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SOLUTIONS MANUAL for Foundations of MicroEconomics, 9e (Global Edition) By Robin Bade, Michael Parkin

Getting Started

Chapter

ANSWERS TO CHAPTER CHECKPOINTS

n Problems and Applications 1.

Provide three examples of scarcity that illustrate why even the 1,826 billionaires in the form world face scarcity. The 1,826 billionaires might want to be able to eat unlimited meals without gaining weight; live to be at least 140 years old and enjoy perfect health everyday; be able to wake up in San Francisco and go to sleep in Paris after spending no more than 3 hours on a plane. None of these wants can be fulfilled given the present state of technology and resources available.

Label each entry in the list as dealing with a microeconomic topic or a macroeconomic topic. Explain your answer. • Motor vehicles production in China is growing by 10 percent a year. This entry is a microeconomic topic because individuals and businesses make decisions whether to buy or sell cars. •

Coffee prices rocket. This entry is a microeconomic topic because individuals and businesses make decisions whether to buy or sell coffee.

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Globalization has reduced African poverty. This entry is a macroeconomic topic because globalization is the result of choices made by billions of people rather than an individual or business. The government must cut its budget deficit. This entry is a macroeconomic topic because neither an individual nor a business makes decision to cut expenditures.

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Apple sells 20 million iPhone 6 smartphones a month. This entry is a microeconomic topic because individuals and Apple make decision whether to buy or sell iPhones.

Part 1 . INTRODUCTION

Use the following information to work Problems 3 to 6. Jurassic World had world-wide box office receipts of $1.66 billion. The movie’s production budget was $150 million with additional marketing costs. A successful movie brings pleasure to millions, creates work for thousands, and makes a few people rich. 3. What contribution does a movie like Jurassic World make to coping with scarcity? When you buy a movie ticket, are you buying a good or a service? Scarcity still exists but the amount of entertainment available in the economy increases. Buying a ticket to watch a movie is buying a service. 4.

Who decides whether a movie is going to be a blockbuster? How do you think the creation of a blockbuster movie influences what, how, and for whom goods and services are produced? The audience decides whether a movie will be a blockbuster because the audience decides whether to attend the movie. The “what” question is affected in three ways: First, one good or service that is produced is the blockbuster movie. Second, the people whose incomes are higher as a result of the blockbuster then buy an assortment of goods and services and so this assortment of goods and services is produced. Finally, the “what” question is influenced if the movie leads to spinoff goods (such as toys) or creates a series of sequels or similar films. The “how” question is affected to the extent that movies use different production methods. Some movies, for instance, have a lot of special effects while other movies have few or none. The “for whom” question is influenced because those people who receive the profits of a blockbuster movie have higher incomes and so more goods and services are produced for them.

What are some of the components of marginal cost and marginal benefit that the producer of a movie faces? Some of the marginal costs the producer faces are the cost of an actor or actress, the costs of the crew for a day, the costs of a location, and the costs of advertising in a newspaper. The marginal benefits the producer enjoys are his or her salary and/or profit participation from the movie, royalties from the movie, the prestige resulting from a successful movie, and any awards given to the producer of the movie.

Suppose that Chris Pratt had been offered a part in another movie and that to hire him for Jurassic World, the producer had to double Chris Pratt’s pay. What incentives would have changed? How might the changed incentives have changed the choices that people made? The higher pay would have increased Mr. Pratt’s incentive to make Jurassic World rather than the other movie and perhaps affected his choice to

Chapter 1 . Getting Started

make Jurassic World rather than the other movie. The higher pay would have increased the incentive of the producer to decrease the expense of other aspects of the movie so the producer might have chosen to reduce the pay of the other stars in the movie. 7.

