.27% Computer systems design and programming, 8.87% Hospitals, 10.67% c) Hospitals Explanation: a) The increases were as follows: Manufacturers, ((69,437-55,239)/55,239) × 100 = 25.7%; 54

Solution Manual for M Economics the Basics 4th Edition by Mike Mandel

Retail trade, ((36,891-30,695)/ 30,695) × 100 = 20.19%; Finance and insurance, ((109,600-88,771)/ 88,771) × 100 = 23.5%; Computer systems design and programming, ((119,263-93,843)/93,843) × 100 = 27.1%; Hospitals, ((66,994-52,006) / 52,006) × 100 = 28.9% b) Using the given (The CPI in 2007 was 207.3, and the CPI in 2017 was 245.1), the percentage change in the CPI from 2007 to 2017 can be calculated as ((245.1 – 207.3) / 207.3) × 100 = 18.23%.

Therefore, the real increases in pay in the five industries were: Manufacturers, 7.47%; Retail trade: 1.96% (salaries fell); Finance and insurance, 5.27%; Computer systems design and programming, 8,87% ; Hospitals, 10.67%. c) Hospitals had the highest increase in real salaries (10.67%).

7.

Q: The sports pages are always filled with news of the latest big contract an athlete has received. The following table shows the average price for major league baseball tickets for four years, the average player salary, and the consumer price index for those years.

2001 2010 2015 2018

Average Ticket 17.64 26.74 28.94 32,44

Average Ticket 177.1 218.1 237.0 251.1

Average Ticket $2.14 $3.31 $4.25 $4.52

Source: Team Marketing Report, Associated Press, USA Today.

a) Calculate the real percentage increase in ticket prices from 2001 to 2015, and from 2015 to 2018. b) Calculate the real percentage increase in player salaries from 2001 to 2015, and from 2015 to 2018. c) Between 2001 and 2015, total attendance at major league baseball games grew from 72.5 million to 73.8 million, despite the increase in real ticket prices. Using what you learned from Chapter 3, state whether this increase in attendance is more likely to represent a supply shift or a demand shift in the market for baseball tickets. d) From the information provided below, do you think the rise in player salaries is the main cause of the rise in ticket prices? Explain.

A: a) 30.3%, 6.10%; b) 64.80%, 0.40%; c) Rightward shift of demand; d) No, because there is not a consistent relationship between the two.

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a) The percentage change in ticket prices from 2001 to 2015 is ((28.94-17.64)/17.64) × 100 = 64.1%. The percentage change in the CPI from 2001 to 2015 is ((237177.1)/177.1) × 100 = 33.8%. The real percentage change in ticket prices of 64.1% minus the percentage change in the CPI of 33.8%=30.3% The percentage change in ticket prices from 2015 to 2018 is ((32.44-28.94)/28.94) × 100 =12.1%. The percentage change in the CPI from 2015 to 2018 is ((251.1237)/237) × 100 = 6%. The real percentage change in ticket prices of 12.1% minus the percentage change in the CPI of 6%=6.1% b) The percentage change in player salaries from 2001 to 2015 is ((4.25-2.14)/2.14) × 100 = 98.6%. The percentage change in the CPI from 2001 to 2015 is ((237177.1)/177.1) × 100 = 33.8%. The real percentage change in the player salaries is 98.6% minus 33.8% = 64.8% The percentage change in player salaries from 2015 to 2018 is ((4.52-4.25)/4.25) × 100 = 6.4%.The percentage change in the CPI from 2015 to 2018 is ((251.1237)/237) × 100 = 6%. The real percentage change in ticket prices of 6.4% minus the percentage change in the CPI of 6%=0.40% c) This represents an increase in demand since the ticket sales and the price rose, so there is a rightward shift of the demand curve. d) The rise in player salaries is not the main cause of the rise in ticket prices because even though both increased, there is not a consistent relationship between the two.

8.

Q: Suppose the annual inflation rate has been 3 percent for several years. Then, without warning, it soars to 10 percent a year. Will each of the following individuals or businesses win or lose from such unexpected inflation? a) A tenant renting an apartment with a lease that fixes the rent for the next three years. b) An automobile dealer who has leased a car to a buyer for three years with fixed payments. c) A bank that has lent money to a family to buy a home with interest rates fixed for the next 30 years.

A: a) win; b) lose; c) lose Explanation: a) If the tenant locks in the lease price before an unexpected rise in inflation, he/she is paying the fixed amount of rent with less valuable dollars, meaning the tenant benefits from inflation. b) If the auto dealer lent the money prior to a period of unexpected inflation, the company will be repaid with less valuable dollars. c) The bank will lose since it has made this loan when the inflation rate is 3%, but now it could make loans at a much higher rate.

9.

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Q: Which situation would most economists prefer? a) An unexpected drop in the inflation rate from 5 percent to 0 percent. b) A steady 2 percent inflation rate. c) An unexpected climb in the inflation rate from 3 percent to 6 percent. d) An expected decline in the inflation rate from 3 percent to −2 percent.

A: b) A steady 2 percent inflation rate.

Explanation: Expected inflation is the inflation rate that consumers and businesses expect will hold over the next year. Unexpected inflation happens when the rate of price increases suddenly accelerates above expected inflation. Unexpected inflation hurts lenders and anyone who is supposed to receive money under a long-term contract. A high level of expected inflation is harmful because it makes a wage–price spiral more likely, because it is unpredictable, and because it increases the cost of transactions. Economists prefer low, steady, inflation.

Chapter 9 Growth Answers to End-of-Chapter Problems 1.

Q: Which of the following statements is not true? a) In a growing economy, the production possibility frontier moves inward. b) Two of the forces driving growth are increases in knowledge and increases in labor. c) The Golden Age of productivity growth ran from roughly the end of World War II to the mid-1970s. d) The arrival of the internet helped spur an increase in productivity growth.

A: a) Ina growing economy, the production possibility frontier moves inward.

Explanation: Economic growth leads to higher living standards. It also offers more choices. By pushing out the production possibility frontier, economic growth increases the productive capabilities of an economy.

2.

Q: The following figure shows a production possibility frontier (PPF), today and next year, for an economy that makes food and cars.

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a) Based on today‘s PPF, which point offers the higher production of cars? b) Which point on next year‘s PPF offers higher production of both cars and food compared to point E? c) Which point on next year‘s PPF offers lower production of cars compared to point D? A: a) Point E; b) Point F; c) This point is not represented on the graph.

Explanation: a) Point E offers higher production of cars because it is located to the right of point D. b) Point F has a higher production of cars and food. c) There is not a point on next year‘s PPC that offers a lower production of cars compared to point D. 3.

Q: Zero-sum means that one person‘s gain is someone else‘s loss. Non-zero-sum means that it is possible for everyone to gain. Say whether each of the following represents a zerosum or non-zero-sum situation. a) Three kids sharing a cookie. b) Two college students collaborating on a class project. c) Two baseball teams playing a game. d) A director and several actors making a movie. e) Two hotels competing for customers in a resort town where the total number of tourists stays the same.

A: a) zero-sum; b) non-zero-sum; c) zero-sum; d) non-zero-sum; e) zero-sum Explanation: In a zero-sum situation if we want something——we have to accept less of something else. In a non-zero-sum situation we can have more of both.

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a) This is a zero-sum situation because if one child gets more of the cookie, the other children necessarily get less. b) This is a non-zero-sum situation because, by collaborating, the students can all receive a higher grade on the project. c) This is a zero-sum situation because if one team wins, the other team must lose. d) This is a non-zero-sum situation because the movie can only get made if they work together. Without actors or a director, the movie could not be made at all. e) This is a zero-sum situation, because any time one of the hotels attracts more tourists, it necessarily attracts them away from the other hotel. Because the total number of tourists will not change, the sum of the changes for each hotel will always be zero.

4.

Q: The accompanying table shows real GDP from 2012 to 2018 for Italy, measured in billions of 2012 dollars.

Billions of 2012 Dollars 2,110 2,074 2,076 2,097 2,114 2,145 2,164

2012 2013 2014 2015 2016 2017 2018

a) By what percentage did the Italian economy grow between 2013 and 2014? b) Which year showed the fastest growth rate? c) Plot the real GDP of the Italian economy A: a) 0.01 ± 0.1 %; b) 2017; c)

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Explanation: a) Growth rates 2013 − ((2,074 − 2,110)/2,110) × 100 = −1.71 2014 − ((2,076 − 2,074)/2,074) × 100 = .01 2015 − ((2,097 − 2,076)/2,076) × 100 = 1.01 2016 − ((2,114 − 2,097)/2.0970 × 100 = .81 2017 − ((2,145 − 2,114)/2,164a0 × 100 = 1.47 2018 − ((2,164 − 2,145)/2,145) × 100 = .89 b) c)

The percentage increase in real GDP from 2013 to 2014 is ((2,076 − 2,074)/2,074) × 100 = .01.

It can be seen that economic growth was the highest in 2017 ((2,145 − 2,114)/2,164) × 100 = 1.47.

5.

Q: Suppose we are looking at an economy that produces only toys. In 2018, the country‘s toy factories produced 5 million toys, which it sold on the international market for $10 per toy. In 2019, the country produced 6 million toys, which it sold for $12 per toy. a) What was the percentage increase in the production of toys from 2018 to 2019? b) What was the gross domestic product of this economy in 2018? What was the gross domestic product in 2019? (Remember that GDP is the monetary value of the economy‘s output, valued at the market price.) c) What was the percentage increase in nominal GDP? d) What was the growth rate of the economy from 2018 to 2019? Explain.

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A: a) 20%; b) GDP in 2018: 50 million, GDP in 2019: 72 million; c) 44%; d) 20% Explanation: a) The country's toy production went from 5 million to 6 million, which is an increase of [(6 million - 5 million) / 5 million] × 100 = 20%. b) GDP for 2014 was the product of the number of toys produced (5 million) and their per-unit price ($10), which is $50 million. In 2015, the country produced 6 million toys and sold them for $12, so GDP was the product of these two numbers, or $72 million. c) The percentage increase in nominal GDP is (($72 million - $50 million) / $50 million) × 100 = 44%. d) If we assume that the rate of inflation was equal to the rate of change of the price of toys—in other words, that the price of toys did not change relative to other prices, then the change in real GDP (the growth rate of the economy) is equal to the change in production, 20%.

6.

Q: The following table shows real GDP (in billions of 2012 dollars) for Japan from 2012 to 2018, along with the population in each year.

Real GDP (Billions of 2012 Dollars)

Population (Millions of People)

4,731 4,825 4,843 4,909 4,956 5,042 5,099

127.6 127.3 127.1 127.0 127.0 126.7 126.4

2012 2013 2014 2015 2016 2017 2018

Real GDP per Capita (Thousands of 2012 Dollars) -

a) Calculate real GDP per capita for each year. b) Is Japan‘s population rising or falling? c) In what year did real GDP per capita rise by the biggest percentage? d) By what percentage did real GDP per capita change from 2012 to 2018? e) Plot real GDP per capita on a graph.

A: a)

2012 2013 2014

Real GDP (Billions of 2012 Dollars) 4,731 4,825 4,843

Population (Millions of People)

Real GDP per Capita (Thousands of 2012 Dollars)

Annual Growth Rate (rounded to 2 decimal places)

127.6 127.3 127.1

37,077 37,903 38,104

2.23 0.53

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2015 2016 2017 2018

4,909 4,956 5,042 5,099

127.0 127.0 126.7 126.4

38,654 39,024 39,795 40,341

1.44 0.96 1.98 1.37

b) Falling c) 2017 d) 8.80 ± .05%

e) Explanation: a) See completed table above. b) Real GDP per capita in Japan is rising. c) Calculate the growth rate of real GDP per capita from year to year. These growth rates are also given in the table above. Real GDP per capita rose the most in 2017. d) The overall increase in real GDP per capita between 2012 and 2018 was (40,341 − 37,077) = $3,264. The percentage change is (3,264 / 37,077) × 100 = 8.80%.

7.

Q: Say whether each of the following is likely to make real GDP for the United States rise or fall. a) An increase in the number of college graduates. b) A war in the Middle East that cuts off the supply of oil to the rest of the world. c) A new technology that speeds up the construction of homes. d) A flu epidemic that forces people to stay home from work. e) The local fast-food restaurant buys equipment to make more french fries at a time.

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A: a) Real GDP will rise; b) Real GDP will fall; c) Real GDP will rise; d) Real GDP will fall; e) Real GDP will rise Explanation: a) If an increasing number of people go to college, then initially, while they're in college, this would constitute a decrease in labor, which might cause GDP to fall.

However, after they graduate from college, the overall effect would be an increase in human capital, which will cause GDP to rise. b) Oil is a raw material that is needed for the production of many things and for the transport of almost all things. This raw material reduction would cause GDP to fall. c) Technology that speeds up production falls under the heading of knowledge. This increase in knowledge should cause GDP to rise. d) A flu epidemic should cause GDP to fall since less production will take place. e) The purchase of new equipment to make more french fries at a time will cause real GDP to rise.

8.

Q: Identify which input (labor, human capital, physical capital, raw materials, or knowledge) is affected in the following scenarios. a) An investment in new airports that cuts the number of flight delays. b) An earthquake that destroys a factory. c) Improved cash registers in stores. d) More immigrants entering the country. e) The discovery of natural gas under Pennsylvania.

A: a) Physical capital; b) Physical capital; c) Physical capital; d) Labor; e) Raw materials Explanation: a) These new airports represent new physical capital. b) This represents the destruction of physical capital. c) This represents better physical capital. d) This is an increase in labor. e) This is an increase in raw materials.

9.

Q: For each of the following government laws and rules, identify whether it affects growth by influencing labor, human capital, physical capital, raw materials, or knowledge. a) A new rule opening up more areas to oil drilling. b) A new law that provides more funds to support college scholarships. c) A new rule restricting how high an office building can be built. d) A new law that makes immigration into the United States more difficult.

A: a) This would cause GDP to rise, as a result of change in raw material; b) This would cause GDP to rise as a result of a change in human capital; c) This would cause GDP to fall as a result of a change in physical capital; d) This would cause GDP to fall as a result of a change in labor.

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a) Oil is a raw material that is needed for the production of many things and for the transport of almost all things. This law would cause GDP to rise. b) If an increasing number of people go to college, then initially, while they're in college, this would constitute a decrease in labor, which might cause GDP to fall.

However, after they graduate from college, the overall effect would be an increase in human capital, which will cause GDP to rise. c) This law influences new physical capital. This should cause GDP to fall. d) This is a decrease in labor, and it will cause GDP to fall.

10.

Q: Which of the following factors can contribute to a slowdown in productivity? a) Tighter environmental regulations. b) Low levels of savings and investments. c) Lower oil prices. d) Lack of innovation.

A: a, b and d.

Explanation: Economists suggested a variety of possible explanations for the productivity slowdown of 1973 to 1995. One theory was that as the baby boom generation entered the workforce, these workers were young, inexperienced, and not highly productive. Another theory was that the environmental regulations passed in the late 1960s and early 1970s—such as the creation of the Environmental Protection Agency in 1970—were dragging down growth. Yet another theory proposed that U.S. workers were not saving and investing enough, which was holding back productivity. And still another theory suggested that there simply were not enough new products and innovation.

11.

Q: One country (call it A) can make 1,000 shirts with 50 hours of labor. A second country (call it C) can make 1,000 shirts with 75 hours of labor. a) Calculate productivity for Countries A and C. Which one is higher? b) Suppose workers in Country A get paid $30 per hour and workers in Country C get paid $10 per hour. In which country is it more expensive to make a shirt (assuming that all other costs are the same between the two countries)?

A: a) Country A: 20.0 shirts per labor hour. Country B: 13.3± .01 shirts per labor hour.

Country A‘s productivity is higher; b) Country A. Explanation: a) The productivity for Country A is 1,000/50 = 20 shirts per labor hour. The productivity for Country C is 1,000/75 = 13.33 shirts per labor hour. Productivity in Country A is higher. b) A shirt in Country A costs $30 per hour × (50/1,000) = $1.50. A shirt in Country C costs $10 per hour × (75/1,000) = $0.75. It is more expensive to make a shirt in Country A.

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Chapter 10 Business Cycles, Unemployment, and Inflation

Answers to End-of-Chapter Problems 1.

Q: Are the following situations more consistent with a positive output gap or a negative output gap? a) Workers at an e-commerce company are putting in lots of overtime shipping packages. b) Many new homes were built but not sold. c) The roads are so crowded during rush hour that you have to leave early for work. d) You apply for a new job listed online, and there are plenty of other applicants.

A: a) Positive output gap; b) Negative output gap; c) Positive output gap; d) Negative output gap.

Explanation: a) This would indicate that GDP is above potential. This is a positive output gap. b) This is consistent with an economy that is not producing as much as it can. This is a negative output gap. c) This suggests that there might be very low unemployment, which means very high output. This is consistent with a positive output gap. d) If there are many applicants for the same position, it might be that unemployment is high. If unemployment is higher than the NAIRU, then there is a negative output gap.

2.

Q: Do the following events increase or decrease potential GDP? a) New government policies that restrict the number of educated immigrants entering the country. b) A decrease in the purchases of new computers by businesses. c) Expansion of funding for higher education d) The discovery of a new oil field in Pennsylvania. e) The discovery of a cheaper way of generating energy from sunlight.

A: a) Decrease; b) Decrease; c) Increase; d) Increase; e) Increase Explanation: a) This would decrease potential GDP over time by reducing the number of workers. b) This does not directly increase or decrease potential GDP. However, a decrease in the purchase of new computers would lead to less productivity over time, resulting in a decrease in potential GDP. c) This would increase potential GDP by increasing Labor quality and thus the productivity of workers. d) This would increase potential GDP by increasing our natural resources of raw materials and thus the productivity of workers.

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e) This would increase potential GDP by increasing productivity—making it easier for firms to produce more with the same effort and the same inputs.

3.

Q: The following table gives the potential GDP and real GDP for a very small economy, both measured in 2012 dollars.

Year 2016 2017 2018 2019

Output Gap Real GDP Potential (2012 (2012 Dollars) GDP Dollars) 100 100 107 105 110 110 113 115

a) Fill in the column for the output gap. b) Plots the lines for real GDP and potential GDP on a graph. c) Would you expect the unemployment rate to be higher in 2017 or 2019? Explain. d) In which year would you expect it to be easiest to find a job? (Assume that the NAIRU is the same each year.)

A: Year Output Gap Real GDP Potential (2012 (2012 Dollars) GDP Dollars) 2016 100 100 0 2017 107 105 2 2018 110 110 0 2019 113 115 -2 a)

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d) In 2017 because real GDP is higher than potential GDP Explanation: a) An output gap is the difference between real and potential GDP. A positive output gap exists if real GDP exceeds potential GDP, whereas a negative output gap exists if real GDP is less than potential GDP. b) See graph. c) The unemployment rate would be higher in 2019, where there is a negative output gap. This economy is not producing at its potential in 2019, which means that it is likely that the unemployment rate is higher than the NAIRU. In 2017, there is a positive output gap, which suggests that the unemployment rate is lower than the NAIRU. d) It should be easiest to find a job in 2017, because the rate of unemployment was probably the lowest in 2017. In this year, you would have less competition for jobs that you apply for; and firms, which were producing a lot of output in 2017, were likely to have greater need for workers than in the other years listed on the table.

4.

Q: A man used to work for pay, but he is currently attending community college in the evening to get a degree, while taking care of his children during the day. We would count him in the category of a) unemployed. b) underemployed. c) employed. d) neither employed nor unemployed.

A: d) neither employed nor unemployed Explanation: This man is neither employed nor unemployed since he is not looking for work. To be employed he must be working, and to be unemployed he must be looking for work.

5.

Q: Say whether each of the following is more likely to be a case of frictional, structural, or cyclical unemployment. a) You graduate from college, and it takes you a month to find a job. b) A slowdown in the economy means that restaurants are hiring fewer workers. c) A furniture maker closes a factory in North Carolina and moves production to China.

The laid-off factory workers have trouble finding new jobs because other furniture companies are closing their U.S. factories as well. d) The rise of e-commerce causes the local department store to lay off workers. e) There are plenty of job advertisements for nurses but few for factory workers.

A: a) Frictional unemployment; b) Cyclical unemployment; c) Structural employment; d) Structural unemployment; e) Structural unemployment.

Explanation: a) Frictional - This unemployment is caused by the fact that job search and job matching sometimes does not happen perfectly and easily.

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b) Cyclical - This unemployment is caused by negative economic conditions that will eventually reverse. c) Structural - This unemployment is caused by the fact that the economy is undergoing a change in the kinds of goods that it will produce. d) Structural - This unemployment is caused by a change in technology, as shoppers shift from shopping in stores to shopping online. e) Structural - This unemployment is caused by the fact that the economy is moving away from manufacturing and toward a service-based economy.

6.

Q: Suppose the NAIRU is 5 percent, and the current unemployment rate is 4.5 percent. Are the following statements true or false? a) The inflation rate is likely to fall in future months. b) Real GDP is likely higher than potential GDP. c) We can find jobs for more people without increasing inflation.

A: a) False; b) True; c) False Explanation: When the current unemployment rate is lower than the NAIRU, there is a positive output gap—the economy is producing above its potential. a) False. This production above potential is likely to lead to inflation. b) True. Real GDP is likely higher than potential GDP because the current unemployment rate (4.5%) is below the NAIRU (5%). c) False. There are already fewer unemployed people than there will be in normal times.

To further reduce unemployment would almost certainly cause inflation.

7.

Q: Some historic inflation and unemployment figures for the United States are presented here.

Year 1996 1997 1998 1999 2000 2001

Inflation Rate (%) 3.0 2.3 1.6 2.2 3.4 2.8

Unemployme nt Rate (%) 5.4 4.9 4.5 4.2 4.0 4.7

a) In what years does the inflation rate rise compared to the previous year? b) What are the unemployment rates for the years when inflation rises? c) Based on these data, was the NAIRU greater or less than 5 percent during this period?

Explain.

A: a) In 1999 and 2000; b) 4.2% and 4.0%; c) Between 4.2% and 5%. In most years it was below 5% but inflation rose when the unemployment rate was 4.2%.

Explanation: a) The inflation rate rose (from the previous year) in 1999 and 2000.

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b) The unemployment rates are 4.2% and 4.0% (inflation rises in 1999 and 2000). c) Based on these data, it appears that the NAIRU was less than 5% during this period.

In most of the years, the actual unemployment rate was less than 5%, but only when it fell very low to 4.2% and 4.0% did the inflation rate actually rise over the previous year. Therefore, we could probably conclude that the NAIRU was less than 5% but greater than 4.2%.

8.

Q: The following table gives real GDP for a small economy going through a business cycle.

Year

Real GDP (2012 Dollars) 101 103 104 102 103 105 106 107

2012 2013 2014 2015 2016 2017 2018 2019

a) Plot the line for real GDP on a graph. b) What are the starting and ending dates of the recession? c) How many years does the expansion last?

A:

a) b) 2014-2015 c) 4 years Explanation: a) The recession that this economy endured started after the peak of 2014 and reached its trough year in 2015.

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b) See graph. c) There is an expansion that has begun by 2015 and continues through 2019. There are four consecutive years of economic growth (2016, 2017, 2018, and 2019).

9.

Q: Recessions affect many aspects of the economy. For each of the following economic quantities, say whether it rises or falls during a typical recession. a) Construction of new hotels. b) Tax revenues. c) Airline workers. d) Workers who are overqualified for their current jobs.

A: a) Fall; b) Fall; c) Fall; d) Rise Explanation: a) Construction of new hotels would fall during recession because demand would be sluggish. b) Tax revenues would fall as income and sales would fall. c) Airline workers would be less needed as fewer people will be flying. d) Workers who are overqualified for their current jobs would increase since many people would lose their job.

10.

Q: Here are several economic events that could potentially help trigger a recession. Say which category each one falls into: negative supply shift, negative demand shift, inflation fighting, or problems in financial markets. a) War in the Middle East destroys oil fields in Saudi Arabia. b) China suddenly cuts off exports to the United States. c) Inflation accelerates sharply to 10 percent a year. d) Mortgages become much harder to get because banks become less willing to lend.

A: a) Negative supply shift; b) Negative supply shift; c) Inflation fighting; d) Problems in financial markets.

Explanation: a) Negative supply shift. This would lead to higher prices for oil, which would cause leftward shifts of supply curves in many markets. b) Negative supply shift. If China ceased sending goods to the U.S., many markets would experience leftward shifts of supply curves. c) Inflation fighting. The Federal Reserve would have to take steps to correct this high inflation, and the steps that it took could potentially cause a recession. d) Problems in financial markets. This unwillingness to lend would slow down the spending of households and firms, which could cause a recession.

Chapter 11 Fiscal Policy

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Answers to End-of-Chapter Problems 1.

Q: Identify whether each of the following government expenditures is a payment for goods and services or a transfer payment. a) A local public school hires a new teacher. b) The Coast Guard orders a new ship. c) Medicare pays for a knee replacement for a 66-year-old. d) A poor family gets food stamps. e) The local Social Security office buys a new computer.

A: a) Payment for goods and services; b) Payment for goods and services; c)Transfer payment; d) Transfer payment; e) Transfer payment.

Explanation: a) This is a payment for service since the teacher will provide instruction. b) This is a payment for the purchase of a new ship used for protecting United States borders. c) This is a transfer payment as this is a social benefit paid to individuals. d) This is a transfer payment as this is a social benefit paid to individuals. e) This is a transfer payment since no good or service is provided.

2.

Q: The federal government hires an extra worker in the Department of Homeland Security, but makes no other changes in taxation or spending. Identify whether each of the following is likely to rise or fall in the short term. (LO11-2) a) Federal government spending. b) Unemployment. c) Wages. d) Real GDP. e) The budget deficit.