What is the social interest? Distinguish it from self-interest. In your answer give an example of self-interest and an example of social interest. The social interest looks at what is best for society as a whole; choices that are best for society as a whole are said to be in the social interest. The selfinterest looks at what is best for the individual; choices that are best for the individual making the choice are said to be in the self-interest. An example of a choice made in the self-interest is a student’s decision to take an economics class. An example of a choice made in the social interest is a firm’s decision to reduce its air pollution.

Dina, Mina, and Tina are deciding on the Birthday Party of their close friend Gina. Dina hates balloons, is happy to get birthday cupcakes, but prefers a big birthday cake. Mina prefers birthday cupcakes, has no problem with a big birthday cake, she also likes to have balloons filling the place. Cupcakes destroy the mood of Tina, she prefers to surprise Gina with balloons, but she's equally satisfied to buy a big birthday cake instead. They decide to buy a big birthday cake. Is this decision rational? What is the opportunity cost of the cake for each of them? What is the benefit that each gets? Their decision was rational because all of them considered the costs and benefits of getting the cake and none of them were opposed to it. Dina was opposed to balloons, Mina was opposed to nothing, and Tina didn't want cupcakes. The opportunity cost of the cake for both Dina and Mina is buying cupcakes; for Tina, it is getting balloons. The benefit each gets is the happiness in celebrating Gina's birthday, the satisfaction from sharing the cake, and the strengthening of their friendship.

Label each of the entries in List 2 as a positive or a normative statement.  Fixed-income receivers get hurt by inflation. Fixed-income receivers get hurt by inflation. Positive. 

World population is growing continuously. World population is growing continuously. Positive.

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Way too many companies are outsourcing production to China. Way too many companies are outsourcing production to China. Normative.

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If tax on cigarettes is increased, smoking decreases. If the tax on cigarettes is increased, smoking decreases. Positive.

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Part 1 . INTRODUCTION

Protecting the environment should be the number one concern of world leaders. Normative. Use the following information to work Problems 10 to 12. Italy is giving away over 100 castles for free – there’s only one catch Under a new scheme backed by the Ministry of Tourism, Italy is giving away castles, monasteries, and farmhouses for free to investors for 9 years, with the option to extend for an additional 9 years. The catch is that investors should transform these sites into tourist attractions. Source: CNBC, May 18, 2017 10. With Italy giving away castles for free, explain what is free and what is scarce. As numerous potential investors start applying and submitting proposals of their plans, the offered sites are scarce. The demand for them would be higher than their actual number: 103 sites. Even though the word "free" is used, the project is not free because investors will have to put in resources and time to accomplish the objective of transforming these sites and bringing in tourists. 11. What’s the Italian government’s incentive to give away these buildings for free? Was this decision made in self-interest or in the social interest? Explain. The goal of the government was to breathe new life into these lifeless, offthe-tourist-map places. The government's self-interest reverts to the social interest of the country as a whole in driving in tourists and causing economic activity in dormant parts of the country. 12. How do the potential investors benefit from this scheme? Potential investors benefit from profits or at least a portion of profits because they will have the rights to the property for 9 years, which can be extended to 18. Even without the extension, it would be a huge entrepreneurial leap in their record if their project is successful. 13. Read Eye on the Benefit and Cost of School on p. XX. When deciding about the offered scholarship, if Clayton Kershaw was guaranteed that he’d be made coach of the Dodgers once he graduates, a position that would earn him $60 million a year, would he have accepted the scholarship or would he have immediately signed with the Dodgers? Given this new information, the right decision would be to accept the scholarship. With this new offer, the benefit of pursuing his education became bigger than the benefit of immediately signing with the Dodgers. If he signs with the Dodgers, the opportunity cost would be huge, but he would be giving up a much higher salary in the future, plus the education he would earn.

Chapter 1 . Getting Started

 Additional Problems and Applications 1.

Read Eye on the Benefit and Cost of School on p. 12 and explain which of the following items are components of the opportunity cost of being a full-time college student who lives at home. The things that the student would have bought with  A higher income The items the student would have purchased with the higher income he or she would have earned if he or she was not a full-time student are an opportunity cost of being a full-time student. 