A: a) rise; b) fall; c) not change; d) rise; e) rise Explanation: a) Federal government spending will rise since the worker will be paid. b) Unemployment will fall if the individual was unemployed. c) Wages do not change in the short run. d) Real GDP will rise since government spending and aggregate demand will increase. e) The budget deficit will rise since more spending will occur without an offset of a tax increase.

3.

Q: The accompanying diagram shows the supply and demand curves for desktop computers. Suppose the federal government decides to boost the economy by buying more computers. (LO11-2)

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a) Draw the new demand curve, and label the new equilibrium. b) Does the federal government purchase increase or decrease the price of computers? c) Does the federal government purchase increase or decrease the quantity of computers sold?

A:

a) b) Increases c) Increases Explanation: a) When the government decides that it wants to purchase more desktop computers, the demand curve for desktop computers shifts to the right. When this happens, the intersection of supply and demand moves up along the supply curve. b) The price of desktop computers will increase. c) The quantity of desktop computers bought and sold will also increase.

4.

Q: Suppose the job multiplier is 0.7. The government hires 200 workers to fill potholes in roads. (LO11-2) a) How much does total employment rise or fall? b) How much does private-sector employment rise or fall? c) Would you regard this outcome as a success? Explain why.

A: a) Total employment will rise by 140 jobs; b) Private sector employment will fall by 60 jobs; c) The overall effect is less than the change in the government effect that caused it.

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Explanation: a) If the job multiplier is 0.7, then when government increases the number of jobs by 200, the economy overall experiences an increase of 0.7 × 200 = 140 jobs. b) It must be that private sector employment in this case falls by 60 jobs. c) The overall effect is less than the change from the government effect that caused it.

5.

Q: Suppose you knew that the NAIRU (the nonaccelerating inflation rate of unemployment) was 5.5 percent. The current unemployment rate is 5 percent. (LO11-3) a) Is an increase in government spending more likely to increase real GDP or to increase inflation? b) Now the unemployment rate rises to 6.5 percent, but the NAIRU stays the same. Is an increase in government spending more likely to increase real GDP or to increase inflation?

A: a) inflation, not GDP; b) GDP, not inflation Explanation: a) In this case, the rate of unemployment is lower than the NAIRU, which means that output is currently higher than potential GDP. For an economy in this situation, there is not much room for output to grow (or unemployment to fall), so an increase in government spending would tend to inflation, not GDP. b) In this case, the rate of unemployment is higher than the NAIRU, so the economy is sluggish. There are many unemployed workers and output has slowed. This economy has room for growth, so a modest increase in government spending would tend to increase GDP, rather than inflation.

6.

Q: Fiscal stimulus using increased government spending is best suited for (LO11-3) a) fighting a short and shallow recession. b) fighting a long and deep recession. c) keeping an expansion from ending A: b) fighting a long and deep recession.

Explanation: Fiscal stimulus using increased government spending is best suited for a long and deep recession because lags can be an obstacle to short term response to economic conditions.

7.

Q: The federal government decides to impose a 3 percent sales tax on the purchase of new motor vehicles. (LO11-4) a) Will the tax increase or decrease the number of motor vehicles sold? b) As the result of the tax, the government collects more revenue. What happens to the budget deficit, assuming spending doesn‘t change? c) What is the effect of the tax on interest rates? d) Most states charge a fee to register a motor vehicle. If the fee was reduced, would the number of motor vehicles sold increase or decrease?

A: a) decrease; b) decrease; c) decrease; d) increase Explanation: 73

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a) A tax on the sale of cars essentially raises their price for consumers and raises their cost for sellers, so this tax would tend to reduce the equilibrium quantity of cars bought and sold. b) All else equal, more revenue means smaller deficits (or bigger surpluses if the government happens to be running a surplus). c) With the government collecting more money from the tax, the budget deficit will be reduced as will interest rates. d) If states reduce the registration fee more motor vehicles will be sold.

8.

Q: Over the last century, the top marginal tax rates in the United States have (LO11-4) a) fallen to a low of 10 percent after supply-side economics was introduced. b) remained stable at 35 percent. c) ranged from a low of 10 percent to a high of 90 percent. d) averaged out at about 45 percent.

A: c) raged from a low of 10% to a high of 90% Explanation: Over the last century, the top marginal tax rates in the United States have ranged from a low of 10% to a high of 90%.

9.

Q: Suppose that the economy is going into a recession. (LO11-5) a) Is a spending increase or a tax cut more likely to be an effective response to the recession? Explain. b) What effect will the tax cut have on the budget deficit?

A: a) Tax cut; c) A tax cut will increase the budget deficit.

Explanation: a) Although both a cut in taxes and an increase in government spending would have a stimulating effect on the economy, the tax cut may be preferable simply because it can be put into effect more quickly. Changes in spending sometimes take a considerable amount of time to work their way through the economy. b) All things equal, a tax cut would lead to less government revenue. In this case, the reduction in taxes would increase deficits (or decrease surpluses).

10.

Q: The following table reports on GDP and government budget surplus or deficit for the country of France (measured in dollars).

Year GDP (Billions Surplus or Surplus or of Dollars) Deficit (-) Deficit as (Billions of Percentage of Dollars) GDP 2009 2010 2011 2012 2013 74

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2014 2015 2016 2017 2018 Data: International Monetary Fund, author calculations. Dollars are adjusted for differences in price levels.

a) For each year, calculate the surplus or deficit as a percentage of GDP. b) In which year was the deficit the biggest as a percentage of GDP? c) In which year was the deficit the smallest as a percentage of GDP? A: Year GDP (Billions Surplus or Surplus or Deficit Deficit (-) of Dollars) as Percentage of (Billions of GDP Dollars) 2009 2,265 −162 −162/2,265=−7.15 201 2,336 −161 −161/2,336=−6.89 2011 2,437 −126 −126/2,437=−5.17 2012 2,422 −124 −124/2,422=−5.12 2013 2,550 −104 −104/2,550=−4.08 2014 2,624 −102 −102/2,624=−3.89 2015 2,680 −97 −97/2,680=−3.62 2016 2,739 −2,684.22 −2,684.22/2,739=−98 2017 2,856 −2,113.44 −2,113.44/2,856=−74 2018 2,969 −2,315.82 −2,315.82/2,969=−78 a) . b) 2016 c) 2015 Explanation: a) A budget deficit is defined as the excess of the federal government's spending over its revenues. A budget surplus is defined as the federal government's revenues over its spending. Divide the surplus or deficit by the GDP for each year. This helps give an idea of the magnitude of the surplus or deficit on a normalized basis. b) The budget deficit was the biggest (as a percentage of GDP) in 2016, at −98%. c) The deficit was the smallest in 2015 when it was 3.62%.

Chapter 12 Monetary Policy

Answers to End-of-Chapter Problems

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1.

Q: Money has three roles: a medium of exchange, a store of value, and a standard of value. Which role is money playing in each of the following? a) You go to the store and buy groceries. b) You put your money into a savings account. c) You write a check to make a purchase. d) You receive a paycheck from your employer. e) You have money taken out of your paycheck for your retirement account. f) You choose between two televisions, one costing $200 and the other costing $300.

A: a) Medium of exchange; b) Store of value; c) Medium of exchange; d) Medium of exchange; e) Store of value; f) Standard of value.

Explanation: Money is a medium of exchange. You can purchase goods and services and accept money in exchange for goods and services you provide. Money is a store of value.

You can hold onto money to use later. Lastly, money is a standard of value. It lets you make comparisons.

2.

Q: You are playing a game of poker with some friends, using poker chips to bet and to keep track of who is winning. At the end of the evening, the chips are cashed in for money. Are these poker chips serving as a medium of exchange, a store of value, or a standard of value?

A: All of the option are correct.

Explanation: The chips serve all three functions of money. Within the game they are being used as a medium of exchange since that is what you are betting with. They are a store of value since they are cashed in at the end. They also serve as a store of value within the game because you are "saving" them for when needed. They are also a standard of value since you are betting against others in terms of the number of chips.

3.

Q: The Federal Reserve was originally founded with the purpose of: a) fighting inflation. b) fighting financial crises. c) printing money. d) controlling the economy.

A: b) fighting financial crises Explanation: Congress founded the Federal Reserve System in 1913 in response to a financial panic in 1907. That panic—which few people except economists and historians remember today—wiped out several big banks and sent the stock market plummeting by nearly 50 percent.

4.

Q: One important goal of the Federal Reserve is controlling inflation. Which of the following policy actions are likely to help the Fed meet that goal? a) Cutting the fed funds rate to zero. b) Setting an inflation target of 2 percent.

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c) Raising the interest rate on reserves. d) Making a large loan to a big financial institution that is about to fail. e) Raising the discount rate.

A: b, c, and e.

Explanation: In general, a cut in the fed funds rate will put upward pressure on prices, while an increase in the fed funds rate will put downward pressure on prices. The Fed also has the power to change the reserve, and the interest rate on reserves. Cutting the rate on reserves should make banks more willing to use their funds for lending. Inflation targeting says the Fed should publicly announce its inflation target—perhaps around 2 percent—and then commit itself to running monetary policy to hit that target. The purpose of the discount window is to give financial institutions access to funds if they run short. By raising the discount rate, the Fed is discouraging borrowing and lending; and keeping inflation in check.

5.

Q: Another important goal of the Federal Reserve is ensuring financial stability. Which of the following policy actions are likely to help the Fed meet that goal? a) Encouraging troubled banks to use the discount window. b) Reassuring investors that the Federal Reserve is standing behind the banking system. c) Raising the fed funds rate. d) Lowering the fed funds rate. e) Direct lending to troubled Wall Street firms.

A: a, b, and e.

Explanation: The Fed‘s prime weapon against a financial crisis is its ability to lend vulnerable financial institutions as much money as they need. To do this, it uses the discount window. During the 2007-2008 financial crisis, the Fed created several new ways to lend money to hard-pressed banks and Wall Street firms. Market reassurance is also helpful.

6.

Q: Suppose the Fed raises the fed funds rate. a) How will this increase affect the interest rates on credit cards? b) Suppose you are the sort of person who buys clothing on your credit card and pays off the balance over time. Will the increase in the fed funds rate raise or lower your purchase of clothing? c) On a supply-demand graph for the clothing market, show how the increase in the fed funds rate shifts the demand curve for clothing. Label the new equilibrium point.

A: a) increase; b) decrease; c)

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Explanation: a) If the Fed raises the federal funds rate, this will put upward pressure on other rates, an increase in the federal funds rate will effectively raise the interest rates on credit cards. b) An increase in the federal funds rate will mean that purchasers put off paying the balance until a later time will likely pay more for their purchases. Higher interest payments reduce clothing purchases on credit.

7.

Q: People borrowing to buy a home usually have to borrow a large sum of money.

Explain how monetary policy is likely to affect the demand for homes.

A: Most people buy their homes by borrowing through either a fixed-rate or an adjustable rate mortgage. Interest rates on fixed-rate mortgages are tied to long-term interest rates, which are not usually affected by the Fed. But, the interest rate on a one-year adjustable mortgage (in which the rate can change once every year) moves up and down with the fed funds rate. When the fed funds rate heads down, so does the one-year mortgage rate. And when the fed funds rate rises, so does the one-year mortgage rate. As interest rates fall, the demand schedule shifts to the right, boosting overall sales. As a result, the Fed can directly affect the affordability of housing through monetary policy.

8.

Q: Suppose there is a sharp rise in oil prices that sends the price of gasoline to $6 per gallon. a) If the output gap is large and positive, the Fed should the fed funds rate. b) If the output gap is negative, the Fed should the fed funds rate. c) If the inflation rate is already 6 percent per year, the Fed should the fed funds rate.

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A: a) raise; b) lower; c) raise Explanation: a) Because prices are rising quickly, the Fed might want to fight inflation. The Fed can fight inflation by raising the federal funds rate. When it raises this rate, it raises other rates and reduces the demand for investment and other spending, which tempers the upward pressure on prices. b) The fact that the economy is headed for recession is a good justification for the Fed to lower the federal funds rate. By lowering the federal funds rate, the Fed will be lowering all interest rates in the economy, and this will cause investment and other spending to increase, leading to an increase in GDP that may help the economy recover from or avoid a recession. c) Since fighting inflation is the main goal of the Federal Reserve, it would make the most sense for it to raise the federal funds rate. This would fight inflation and reduce the increases in prices.

9.

Q: The Fed‘s tool for helping financial institutions that are running short on money, even when the economy is not in crisis, is: a) opening the discount window. b) lowering reserve requirements. c) lowering the fed funds rate. d) raising the fed funds rate.

A: a) opening the discount window Explanation: The Fed‘s prime weapon against a financial crisis is its ability to lend vulnerable financial institutions as much money as they need. To do this, it uses the discount window. During the financial crisis, the Fed created several new ways to lend money to hard-pressed banks and Wall Street firms.

10.

Q: Monetary policy has little effect on which of the following economic outcomes? a) Unemployment rate. b) Inflation. c) Technological change. d) Stability of the financial system. e) Long-term productivity growth.

A: c and e.

Explanation: Economists have become much more adept at using monetary policy to accomplish important goals, such as controlling inflation, smoothing out the business cycle, ensuring high employment financial stability. Most recently, to deal with the housing bust, the Fed had to find new ways of getting funds to vulnerable financial institutions. The elements of the economy are interrelated so there can be some eventual effect on other variables. The main impacts of monetary policy are felt through inflation and the stability of the financial system.

11.

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Q: Compared to fiscal policy, monetary policy is the preferred tool to fight inflation and smooth out business cycles, because: a) monetary policy is more sensitive to politics. b) monetary policy can be adjusted more easily when economic conditions change. c) fiscal policy can be reversed faster. d) monetary policy is less transparent.

A: b) monetary policy can be adjusted more easily when economic conditions change.

Explanation: The advantages of monetary policy over fiscal policy as a tool for influencing the economy are that monetary policy is more flexible and less political. The Fed can react more quickly, take action in small steps to see how the economy reacts, and change direction if needed.

Chapter 12 Monetary Policy

Answers to Appendix Problems 1.

Q: Which of the following statements is not true? a) Personal consumption is part of aggregate demand. b) If the price level rises, it becomes more attractive in the short run for businesses to hire workers. c) The wealth effect helps explain why the aggregate supply curve is upward-sloping. d) The long-term aggregate supply curve is related to potential GDP. A: c) The wealth effect helps explain why the aggregate supply curve is upward-sloping.

Explanation: Personal consumption is part of aggregate demand along with investment, government spending and net exports.

If the price level rises, it becomes more attractive in the short run for businesses to hire workers. In the short-run prices increase while costs stay the same. Therefore, profit margins rise, production rises, and more workers will be needed.

A higher price level means less aggregate quantity demanded in part, because of the wealth effect: if prices are higher, the cash in your pocket and your bank account is worth less. So the wealth effect does not explain why the aggregate supply curve is upward sloping.

The long-term aggregate supply curve is vertical at the level of potential GDP. 2.

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Q: Which of the following factors will affect the long-term aggregate supply curve? a) Productivity. b) Unemployment rate. c) Education of the workforce. d) Government spending.

A: a, b, and c.

Explanation: The aggregate supply curve links the average price level of the economy with the quantity of goods and services produced. The long-term aggregate supply curve is vertical, meaning that price changes have no effect on the quantity produced. The longterm aggregate supply curve shifts if there is any significant technological change that can change aggregate supply, any change in labor productivity, including educational levels. If more people are unemployed the long-term aggregate supply will shift left.

Changes in the level of potential output shift the aggregate supply curve. The information revolution led to an increase in productivity as more businesses learned how to use computers increasing the long-term aggregate supply. Changes in government spending influence aggregate demand, not aggregate supply.

3.

Q: From 2014 to 2015, the average price of crude oil plunged from $100 per barrel to $50 per barrel. a) Did the decline in the price of oil cause a shift in the aggregate supply curve or the aggregate demand curve? b) Draw an aggregate supply–aggregate demand diagram to illustrate the impact of the oil price decline. Label the original aggregate equilibrium and the new aggregate equilibrium. Does output Q rise or fall?

A: a) demand curve because of consumer spending increases, and supply curve because oil is a key commodity needed for production; b) rise.

Explanation: a) Because oil is a key commodity that has widespread uses in both consumption and production, a sharp decline in its price is going to move both the aggregate demand and aggregate supply curves to the right.

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b) The increase in aggregate demand causes higher prices and higher output.

4.

Q: Suppose that the Federal Reserve raises the fed funds rate. a) Does the increase in rates cause a shift in the aggregate supply curve or the aggregate demand curve? b) Draw an aggregate supply–aggregate demand diagram to illustrate the impact of the interest rate cut. Label the original aggregate equilibrium and the final aggregate equilibrium. c) Does output rise or fall in the short run? Does output rise or fall in the long run?

A: a) Both the aggregate supply curve and aggregate demand curve shift; b) see graph below; c) In the short run there is a decrease in output and prices, but in the long run there is only a decrease in prices.

Explanation: a) Higher interest rates will cause a leftward shift in both curves, but the stronger shift will be in aggregate supply. b) After the aggregate demand shift, the new equilibrium is at Point A. c) In the short run, there is an decrease in prices and in output. In the long run, there is only an decrease in prices.

5.

Q: The aggregate supply–aggregate demand framework can be used to understand the impact of the financial crisis that hit the U.S. economy in 2007–2009. a) As part of the financial crisis, banks tightened lending standards for consumers, making it harder to borrow to buy a car or home. Did that cause the aggregate demand curve to shift to the left or right? b) Assuming everything else stays constant, does the shift in the aggregate demand curve cause the equilibrium output to rise or fall? Does it cause the equilibrium price level to rise or fall?

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c) Another effect of the financial crisis was that many businesses found it harder to borrow money to buy new equipment or pay for raw materials, so their production slowed. Did that cause the aggregate supply curve to shift to the left or right? d) Assuming everything else stays constant, does the shift in the aggregate supply curve cause the equilibrium output to rise or fall? e) Based on your answers to (a) through (d), did the financial crisis raise the equilibrium price level, lower the equilibrium price level, or have an ambiguous effect?

A: a) shift to the left; b) price and output both fall; c) shift to the left; d) fall; e) An ambiguous effect.

Explanation: a) This affects the aggregate demand curve, because it makes consumers less able to spend money on consumption opportunities. It will shift the aggregate demand curve to the left. b) There is a decrease in prices and in output. c) Slower production shifts the aggregate supply to the left. d) The adverse shock in aggregate supply results in a decrease in output. e) The lower aggregate demand lowers the price level, so the combined effect on the price level is ambiguous. The lower aggregate demand lowers the output level, and the lower aggregate supply also lowers the output level.

Chapter 13 The Financial Markets Answers to End-of-Chapters Problems 1.

Q: Suppose a company borrows $20 million for a year at an interest rate of 6 percent annually, with all interest and principal to be paid at the end of the year. a) How much money will the company give the lender at the end of the year? b) How much is the principal, and how much is the interest payment?

A: a) $21.2 million; b) $20 million; $1.2 million.

Explanation: a) The company will have to repay 106% of the amount of the loan, which is 1.06 × $20 million = $21.2 million. b) The principal is the amount of the loan, the $20 million. The interest is 6% of this amount, 0.06 × $20 million = $1.2 million.

2.

Q: In each of the following scenarios, identify the borrower and the lender. a) A corporation sells $1,000,000 in bonds to investors.

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b) A family takes out a mortgage from a bank for $250,000. c) A foreign investor buys $10 million in Treasury bonds. d) You buy a new coat with your credit card issued by your local bank.

A: a) The corporation is the borrower and the purchasers of the bonds are the lenders; b) The bank is the lender and the family is the borrower; c) The foreign investor is the lender and the U.S. Treasury (or the U.S. government) is the borrower; d) You are the borrower and the credit card company is the lender.

3.

Q: Your brother-in-law wants to borrow $100,000 to start a new business selling Tshirts online. Will each of the following events make you more or less likely to lend him the money? Give the appropriate reason for each answer (time value of money or risk of default). a) The interest rate on savings accounts goes up. b) Your teenager wins a full scholarship to college. c) You discover that your brother-in-law has started a business before and failed. d) Economists predict a recession for next year. e) Your neighbor comes to you with a hot stock tip.

A: a) less likely; time value of money has increased; b) more likely; time value of money has decreased; c) less likely; risk of default is high; d) less likely; both the risk of default and the time value of money are too high; e) less likely; time value of money has increased.

Explanation: a) This will make you less likely to lend money to him, because the time value of money has increased. Giving the money to him now means forgoing more interest that can be earned on the money. b) This will make you more likely to lend him money, because the time value of money is lower. One of the things you might have done with the money (paying college tuition) is no longer an issue. In other words, this money is ―freed up‖ by having fewer other uses. c) This will make you less likely to lend him money, because it increases the risk of default if he has a knack for starting businesses that do not succeed. d) This will make you less likely to lend him money. The recession next year might cause consumers to purchase fewer T-shirts, which might make it more likely that the business will fail—increasing the risk of default. Additionally, if there is going to be a recession next year, you may want to have your money just in case of a decrease in salary— your time value of money. e) The hot stock tip is another possible use of your money that competes with your brother-in-law‘s proposed use. Because you could invest your money on this stock and potentially make a large profit, the time value of money has increased, making it less likely that you will lend to him.

4.

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Q: For each of the following, identify the main suppliers of capital, the main users of capital, and the financial intermediary. a) A bank credit card. b) An investment in a new mobile game company. c) A mortgage loan from a local bank.

A: a) Households and businesses; People seeking a short term loan; Banks; b) Risk taking investors; The new mobile game company; Venture capital firms; c) Depositors in the bank; Mortgage borrowers; Local bank Explanation: a) For a bank credit card, the main suppliers of capital are bank depositors— primarily households and businesses. The users of capital are those people that seek the short term loan that a credit card provides—households (who get mortgages, car loans, etc.) or businesses. The banks themselves are the financial intermediary. b) In this case, the main suppliers of capital are usually institutions that can take risks with their investments. The venture capital firms act as the financial intermediary and move this capital from the suppliers to the users of capital. In this case, the user of capital is the new mobile game company. c) In the mortgage market, the suppliers of capital are the depositors in the local bank. The users of capital are the mortgage borrowers, usually local residents or businesses. The financial intermediary is the local bank.

5.

Q: Are the following statements true or false? a) Venture capital goes to established companies such as General Motors and Procter & Gamble. b) Venture capital is a high-risk investment. c) The suppliers of capital in the venture capital market are ordinary individuals. d) Venture capital firms expect that most of the companies they invest in will be big successes. e) The venture capital market helps accelerate the adoption of new technology.

A: a) False; b) True; c) False; d) False; e) True.

Explanation: Venture capital firms are financial intermediaries that provide funds to risky start-ups.

6.

Q: Two restaurants are on the same block. One has been open 10 years and is a thriving business. The other one has been open for only a year. They both want to expand. When the two owners go to the local bank looking for a loan, which one is likely to get a lower interest rate? Explain in terms of the risk–return principle.

A: The restaurant that has been open for 10 years is more likely to get the loan because they have a lower risk of default.

Explanation: The restaurant that has been in business for 10 years and is thriving is more likely to secure the loan. This is because, with a proven track record of success, the risk of default for this restaurant is lower than for the other. Many restaurants 85

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open up every year only to fail shortly thereafter. The fact that the established restaurant has been around for 10 years is a sign that it is well-run and well-liked. It does not guarantee its future success, but it makes success more likely for this restaurant than for the newer one.

7.

Q: Following are the actual stock prices for Boeing at the end of three different months, along with dividend payments.

Month

Price of a Share of Boeing Stock (at end of month)

June 2013 June 2014 June 2015

$102.44 $127.23 $138.72 Dividend Paid on a Share of Boeing Stock $2.43

June 2014–June 2015 June 2014–June 2015

$3.28

a) What was the price appreciation from June 2013 to June 2014, in dollars? b) What was the price appreciation from June 2014 to June 2015, in dollars? c) What was the total return from June 2013 to June 2014, as a percentage? d) What was the total return from June 2014 to June 2015, as a percentage?

A: a) $24.79; b) $11.49; c) 26.57%; d) 11.61% Explanation: a) In dollars the price appreciated $24.79. As a percent, this is $24.79 / $102.44 = 24.20%. b) In dollars the price appreciated $11.49. As a percent, this is $11.49 / $127.23 = 9.03%. c) In dollars the return was $24.79 in appreciation plus $2.43 in dividends, or $27.22 total. As a percent, this is $27.22 / $102.44 = 26.57%. d) In dollars the return was $11.49 in appreciation plus $3.28 in dividends, or $14.77 total. As a percent, this is $14.77 / $127.33 = 11.61%.

8.

Q: If you use a credit card, have you looked carefully at how much the credit card company can charge you for your unpaid balances? Probably not—but you might be surprised to find that the maximum interest rate on a typical card can go up to 25 percent or higher. True, virtually all states have usury (excess interest) laws that appear to limit interest rates. For example, in Michigan the usury limit is 7 percent.

However, these laws are riddled with loopholes. They do not apply to national banks, 86

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including the ones that issue most credit cards. Nor do they apply to car financing companies or to late fees. In fact, the usury laws generally apply only to loans made between individuals or nonfinancial businesses, which of course are relatively rare. a) What would happen if state governments tightened their usury laws so that nobody could charge more than 5 percent on any kind of debt? Would that restriction increase or decrease the quantity of loans demanded? Explain. b) Would tighter usury laws increase or decrease the quantity of loans supplied?

Explain. c) Would tighter usury laws make it harder or easier to get a credit card? Explain.