Expenditure on tuition The cost of tuition is part of the opportunity cost of being a full-time student because this expense is paid only because the person is a student.

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A subscription to the Rolling Stone magazine If the subscription was required by a class and the individual subscribed only because of the class requirement, then the cost of the subscription is an opportunity cost of being a student. However if the person would have subscribed to Rolling Stone even if he or she was not a student, then the cost of the subscription is not an opportunity cost of being a student.

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The income a student will earn after graduating The income earned after graduation is not an opportunity cost of being a student. Think about the following news items and label each as involving a what, how, or for whom question: Today, most stores use computers to keep their inventory records, whereas 20 years ago most stores used paper records. Stores using computers for inventory records today versus paper 20 years ago answers the how question.

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Healthcare professionals and drug companies recommend that Medicaid drug rebates be made available to everyone in need. Deciding whether to offer lower Medicaid drug rebates, which would lower the prices for drugs, is a for whom question.

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An increase in the gas tax pays for low-cost public transit. Building a low-cost public transit system answers a what question. Because not everyone will use the public transportation equally nor will everyone pay the same amount of taxes, there also is a for whom aspect of the headline.

The headlines in List 1 are from an imaginary newspaper. Classify each headline as a signal that the news article is about a microeconomic topic or a macroeconomic topic. Explain your answers. © 2023 Pearson Education, Ltd.

Part 1 . INTRODUCTION

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XYZ Bank on Brink of Bankruptcy XYZ Bank on Brink of Bankruptcy; this entry is a microeconomic topic because it concerns the financial situation of a specific company, Bank XYZ.

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Brain Drain hits Firefly Island Brain Drain hits Firefly Island; this entry is a macroeconomic topic because it deals with brain drain, a situation when the well-educated leave the country for better job opportunities abroad, a concern for the whole economy.

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Good Crop, Wheat Price Falls Good Crop, Wheat Price Falls; this entry is a microeconomic topic because it is about the price of one good in particular, wheat, not the overall price level in the economy.

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Inflation Scare Again? Inflation Scare Again?; this entry is a macroeconomic topic because inflation affects the whole economy, it ims an increase in the level of prices in general.

Your school decides to increase the intake of new students next year. To make its decision, what economic concepts would it have considered? Would the school have used the “economic way of thinking” in reaching its decision? Would the school have made its decision on the margin? The school would consider the extra revenue that each additional student would bring and compare that to the extra cost of providing each student with instruction and service. By comparing the extra revenue and the extra cost, the school is making its decision on the margin and is using the economic way of thinking. If the school compares the additional revenue to the additional cost, it makes its decision on the margin.

The following list gives examples of incentives that government policies use to influence behavior: (a) speed humps; (b) school immunization programs; (c) increased taxes on cigarettes; (d) rebates for installing energy efficient windows. Complete the table by classifying each item in the list as a "carrot" incentive or a "stick" incentive, and as a "monetary" incentive or "non-monetary" incentive.

Chapter 1 . Getting Started

(a)

Speed humps are non-monetary sticks because they represent an incentive to discourage motorists from speeding, yet they do not involve monetary payments.

(b)

School immunization programs are examples of non-monetary carrots given that the incentive is a benefit to students and does not involve the payment of money.

(c)

Increased taxes on cigarettes is an example of a monetary stick incentive because it discourages the consumption of cigarettes involving an out-of-pocket payment per unit purchased.

(d)

Rebates for installing energy-efficient windows involves making monetary payments to people who install energy-efficient windows in order to encourage such an action; therefore, it is a monetary carrot incentive.