A: a) increase; b) decrease; c) harder Explanation: a) That restriction would increase the quantity of loans demanded because the interest rate would fall for some loans. b) That restriction would decrease the quantity of loans supplied because the interest rate, and the profitability, would fall for many types of loans. c) Usury laws make it harder to get a credit card because only the lower-risk users would qualify for cards.

9.

Q: A large company needs money to construct a new headquarters building. Which of these funding sources is the least likely source of financing for the construction? a) Venture capital. b) The bond market. c) The mortgage market. d) The stock market.

A: a) Venture capital Explanation: The least likely source of financing for the construction is venture capital as this company is not a new, risky start-up.

10.

Q: When a company borrows money in the bond market, that means it: a) buys bonds. b) sells bonds. c) collects interest. d) sells stock.

A: b) sells bonds Explanation: When a company borrows money in the bond market that means it sells bonds to raise capital.

11.

Q: If financial regulation had been stricter in the years leading up to the financial crisis, in all likelihood mortgage loans would have been harder to get. That would have meant that: a) housing prices would have gone even higher. b) the housing bubble would have been less pronounced.

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c) the financial crisis would have been more severe.

A: b) the housing bubble would have been less pronounced.

Explanation: Stricter financial regulations would have meant lower availability of mortgages, which would have reduced upward pressure on housing.

Chapter 14 International Trade

Answers to End-of-Chapter Problems 1.

Q: Identify each of the following transactions as an import, an export, or neither, from the perspective of the United States. a) You purchase a 2019 BMW made in Germany. b) You purchase a Toyota Camry made in Toyota‘s Kentucky plant. c) Air France, an airline based in Paris, purchases a new 777 airplane from Boeing, a company based in Seattle. d) You call customer service for your computer and are connected to a service representative in India. e) You study in another country for a year.

A: a) Import; b) Neither; c) Export; d) Import; e) Import Explanation: Imports are goods and services produced outside a country and consumed within that country. Exports are goods and services produced in a country and sold outside that country.

2.

Q: Americans have a choice between buying U.S.-made motorcycles and imported motorcycles. a) Draw a supply-demand diagram for the market for U.S.-made motorcycles. Label the equilibrium point. b) Show how a drop in the price of imported motorcycles affects the demand curve for U.S.-made motorcycles. Label the new equilibrium point. c) Will the quantity of U.S.-made motorcycles rise, fall, or stay the same? Will the price of U.S.-made motorcycles rise, fall, or stay the same?

A: a) Equilibrium price: $15,000, Equilibrium quantity: 7 thousand units; see graph below; b) see graph below; c) Fall; Fall

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Explanation: a) Imported motorcycles are a substitute for U.S.-made goods since producers in other countries will want to satisfy the market. This would increase the demand of imports, but not necessarily the supply, so the supply curve stays the same. b) As demand falls, the quantity of U.S.-made motorcycles also falls. c) As demand falls, the price of U.S.-made motorcycles also falls.

3.

Q: The U.S. imposes a new tariff of $50.00 on every imported kitchen appliance. a) Does imposing the tariff raise or lower the prices U.S. consumers pay? b) Does the tariff raise or lower the prices foreign appliance producers receive for the appliances they sell in the United States? c) Does imposing the tariff increase or decrease the quantity of imported appliances? d) Does the tariff make U.S. consumers better off or worse off?

A: a) Raise; b) Lower; c) Decrease; d) Worse off 4.

Q: This chapter identifies four categories of gains from trade: lower prices of goods and services, access to natural resources, access to global markets, and access to new ideas.

For each of the following situations, identify which category of gain from trade is the most important and explain why. a) In 2018, Google received 54 percent of its revenue from customers outside the United States. b) The United States imports 94 percent of the platinum that it uses. c) The Wii video game machine, designed in Japan by Nintendo, was a big hit in the United States. d) The price of furniture to U.S. consumers has dropped because of imports from China.

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A: a) Access to global markets; b) Access to natural resources; c) Access to new ideas; d) Lower prices of goods and services Explanation: a) The primary gain from trade here is access to global markets. b) The primary gain from trade here is access to natural resources. c) The Wii system represents such a dramatic shift in video game technology that it is fair to classify this as representing access to new ideas. d) The primary gain from trade in this situation is lower prices so U.S. consumers directly benefit. Chinese furniture is less expensive that U.S.-made furniture, so competition with Chinese furniture drives down prices for U.S. consumers.

5.

Q: One important gain to trade is access to global markets. That‘s likely to be important for U.S. companies if: a) U.S. wages are rising. b) the United States is growing faster than other countries. c) other countries are growing faster than the United States. d) wages in other countries are falling.

A: c) other countries are growing faster than the United States Explanation: A gain from trade is that it gives companies access to global markets. The global market is bigger than any single national market, including that of the United States. So if you are running a company that has spent a lot of money developing a new product, you want to get the maximum benefit from your investment by selling it in the biggest market possible—that is, the global one.

6.

Q: Suppose that because of climate or some other reason, Country A‘s wheat farmers have higher productivity than Country B‘s wheat farmers. That is, on the same size farm, Country A can grow twice as much wheat as Country B with the same amount of labor. a) Is this an example of absolute advantage or comparative advantage? Explain. b) Does this mean Country A will necessarily export wheat to Country B? Explain.

A: a) This is an example of absolute advantage because Country A can produce more with the same resources as Country B; b) This means Country A may or may not export wheat depending on the ability to produce other goods.

Explanation: a) This is an example of absolute advantage because Country A can produce more with the same resources as Country B. b) Country A may or may not export wheat. In order to know whether Country A or Country B will export wheat, we would also need to know how they compare in terms of other goods they might trade. For example, if Country A can make three times as much of some other good as can Country B, then Country A would be an exporter of the other good and Country B would be an exporter of wheat. A country specializes in producing a good for which it has a comparative—not absolute—advantage.

7.

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Q: Suppose that a massive oil field was discovered in Michigan. If it was large enough, we would expect that: a) oil imports would increase. b) the United States would become a net exporter of oil. c) oil consumption would fall. d) the United States would lose its comparative advantage in oil drilling.

A: b) the United states would become a net exporter of oil.

8.

Q: Suppose that Chinese manufacturers develop the ability to build a good car that costs only $5,000. They start shipping it to the United States. For each of the following groups, say whether they are likely to win, lose, or not be affected much by the Chinese imported cars. a) Low-income American families. b) High-income American families. c) U.S. autoworkers. d) U.S. auto companies.

A: a) Win; b) Not be affected; c) Lose; c) Lose Explanation: a) The most obvious potential ‗winner‘ from this situation would be the low-income American families who get to purchase a less expensive car. The gains from trade here are the lower prices. b) High-income American families will not be affected much since they can afford more expensive cars. c) U.S. autoworkers are lose in this situation since there will be less demand for U.S.made cars. d) U.S. auto companies lose in this situation since there will be less demand for U.S.made cars.

9.

Q: Sometimes exchange rates change rapidly over a short period of time. For example, at the end of 1993, the exchange rate between Mexico and the United States was 3.1 pesos to the dollar. By the end of 1994, the exchange rate was 5 pesos to the dollar, and at the end of 1995, it was 7.7 pesos to the dollar. a) Over this period, did the dollar appreciate or depreciate against the peso? b) A $1,000 piece of construction equipment made in the United States would have cost pesos in 1993. It would have cost pesos in 1995. c) Would you expect exports from the United States to Mexico to rise or fall over this period? d) Suppose it cost 1,000 pesos to make a television set in Mexico in the early 1990s.

That was equivalent to dollars in 1993 and dollars in 1995. e) Would you expect imports from Mexico to the United States to rise or fall over this period?

A: a) appreciated; b) 3,1000; 7,700; c) fall; d) 322.58; 129.87; e) rise Explanation: 91

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a) Over this period, the dollar appreciated against the peso, because the dollar became worth more, in pesos, over this time. b) A $1,000 piece of construction equipment made in the United States would have cost (3.1 × 1,000) = 3,100 pesos in 1993. It would have cost 7,700 pesos in 1995. c) This change would make U.S. exports more expensive in Mexico, decreasing U.S. exports to Mexico. d) A 1,000 peso television made in the Mexico would have cost (1,000/3.1) = $322.58 in 1993. It would have cost $129.87 pesos in 1995. e) This change would make U.S. imports from Mexico cheaper for American buyers, increasing imports.

10.

Q: The currency of Iceland is called the krona. In July 2007, the exchange rate was roughly 60 krona to a dollar. In April 2019, the exchange rate was roughly 123 krona to a dollar. a) Over this period, would you expect exports from the United States to Iceland to get cheaper or more expensive in Iceland? b) Would you expect living standards in Iceland to rise or fall? c) Is the krona appreciating or depreciating against the dollar?

A: a) more expensive; b) fall; c) depreciating Explanation: a) Over this period, you would expect exports from the United States to Iceland to get more expensive in Iceland because more krona are needed to buy a dollar. b) You would you expect living standards in Iceland to fall since more krona are needed to buy a dollar. c) The krona has depreciated because more krona are needed to buy a dollar.

11.

Q: In 2018, the United States ran a trade deficit equal to about 3 percent of GDP. Suppose that the government imposed tariffs of 100 percent on all imported goods, effectively doubling the price of imported goods such as electronics and clothing. a) Would the quantity demanded of imported goods rise or fall? b) Would the size of the trade deficit shrink or increase? c) Would U.S. consumers be better off or worse off because of the tariffs?

A: a) fall; b) shrink; c) worse off Explanation: a) Because of the tariffs, imported goods are now more expensive. Therefore, American consumers would buy fewer. b) Since American consumers are buying far fewer imports, the trade deficit would shrink. c) The American consumer would be worse off.

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Chapter 15 Technological Change Answers to End-of-Chapter Problems 1.

Q: Technological change is the surest route to higher living standards. For example, farmers can now use sensors in their fields to precisely identify the best times to plant, water, and harvest crops. This enables farmers to produce more food using the same amount of resources, such as land and fertilizer. a) Draw a supply–demand diagram for food. In the diagram, show how technological change in farming affects the supply curve for food. Label the new equilibrium point. b) Does technological change in farming raise or lower the price of food? Does technological change in farming raise or lower the quantity of food demanded? c) Would you expect technological change in farming to reduce or increase the number of people who go hungry? Explain. d) Would you expect technological change in farming to reduce or increase the exports of food? Explain.

A: a) See graph below; b) Lower; c) Increase; d) Reduce; e) Increase

Explanation: Technological change results in improved living standards, faster growth, and longer lives.

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b) Technological change will lower the price of food because now farmers can produce more with fewer or the same resources. c) The decrease in price, caused by the change in technology, increased the quantity demanded. d) Technological change will reduce the number of people who go hungry because there would be more food available. e) Technological change will increase the foods we export because there would be more food available.

2.

Q: Moore‘s law says that microprocessor performance improves at a rapid pace. For each of the following statements, state whether Moore‘s law would make it more or less likely. a) Cell phones getting smaller. b) The cost of internet service rising. c) The creation of new companies like Facebook. d) Supermarkets charging a fee for using a credit card.

A: a) less; b) more; c) less; d) more Explanation: Moore‘s law says that microprocessors double their performance every 18– 24 months. a) The end of Moore‘s law would make this event less likely since cell phone components would not be improved. b) The end of Moore‘s law would make this event more likely since the costs of electronic service should increase. c) The end of Moore‘s law would make this event less likely since decreased microprocessor performance would make it more costly to create these types of companies. d) The end of Moore‘s law would make this event more likely since the costs of data processing should rise.

3.

Q: Say whether each of the following is mainly a productivity-enhancing innovation, a creation of new goods and services, or a quality-of-life innovation. a) A car that emits less pollution. b) A car that uses less gasoline. c) A drug that cures lung cancer. d) Robot construction workers that can put up buildings. e) Passenger drones that can carry up to four people by air over short distances.

A: a) a quality-of-life innovation; b) a productivity-enhancing innovation; c) a quality-oflife innovation; d) a productivity-enhancing innovation; e) a creation of new goods and services Explanation: A productivity-enhancing innovation gives you more of the same product, holding fixed the resources used. Businesses can afford to produce more output for the same cost, typically reducing the market price and increasing the quantity sold in the market. The creation of new goods and services enable people to do things that weren‘t

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possible before. A quality-of-life innovation generates positive externalities or reduces negative externalities. a) This is a quality-of-life enhancement because we get to enjoy the same product (a car), but we get to live in a world with less pollution. b) This is a productivity-enhancing innovation because we get the same outcome, but it involves using fewer of society‘s resources. c) This is a quality-of-life enhancement because it allows you to live longer. This good provides others with a positive externality. d) A productivity-enhancing because we can construct more buildings with fewer resources. e) A productivity-enhancing because we can get around a lot faster.

4.

Q: Which of the following represents an increase in innovative activity? Explain. a) A drug company hires more scientists to work on a new cancer drug. b) A department store hires more sales clerks. c) A university buys faster computers for its research labs. d) An automobile manufacturer tells its engineers to figure out how to reduce the cost of car production.

A: a and c Explanation: A drug company hires more scientists to work on a new cancer drug: Because more resources are devoted to innovative activity, it is reasonable to expect that more innovation will result. This represents an increase in innovative activity.

A department store hires more clerks: This is not an increase in innovative activity because sales clerks are not engaged in research or development.

A university buys faster computers for its research labs: This does represent an increase in innovative activity because it shows more resources being devoted to research and development. We could reasonably expect the amount of innovation to increase.

An automobile manufacturer tells its engineers to figure out how to reduce the cost of car production: This alone would not constitute an increase in innovative activity, unless the firm provided the engineers with the tools and funding, etc., that were needed to accomplish this task.

5.

Q: Many U.S. companies have opened research facilities in China and India, where the lower cost of labor lets them hire more scientists and engineers. Consider a company trying to develop passenger drones. a) Draw the supply and demand curves for innovative activities directed toward the development of passenger drones. b) Suppose the company moves some of the development of passenger drones to China and India. Does this affect the supply curve or the demand curve for innovative activities? Show the change on your supply–demand diagram.

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c) What happens to the quantity of innovative activity when new research centers open abroad? Do we get more or fewer new models of passenger drones?

A: a) see graph below

b) Increases the supply of innovative activity; see graph below

c) Increase, leading to more new passenger drones Explanation: If the labor cost for scientists and engineers is lower abroad, then this affects the supply of innovative activities. It means that more innovation can be done at any given price.

This will shift the supply curve for innovative activity to the right.

The quantity of innovative activities increases when research centers open abroad.

Presumably, this increased innovative activity will lead to more new models of passenger drones.

6.

Q: There‘s a very heavy concentration of biotechnology firms in the Boston area that are closely attached to the Massachusetts Institute of Technology. This concentration of 96

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biotech is usually considered one of the premier innovation clusters in the United States.

If you were starting a new biotech company, which of the following would be an advantage of locating to the Boston area? a) A large pool of well-trained scientists. b) Warm climate. c) Lack of competition from other companies in the same industry. d) Easy access to special technical equipment.

A: a and d Explanation: The main advantage to starting your new biotech company in the Boston area is that you would have better access to the skilled workforce and the specialized machinery and materials that you need. Workers with the kinds of skills needed by firms in this industry will locate to the Boston area because they realize that there is a cluster of biotech firms there. Likewise, firms that offer products or services that support the biotech industry will also locate to the Boston area. This makes the inputs that you need cheaper (because they‘re located locally).

7.

Q: Suppose that a drug company spends $1 billion developing a new treatment that potentially cures cancer. a) Is the private return from this innovative activity best measured by increased life expectancy for patients, or by higher profits for the drug company? b) Is the social return from this innovative activity best measured by increased life expectancy for patients, or by higher profits for the drug company?

A: a) higher profits for the drug company; b) increased life expectancy for patients Explanation: The private return from innovative activities is the gain to the original company sponsoring the research, while the social return from innovation is the benefit to the whole economy. a) The private return is the profits this company makes from sales of its new drug. b) The social return is the decrease in deaths from cancer and the lengthened life expectancies for many people.

8.

Q: Imagine that a company has a monopoly on video game sales in a country. That is, it is the only company allowed to develop and sell new video games. The company has a choice: It can spend $500,000 to slightly update its best-selling game or $100 million to write a completely new game, which might or might not be a success. a) As a monopolist, explain which choice the company might make. b) Now suppose the video game company faces new competition in the form of a hot new game imported from another country. Explain which choice the company might make.

A: a) take the safer route and update the old game; b) take the innovative route and choose to write a new game Explanation: a) Because the monopolist does not have any competitors, it does not have to bear the risk of putting a product on the market that might fail. The monopolist might take the 97

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safer route and simply update the old game. The textbook includes ―intensity of competition‖ as one of the factors of the demand for innovative activity. A monopolist has no competition, so it likewise has a lower demand for innovative activities. b) If a hot new game is imported from another country, then the intensity of competition has just increased. The demand curve for innovative activities for the previouslymonopolistic video game company will shift to the right. Whether it will definitely choose to write a new game or not, it is certainly more likely that the video game manufacturer will take the risk now that it has competition.

9.

Q: Suppose workers are going to retire at a higher age and stay in the workforce longer. a) Does the higher retirement age increase or decrease the willingness of workers to learn new technology? b) Does postponed retirement affect the supply curve or the demand curve for innovative activities? What happens to the quantity of innovative activities?

A: a) increase; b) the demand curve; increase Explanation: a) If retirement ages rise, then workers plan on staying in the workforce longer. This increases the potential return from learning new technologies. If a worker expects to retire very young, he or she may try to ―get by‖ without learning new technologies because he or she does not intend on working for very long. However, if a worker expects to stay on the job for many years, the potential benefits from learning the new technology (in the form of higher wages over a long period of time) increase. b) Since workers are more likely to learn and adapt to new technologies as the retirement age increases, this increases the expected return to the firm of investing in innovative activities. For example, if a firm knew that its employees would not bother learning a new technology, then they would benefit little from developing it.

However, if the firm expected its employees to learn and adapt to the technology, then it might be worth it. This would shift the demand curve for innovative activities to the right. As this happens, the quantity of innovative activities will increase.

10.

Q: Companies are putting large amounts of money into developing self-driving trucks (also known as ―autonomous trucks‖). Self-driving trucks are expected to save money by reducing labor costs. In addition, because self-driving trucks can travel all night, they can get cargo to its destination faster. Finally, self-driving trucks will reduce the occupational death rate for truckers, which today is quite high. a) Draw the supply–demand diagram for R&D spending on self-driving trucks. Suppose the wage of truck drivers rises. Show how that affects the demand curve for R&D spending for self-driving. Label the new equilibrium point. b) Does the amount spent on self-driving truck R&D go up or down? c) Suppose Congress passes a law imposing a big fine on trucking companies for each death of a truck driver. Show how that affects the demand curve for R&D spending for self-driving. Label the new equilibrium point.

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A: a) See graphs below

b) Up c) see graph below

Explanation: a) The demand for R&D spending on trucks will increase. With an increase in the wage truck drivers receive, trucking companies will increase their demand for more R&D. b) With a big fine for each trucker driver killed while on the job, trucking companies will increase their demand for more R&D. c) If a law is passed fining truck companies large amounts of money for each death of a truck driver, then the demand for R&D spending will increase.

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Chapter 16 Economics of the Labor Market Answers to End-of-Chapter Problems 1.

Q: Identify which of the following statements is false. a) The internet makes it easier for employers to find potential job candidates. b) High unemployment means there are no job openings. c) The labor demand curve slopes down. d) The labor market is in some ways different from other markets.

A: b) High unemployment means there are no job openings.

Explanation: The Internet makes it easier for employers to find potential job candidates.

The labor demand curve slopes down. The labor market is in some ways different than other markets. High unemployment can occur if job searchers cannot be matched with job openings.

2.

Q: The following table shows the production function for a bicycle manufacturer.

Number of Workers

Number of Bicycles Produced per Week

1 2 3 4 5

3 7 10 12 13

a) Suppose that the weekly wage is $850. What is the marginal labor cost of the second worker per week? b) Suppose that the price of a bicycle is $450. What is the marginal revenue of the third worker, per week? c) How many workers does the bicycle manufacturer employ if the price per bicycle is $450 and the weekly wage is $850? d) If the price per bicycle drops to $300, what happens to the number of employed workers?

A: a) $850; b) $1,350; c) 4 workers; d) fall Explanation: a) The marginal cost of labor is the wage that the company must pay the additional worker. In this case, the marginal cost of labor cost will always be $850. b) The marginal revenue is equal to the price of the output times the marginal product.

For example, the marginal revenue for three workers is $450 × 3 = $1,350.

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c) The marginal revenue ($900) is still greater than the marginal cost of labor ($850) at 4 workers. For 5 workers the marginal revenue ($450) is less than the marginal cost of labor ($850). Therefore, the bicycle manufacturer will hire 4 workers. d) The number of employed workers will fall since the marginal revenue will fall because bicycles are now selling at a lower price. At a lower price received per bicycle the demand for labor will fall.

3.

Q: Consider the labor demand curve for a city. For each of the following events, say whether the labor demand curve shifts to the left, shifts to the right, or stays in place.

Explain. a) The local factory installs a robot assembly line. b) The local wage increases. c) The local factory is able to sell more products overseas. d) A new department store opens in town to compete with existing retailers.

A: a) shifts to the left; b) stays in place; c) shifts to the right; d) shifts to the right Explanation: a) A robotic assembly line means that the factory no longer needs human line workers as much. This will decrease the demand for labor, shifting the demand curve to the left.

However, it will need workers who can perform maintenance on these robots (something it never needed before), so the factory‘s demand for labor with robotrepair skills would increase, shifting that demand curve to the right. b) Nothing happens to move the demand curve in this case. The wage is determined by the intersection of supply and demand (unless there are other causes like unions or a minimum wage). If the wage has gone up, the quantity of labor demanded would go down, but the curve itself would not shift. c) If the prices of the products made at the local factory go up, then the marginal revenue of the workers at this factory also goes up, making the benefit from hiring additional workers greater. In this case, the firm would want more workers, so the demand for labor would increase; the demand curve would shift to the right. d) If a new department store opens, this increases the ‗number of buyers‘ of labor, which will increase demand and cause the demand curve to shift to the right. At any given wage, there are more jobs offered in this city than before because there is one more employer.

4.

Q: A restaurant installs an automated conveyor belt system for getting food from the kitchen to customers‘ tables faster, with fewer dropped plates. Is this technology a substitute or a complement for the following jobs? a) Waitress. b) Conveyor belt mechanic. c) Cook. d) Cashier.

A: a) substitute; b) complement; c) complement; d) complement Explanation: 101

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a) Substitute. Waitresses provide other services too, but since this conveyor belt system will mean that the waitresses can spend more of their time taking orders and less time bringing food out to tables, the restaurant will need fewer waitresses. Because this technology decreases the demand for waitresses, this is a substitute. b) Complement. The restaurant will have to hire more conveyor belt mechanics after they install the conveyor belt (compared to before they installed it). Therefore, since this technology increases the demand for this type of labor, they are complements. c) Complement. If the restaurant is able to serve more customers because of the new system, then it will need to hire more cooks. Therefore, since this technology increases the demand for this type of labor, they are complements. d) Complement. The restaurant will be able to serve customers quicker because of the new system. It is conceivable that more customers will be served since new customers will be able to be serviced quicker as well.

5.

Q: Identify whether each of the following situations is an example of the market expansion effect or the labor pool effect of globalization. a) A furniture maker shifts production from the United States to China. b) Merck, a large U.S. pharmaceutical company, hires more scientists in the United States so it can develop drugs to sell in overseas markets. c) A U.S. newspaper hires reporters in India to write about the U.S. stock market. d) A U.S. magazine hires reporters in the United States to write about the Indian stock market.

A: a) the labor pool effect: b) the market expansion effect; c) the labor pool effect; d) the market expansion effect Explanation: Assuming no change in demand, the labor pool effect causes the wages in the United States to drop because U.S. companies can now employ low-wage workers in other countries. The market expansion effect represents an increase in labor demand when businesses can sell to overseas markets.

6.

Q: Indicate whether each of these factors will increase or decrease the odds that a young person in the United States will choose to get a college education. a) An increase in the global number of unskilled workers. b) Increased industry investment in technology. c) Increased college tuition. d) Increased pay for high school graduates. e) Rising wages in India for college-educated workers.

A: a) increase; b) increase; c) decrease; d) decrease; e) increase Explanation: a) This would increase the odds that a young person would pursue a college education, because wages for unskilled workers will fall and young people will want to have skills.

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b) This would increase the odds that a young person would pursue a college education, because more technology in industry will raise demand for skilled workers who can use the technology. c) This would decrease the odds that a young person would pursue a college education, because the returns (net of the cost) to receiving a college education will fall. d) This would decrease the odds that a young person would pursue a college education, because workers would realize that they could earn a decent living without a degree.

In other words, the returns (net of the cost) to receiving a college education (as opposed to only a high school education) will fall. e) This would increase the odds that a young person would pursue a college education, because rising wages for college-educated workers in India means that these Indian workers are less attractive hires to U.S. firms, which makes U.S. workers relatively more attractive. Since this raises the demand for college-educated U.S. workers, it raises their wage. Young people will respond to the higher wages for collegeeducated workers by pursuing college education.

7.

Q: Suppose a law is passed forcing everyone to work until age 69. a) In March 2019, the labor force participation rate of people aged 65–69 was 34 percent. After the law is passed, will the labor force participation rate of this group go up or down? b) What will be the impact of the new law on the labor supply curve? Will it shift left, shift right, or stay in place? c) Will the new law raise wages, cut wages, or leave them the same?

A: a) up; b) increase; c) cut wages Explanation: a) Because this law would not allow workers in this age range to retire or otherwise exit the labor force, it would increase the labor force participation rate. Even if it were a very strict law, and even if exceptions were made for the disabled, etc., although the rate would be always be lower than 100%, it would still be higher than 34%. b) This new law would increase the labor supply, because it would make early retirement less attractive. c) When the supply of labor has increased, it reduces equilibrium wages in the market.

8.

Q: Suppose labor laws in China were changed to require a higher minimum wage for Chinese workers. a) What would happen to the price of Chinese-made products? b) How would that affect the labor demand curve for U.S. factory workers? c) What would happen to U.S. factory wages?

A: a) increase; b) increase; c) increase Explanation: a) Because Chinese workers are an input for Chinese-made goods, this increase in their wage is an increase in costs for Chinese manufacturers. This would shift the supply curves for Chinese-made goods to the left, which will lead to a higher price.

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b) If Chinese law required a higher minimum wage, U.S. workers become more attractive than they previously were. This would increase the demand for U.S. factory workers and shift the demand curve for U.S. workers to the right. c) Since the demand curve for U.S. workers would shift to the right, this would raise wages for U.S. factory workers.

9.

Q: A town changes its zoning regulations to close down all its dance clubs because too many workers are staying out late and aren‘t able to come to work the next day. a) In the short run, does the labor supply curve shift to the left, shift to the right, or stay the same? What happens to production in the town? b) The town develops a reputation as a boring place, so young people no longer want to live there. In the long run, does the labor supply curve shift to the left or the right? c) In the long run, would you expect wages and employment to go up or down? Explain your reasoning.

A: a) shift to the right; increase; b) shift to the left; c) up Explanation: a) In the short run, if it has the desired effect, it would shift the labor supply curve to the right because every morning more workers are awake and ready for work than previously would have been. This leads to higher employment, and production in the town increases. b) This would cause a shift of the labor supply curve to the left in the long run. As young people begin leaving the town, there are fewer and fewer workers available to be hired by firms.

10.

Q: Consider the long-term labor supply curve for a city. For each of the following events, say whether the labor supply curve shifts to the left, shifts to the right, or stays in place.

Explain. a) The tuition of the local community college is raised. b) The local wage increases. c) The minimum wage in a neighboring city is increased. d) The city receives a sudden influx of immigrants from another country.

A: a) shifts right for jobs not requiring a college degree; b) stays the same; c) shifts left because workers will want to work in that neighboring city; d) shifts right because more workers are willing to work at every wage Explanation: a) If tuition for college increases, then some people may choose to go to work rather than go to college. Therefore, for the kinds of jobs that these workers will go into, the labor supply curve will shift to the right. b) Nothing happens to move the supply curve in this case. The wage is determined by the intersection of supply and demand (unless there are other causes like unions or a minimum wage). If the wage has gone up, the quantity of labor supplied would go up, but the curve itself would not shift.

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c) If the minimum wage in a neighboring city is increased, then workers will either go to work in that neighboring city or demand pay equivalent to the greater pay in the neighboring city. Either way, the supply of labor would decrease, so the supply curve would shift to the left. d) A sudden influx of immigrants would increase the supply of labor and shift the supply curve to the right. At any given wage, firms are able to find more workers willing to work than they previously were able to find.

11.

Q: This chapter focused on individuals who work for an employer. But another alternative is to start your own business. This is a risky proposition, however. The upside is that successful business owners can make a lot of money. The downside is that many new businesses either fail or end up requiring a lot of work hours without much profit. a) What are the advantages of starting a new business when you are young? (Hint: Consider opportunity cost.) b) What are the disadvantages of starting a new business when you are young? (Hint: Think about the different skills you might need.)

A: a) There is a lower opportunity cost because less experience results in lower wages; b) young people have not had time to develop the skills needed to foster a business to success.

Explanation: a) Younger people have less experience, and typically earn lower wages in the labor market. Therefore, giving up lower wages to start their own business results in a lower opportunity cost. b) Younger people may have less access to capital resources and will have had less time to develop the skills that will be useful in starting and fostering a new business.

Chapter 17 The Distribution of Income

Answers to End-of-Chapter Problems 1.

Q: Look at Figure 17.1, which gives some basic information about the income distribution in 2017. a) What percentage of households received between $100,000 and $150,000 in income in 2017? b) What percentage of total income did this group get? c) What percentage of households received between $0 and $100,000 in income in 2017? (Hint: You can add the percentages of different categories.) d) Look at the households with incomes greater than $250,000. What percentage of total income did this group get?

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A: a) 13%; b) 21%; c) 76%; d) 16% 2.

Q: The following table gives eight occupations and their average annual wages in 2017, as determined by the Bureau of Labor Statistics (these are nationwide averages across all experience levels).

Occupation

Compensation and benefits managers Elementary schoolteachers Fashion designers Network and computer systems administrators Paralegals and legal assistants Registered nurses Security guards Shampooers (in haircutting establishments)

Average Annual Wage (Dollars)

Quintile

$ 132,860

—

62,200

—

87,610 87,070

— —

54,500

—

75,510 32,050 22,160

— — —

a) Suppose that a worker is the only person employed in a one-earner household. For each occupation listed in the table, identify which quintile of income that puts their household into. Use the data in Table 17.1, and assume that the quintiles for 2018 are the same as the ones for 2017. b) Suppose a fashion designer married a security guard, and they both kept working.

Which quintile would their household be in? c) Suppose a network administrator married a registered nurse. Which quintile would their household be in (assuming both keep working)?

A: a) see chart below; b) Fourth; c) Top Occupation Compensation and benefits managers Elementary schoolteachers Fashion designers Network and computer systems administrators Paralegals and legal assistants Registered nurses

Average Annual Wage (Dollars)

Quintile

$ 132,860

Top

62,200

Third

87,610 87,070

Fourth Fourth

54,500

Third

75,510

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Security guards Shampooers (in hair-cutting establishments)

32,050 22,160

Second Second

3.

Q: Which of the following is not a reason for rising inequality? a) Widespread use of computers. b) Rising enrollments at community colleges. c) Increased global competition from China and other low-wage countries. d) The widening education premium.

A: b) Rising enrollments at community colleges Explanation: Reasons for rising inequality include rapid technological change, the growth of foreign trade, shift to superstar markets, and changes in government policy.

4.

Q: Suppose that we have a country with a population of 30 million, where 3 million are below the poverty line. What would the poverty rate be? a) 10 percent. b) 30 percent. c) 3 percent. d) 15 percent.

A: a) 10 percent Explanation: The poverty rate would be (3/30) × 100 = 10%.

5.

Q: Many CEOs of large corporations have enormous pay packages in the tens of millions of dollars per year. Such high pay helps contribute to income inequality because the vast majority of people earn much less. Suppose Congress passed a law that the annual pay for any job could not exceed $500,000 per year. What effect would this law have on the market for corporate executives?

A: The supply would fall.

Explanation: Many corporate executives would choose not to work, or to work in other professions, rather than take the pay cut required by this law.

6.

Q: It‘s sometimes said, half in jest, that the best antipoverty policy is to simply give the poor more money. Which of the following would be a disadvantage of such a policy? a) More equal societies tend to experience greater growth. b) People would have less incentive to work hard. c) Big income differences cause political strife. d) A wide gap in income is immoral.

A: b) People would have less incentive to work hard.

Explanation: It is better to give people skills than money. Money can be spent, but skills can be used to generate ongoing income.

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7.

Q: Suppose our tax system imposed a 30 percent tax rate on income up to $50,000 and a 10 percent tax rate on income over $50,000. a) Would this tax system be progressive or regressive? b) The Social Security tax paid by workers is 6.2 percent of wages, up to a maximum of $132,900 in 2019. For incomes above that maximum, no additional taxes are paid. Is the Social Security tax progressive or regressive?

A: a) regressive; b) regressive Explanation: a) This tax system would be regressive, because the average tax rate would fall as income went up. For example, someone who made exactly $50,000 would pay (0.30 × $50,000) = $15,000 in taxes. This is 30 percent of their income. However, someone who made $100,000 would pay (0.30 × $50,000) + (0.10 × $50,000) = $20,000 in taxes. This is only 20 percent of their income. b) Described in this way, the Social Security tax is regressive, because anyone who makes less than $132,900 in income pays 6.2 percent of their wages in Social Security taxes, but anyone who makes more than $132,900 pays less than 6.2 percent of their income in Social Security taxes. Social Security benefits are limited such that the wealthy receive smaller benefits as a percent of their contributions.

8.

Q: Which of the following situations most clearly represents labor market discrimination against women? a) A man earns $50,000 per year, and a woman in a different occupation and the same education and experience earns $40,000. b) A woman earns $75,000 and a man with less experience earns $70,000. c) A man earns $50,000 per year, and a woman in the same occupation with the same education and experience earns $45,000. d) A woman earns $100,000 and a man with less experience and more education earns $110,000.

A: c) A man earns $50,000 per year, and a woman in the same occupation with the same education and experience earns $45,000 Explanation: A man who earns $50,000 per year, and a woman in the same occupation with the same education and experience who earns $45,000 is an example of discrimination. Since she has the same education and experience, and earns less, there is evidence of discrimination.

Chapter 18 The Economics of Retirement and Health Care Answers to End-of-Chapter Problems

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1.

Q: In 2017, health care cost Americans an average of $10,209 per person, a figure that includes both private and public spending. Canadians spent $4,826 per person on health care. Life expectancy at birth in Canada is 82.8 years, and life expectancy at birth in the United States is 78.6 years. In which country do people expect to live longer? In which country is health care more expensive? The Canadian health care system has universal coverage provided by the government, supplemented by private insurance. Wait times are long: One report, by the Fraser Institute, reported a median wait time of almost 20 weeks from referral by a general practitioner to treatment by a specialist. Out of the following, which are potential reasons why wait times might be longer? a) The Canadian health care system employs fewer specialists per patient than the United States health care system. b) Canadians are sicker than Americans. c) Canada spends less per person on health care than the United States does. d) Canadians care less about waiting than Americans do.

A: People are expected to live longer in Canada; Health care is more expensive in the United States; a and c are both potential reasons why wait time might be longer.

Explanation: Canadians live about 4.2 years longer than Americans.

Americans spend more on health care than Canadians by $5,383 per person.

Because Canadians spend less on health care than Americans and they may employ fewer specialists than the United States could be 2 reasons wait times are longer.

2.

Q: In this chapter, we identify several reasons that might explain why health care costs have risen so rapidly. Fill in the blanks in the following statements. a) If a state‘s population is older than the rest of the country, health care costs would be than the rest of the country. b) If workers were forced to pay income taxes on the value of their employer-provided health care benefits, then the growth rate of health care costs would . c) If we could identify health care practices that don‘t work, then the cost of health care would . d) If patients were forced to pay a bigger share of their medical bills, that would lessen the problem.

A: a) be increasing; b) be decreasing; c) decrease; d) health care poverty Explanation: a) In those states that have an older population, more will be spent on medical care than those states that have a younger population. b) If workers were forced to pay income taxes on the value of their employer provided health care benefits, then the growth rate of health care costs would decrease. c) If we could identify health care practices, the cost of health care would decrease.

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d) If patients were forced to pay more of their medical bills, then that would worsen the health care poverty program as more poor people could not afford the additional costs.

3.

Q: Cancer was the second-leading cause of death in 2016, resulting in an estimated 600,000 deaths. Suppose a drug was approved that immediately cured cancer. a) In the short run, is that drug likely to increase or decrease health care spending?

Explain. b) In the long run, is that drug likely to increase or decrease health care spending?

Explain.

A: a) Increase; b) Decrease Explanation: a) In the short run, the drug will increase health care spending because of the higher cost of treatment. b) In the long run, the drug will decrease health care spending. As the original manufacturer's patents expire, generic drugs, or copies of brand drugs, will become less expensive.

4.

Q: The United States is currently debating another round of health reform. a) Name the three approaches to health care reform. b) Which approach to health care reform is likely to provide the most Americans with health insurance? c) Which approach to health care reform is likely to reduce taxes? d) Which approach to health care reform is likely to lead to an adverse selection problem?

A: a) Keeping and improving current systems; Reducing government‘s role; Increasing government‘s role; b) Increasing government‘s role; c) Reducing government‘s role; d) Reducing government‘s role Explanation: a) The 3 approaches to health care reform include: keeping the current system, increasing government's role, and decreasing government's role. b) By increasing government's role the government would offer individuals more options for government-provided health insurance. Some people have proposed a single-payer system. The positives of this proposal is that everyone would have access to good health insurance, perhaps at a lower price. Companies would have lower health care costs. The negatives include taxes would likely rise. c) By reducing government's role would reducing regulation of health insurance plans and cut back on subsidies for poor. The positives of this proposal is that it would lower cost to taxpayers, at least in short run. The negatives include more people would not have health insurance. d) Decreasing government's role would mean that healthy low-income people will choose not to get health insurance, so potential buyers of insurance will be less healthy than average.

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5.

Q: Consider the life cycle theory of retirement. a) In which stage do workers accumulate savings for retirement? b) An individual who comes from a long-lived family needs to pay special attention to which retirement life cycle problem? c) Social Security payments are adjusted for inflation. That helps solve which retirement life cycle problem?

A: a) During the latter part of their working lives; b) Retirement uncertainty problem; c) Retirement uncertainty problem.

Explanation: a) The life cycle theory of retirement says people spend when they are young, save during the latter part of their working lives, and spend while they are retired. b) The retirement uncertainty problem is that the length of your life is not the only unknown, making it difficult to plan the right amount of money to save for retirement. c) Social Security benefits are indexed to inflation—so as prices rise, the benefits rise to keep pace with them. This reduces the retirement uncertainty problem.

6.

Q: Suppose that you reach 65 years old and have $100,000 in an investment that pays a return of 5 percent per year. a) If you withdraw $10,000 at the end of each year for living expenses, how many years will it take before your investment is gone? (Hint: Go year by year and calculate the return on the investment and then the amount remaining after the withdrawal.) b) If you withdraw $5,000 at the end of each year for living expenses, how many years will it take before your investment is gone?

A: a) 14 years; b) The money will permanently be in the account.

Explanation: b) Since the earnings per year ($5,000 = $100,000 × 0.05) are equal to the withdrawals, the money will permanently be in the account.

7.

Q: Employer retirement plans are an important element of retirement income. a) Suppose that in addition to your salary, your employer invests a sum of money in the stock market each year in your name. Then, when you retire, you get the current value of the invested money. Is this a defined benefit or a defined contribution plan? b) Suppose the plan is set up so that it is invested only in the stock of the company you work for. Which life cycle retirement problem does this not solve?

A: a) Defined contribution plan; b) Retirement uncertainty problem Explanation: a) A defined contribution plan allows workers to make their own choices about the investment of their savings and then pays retirees based on the returns from their investments. A defined benefit plan is one that pays a predetermined amount of money to retirees. b) This does not solve the retirement uncertainty problem because you do not know whether this stock value will increase or decrease over the years.

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8.

Q: The labor force participation rate of an age group is the percentage of people of that age who are either working or actively looking for jobs. Would you expect the existence of Social Security to increase or decrease the labor force participation rate for people aged 65 and over? Explain your answer.

A: a) decrease Explanation: By providing a source of income for people 65 and older, Social Security reduces the labor force participation rate for this age group. Without Social Security payments, many people in this age group would have to work.

9.

Q: Most economists agree that immigration helps improve the finances of the Social Security system. a) To benefit Social Security funding, would we prefer immigrants to be old or young?

Explain. b) Would the finances of Social Security benefit more from low-wage immigrants or high-wage, highly skilled immigrants? c) Assume that about half of illegal immigrants actually pay Social Security taxes, but they are unlikely to collect benefits. Based on that assumption, do illegal immigrants help improve the finances of the Social Security system? Explain.

A: a) Young, so they can work longer and pay into Social Security more; b) High wage immigrants because they will pay more into Social Security taxes; c) Yes, the system will be improved by illegal immigrants because they pay into Social Security and do not collect.

Explanation: a) Preferably the immigrants will be young so they can work longer, and delay the period when they will collect benefits. b) Since Social Security payments are a percentage of income (up to the maximum income level), the higher the income, the greater the level of revenue from the tax. c) Since these illegal workers pay into the system and will not collect, they improve the finances of the Social Security system.

10.

Q: The following table gives the population at different ages for the city of Elizabeth, New Jersey, as of 2017.

Age

Number of People

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10,442 18,709 8,266

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Ages 20–64 Ages 65 and over

78,247 12,368

a) What is the old-age dependency ratio in Elizabeth?

A: 0.158 Explanation: The old-age dependency ratio is the ratio of the number of older individuals (65+) to the number of working-age individuals (20 – 64). In the town of Elizabeth, the first number is 11,482 and the second number is 78,477. The old-age dependency ratio is 12,368/ 78,477= 0.158.

Chapter 19 The Economics of Energy, the Environment, and Global Climate Change Answers to End-of-Chapter Problems 1.

Q: From 2016 to 2018, the price of jet fuel nearly doubled. a) What effect did that price increase have on the supply curve for airplane travel? b) Show what changed on a supply–demand diagram. c) All other things being equal, what effect would that change have on the price of air travel tickets? d) All other things being equal, how would the quantity of air travel change?

A: a) Increase the supply of airplane travel; b) see graph below; c) increase; d) decrease

Explanation:

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a) Because jet fuel is an input for the suppliers of airplane travel, this increase in the price of crude oil (and the subsequent increase in jet fuel) will cause a decrease or leftward shift in the supply of airplane travel. b) The result of the oil price increase would decrease the supply of airplane travel, therefore, shifting the supply curve left. c) All other things being equal, the equilibrium price of airplane travel will increase. d) All other things being equal, the equilibrium quantity of airplane travel will decrease.

2.

Q: In 2019, the Department of Energy (DOE) projected that the price of electricity, adjusted for inflation, would remain roughly flat for the next 25 years. Meanwhile, the price of gasoline, adjusted for inflation, was expected to rise by about 25 percent. a) If the DOE is right, is that likely to increase or decrease the demand for electric vehicles? b) Draw a supply–demand diagram for electric vehicles and show how the curves shift as the price of gasoline increases. Label the new equilibrium point.

A: a) Increase; b) see graph below.

Explanation: a) The demand for electric cars is likely to increase since people will choose these types of cars if electric prices are not expected to change and gasoline prices rise. b) As the demand curve shifts rightward for electric cars due to the increase in the price of gasoline, both price and quantity of electric cars increase.

3.

Q: It is common to use the tax system to help support new energy technologies. As of 2019, for example, the federal government was offering a tax credit of up to $7,500 for the purchase of electric and plug-in hybrid vehicles (gas–electric combinations that use less gasoline than conventional internal combustion engines). a) What effect does the tax credit have on the number of electric and hybrid vehicles sold?

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b) Does the tax credit raise or lower the price charged by sellers of electric and hybrid vehicles?

A: a) The tax credit will increase the number of electric and hybrid cars sold because it lowers the price for buyers without lowering the return to sellers; b) The tax credit raises the price charged by sellers, but buyers still pay less than they would without the tax credit.

Explanation: a) The tax credit will increase the number of electric and hybrid cars sold, by lowering the price for buyers without lowering the return to sellers. b) The tax credit actually raises the price charged by sellers, although buyers still pay less than they would without the tax credit. The price would have to rise because quantity is increasing beyond the market equilibrium. The only way to get buyers to buy more than the market equilibrium quantity is to charge them a price lower than the market equilibrium price; the only way to get sellers to supply more than the market equilibrium is to pay them more than the market equilibrium price.

4.

Q: A potential negative impact of energy generated by wind turbines is: a) visual pollution. b) negative health effects. c) ecological damage. d) crop damage.

A: a) visual pollution Explanation: Many people find that wind turbines cause a kind of externality: visual pollution. Across the country people and communities have opposed the construction of wind turbines for power. The reason is simple. Today‘s power-generating wind turbines are typically over 400 feet high, or as tall as a 30-story building.

5.

Q: The patrons at a local bar get rowdy on Friday and Saturday nights and wake up the 10 residents of the adjacent apartment building. The town economist surveyed the residents and found that each of the residents would be willing to pay $15 per night, on average, to not be woken. a) Calculate the size of the negative externality per night. b) Calculate the size of the negative externality over the course of the year (assuming 50 weeks).

A: a) $150/night; b) $15,000 Explanation: a) The size of the negative externality on Friday and Saturday nights would be (10 × $15) = $150 per night. b) For 50 weeks, the negative externality would be ($150 × 2 × 50) = $15,000.

6.

Q: Suppose a town has lots of noisy restaurants that disturb their neighbors. The citizens would like to reduce the noise level without driving all of the restaurants away.

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a) Suppose the town issues fines for exceeding noise limits. This is an example of the approach to pollution control. b) Alternatively, the town decides to issue tradable ―noise permits‖ that allow restaurants to make a certain amount of noise each night. This is an example of the approach to pollution control. c) Suppose there are six restaurants making the same amount of noise each night, but the town would like to get the number down to three. Is the fine-based or the tradable permit approach likely to work better? d) If the town succeeds in reducing the number of noisy restaurants, is the price of a meal likely to rise or fall?

A: a) fine-based; b) market-based; c) tradable permit; d) rise Explanation: a) Three possibilities could be to make it illegal for the restaurants to produce noise that bothers the neighbors: command-and-control , to fine the noisy restaurants, or to issue tradable noise permits that allow restaurants to generate one hour of noise for each permit they hold. If the town issues fines for exceeding noise limits, it is using a finebased approach. b) If the town issues tradable ―noise permits‖ for exceeding noise limits, it is using a market-based approach. c) The market-based approaches (taxes or permits) allow the restaurants themselves to decide which restaurants should reduce noise (those who can reduce it at least cost).

Each restaurant has a choice in what it does with its permits. It can use its permits. It can buy more permits from other restaurants if it exceeds its noise allowance. Or it can sell its permits if it‘s managed to reduce its noise level. d) Achieving a lower noise level has increased the cost for the restaurants in some way.

This will shift the supply to the left and raise the price for a meal.

7.

Q: Every household produces garbage, some more than others. In town A, the local sanitation department will collect all the garbage that households put out. In town B, the residents have to pay per bag to have their garbage collected. In all other respects, the towns are identical. a) In which town would the residents produce less garbage? Explain. b) Suppose town A finds itself with soaring garbage costs because too many households put out 5 or 10 bags of garbage per week. To solve this problem, the town imposes a new rule saying that households can put out only three bags of garbage. What type of households would be hurt by this rule? c) Would you prefer to live in town A (with the maximum number bag rule) or town B? Explain.

A: a) town B will produce less garbage because they pay per bag; b) Larger households with lots of garbage will be hurt the most; c) Town A if they generated three or fewer bags of trash.

Explanation: a) In town B, where they face a cost every time they generate garbage, they are more conscious of the garbage they generate. Since they realize they can reduce the fees 116

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that they pay, these households have an incentive to produce as little garbage as possible. The residents of town A have no such incentive. Therefore, we should expect there to be less garbage produced in town B. b) Very large households that can‘t help but to generate more garbage than other smaller households will be hurt. A single person living by him- or herself should have no problem limiting their garbage production to three bags per week. A household of ten, however, would have a much harder time. c) Someone who feels like their household can consistently generate three or fewer bags of trash will choose town A, because they will pay nothing for trash pickup. Someone who feels like they will often generate more than three bags of trash will likely choose town B. 8.

Q: Economists regularly suggest that the United States needs to raise the gasoline tax. a) The following table lays out the share of expenditures spent on gasoline and motor oil by households with different levels of income. Using the table, explain why a higher gasoline tax would be regressive or progressive.

Income Level

Spending on Gasoline and Motor Oil as a Percentage of Total Expenditures, 2017

Less than $70,000 $70,000–$100,000 $100,000–$200,000 $200,000 and more

3.8% 3.8% 3.0% 1.9%

Source: Bureau of Labor Statistics.

b) People in the Northeast devote 2.7 percent of their spending to gasoline and motor fuels, compared to 3.4 percent in the Midwest, 3.6 percent in the South, and 3.2 percent in the West. Which region is most likely to favor raising the gasoline tax?

Which region is more likely to be opposed?

A: a) Regressive because higher income groups pay a lower proportion of income in gasoline tax; b) Northeast; Midwest Explanation: a) Because low-income households spend a larger portion of their income on gasoline, a gasoline tax is regressive, which means it hurts low-income households more than high-income households. Many believe this would be unfair. Also, some places in the U.S. are very expansive, and residents have to drive farther for things like work, shopping, etc. than do residents in more dense areas of the country. These people, like low-income households, would be disproportionately hurt by a higher gasoline tax.

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b) Because the Northeast only drives 2.7% they would be the least to oppose a gasoline tax. Because the Midwest drives 3.6%, they would be the most to oppose a gasoline tax 9.

Q: Consider the following actions for dealing with global climate change. Identify whether each represents adaptation or mitigation. a) Building up tall levees to stop the rising ocean from flooding a town. b) Raising the tax on gasoline. c) Giving a subsidy for people to buy hybrid cars. d) Giving a subsidy for people to buy air conditioners for their homes.

A: a) adaptation; b) mitigation; c) mitigation; d) mitigation Explanation: Adaptation is the alteration of consumer and business behavior to reduce the damage from global climate change. Mitigation includes policies to reduce the effect of global climate change. a) Building up tall levees to stop the rising ocean from flooding a town: This is an adaptation strategy. b) Raising the tax on gasoline: This is designed to reduce consumer purchases so it is a mitigation strategy. c) Giving a subsidy for people to buy hybrid cars: This is designed to increase consumer purchases so it is a mitigation strategy. d) Giving a subsidy for people to buy air conditioners for their homes. This is designed to increase consumer purchases so it is a mitigation strategy.

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