Think about each of the items in List 2 and explain how they affect incentives and might change the choices people make.  Terrorists announce that the next attacks will hit the subway metro system in Europe. Such news will affect European countries. Residents’ incentives to take the subway will decrease: some will turn to other types of public transportation, many will start using their cars to go to work, and some others might decide to move out of the major cities. It would also increase government incentives to increase security measures.  A rare disease kills huge numbers of cows which leads to the price of milk skyrocketing. The rise in the price of milk affects consumers’ incentives to buy milk and dairy products in general. Restaurants will be affected as well, as the dairy-based ingredients of their dishes now cost more, so it would be an incentive for them to produce less. Consumers and restaurants will start substituting plant-based milks and vegan recipes for milk and regular dairy products.  The price of DSLR cameras plummets to the €100 range. The fall in the price of DSLR cameras increases consumers’ incentives to buy cameras and decreases producers’ incentives to produce cameras. More consumers will buy new DSLR cameras, but producers will focus on the production of more professional cameras instead.  Studies find that lack of physical activity increases the risk of cancer. Such findings will increase people’s incentives to join gyms and others to purchase exercise and fitness equipment to exercise at home. This increased demand on gym memberships and sport equipment will lead to higher prices, which in turn will increase the incentives of suppliers of such services and products to offer more.

Part 1 . INTRODUCTION

Does the decision to make a blockbuster movie mean that some other more desirable activities get fewer resources than they deserve? Is your answer positive or normative? Explain your answer. Making a blockbuster movie means that some other activities get fewer resources. But whether “more desirable” activities get fewer resources than they “deserve” is a normative answer for two reasons. First the question of whether an activity is more desirable or less desirable depends on the person’s judgment and values. Second the determination of whether an activity gets fewer resources than it deserves also involves the normative decision about the quantity of resources an activity deserves. So the answer to the question of whether making a blockbuster movie means that other more desirable activities get fewer resources than they deserve is a normative answer that depends on the student’s values.

The following headlines are examples of economics being used as a tool to make a decision. 1. More people choose home ownership over renting 2. Laws tightened to limit urban sprawl as housing market keeps booming. 3. Lower taxes for seniors encourages later retirement Which statements are examples of a tool used by a person, a business, and a government? • Statement #1 is an example of people using economics as a tool to make a home ownership versus renting decision. • Statement #2 is an example of a government using economics as a tool to make a decision as only governments, not individuals or businesses, can change laws. • Statement #3 is an example of a government using economics as a tool to make a decision. This headline pinpoints the government changing taxation policy in order to encourage seniors to retire later.

Use the following news clip to work Problems 9 to 12. To vaccinate or not debate: Italy is succumbing to eradicable diseases The vaccination debate is taking a toll on Italy after a recent outbreak of measles in March 2017. Vaccination is on the decrease in Italy after links were made to autism in a study. Opponents to vaccination do not trust the government and the pharmaceutical industry, whereas proponents are afraid of dire health consequences if opting out of vaccination becomes a legal option. Source: Financial Times, April 19, 2017 8. What are the benefits of making vaccination compulsory for all? Who benefits: citizens, the government, or pharmaceutical companies? If vaccination is compulsory, citizens benefit in terms of health and avoiding illnesses that might be deadly, the government benefits from the decrease in the cost of caring for the ill children, and pharmaceutical © 2023 Pearson Education, Ltd.

Chapter 1 . Getting Started

companies benefit from the profit they would make selling vaccines. 9. What are the costs of opting not to vaccinate children? Who bears these costs: citizens or the government, or both the citizens and the government? The cost of not vaccinating is the risk of having long-eradicated illnesses return. Both parents and the government share those costs because parents will have to deal with sick children, parents of vaccinated kids will deal with infectious diseases, and the government will have to care about the healthcare costs of the illnesses returning. 10. Explain why someone would oppose vaccination when its benefits outweighs its costs? For people opposing vaccination, governments and pharmaceuticals are in favor of vaccination because they are following their own selfinterest—making profits. Even after the discrediting of the study linking autism to vaccination, they still hold on to this study, not realizing that the social benefits of vaccination far outweigh its costs. Conspiracy theories might be proven correct one day, but this particular theory linking autism to vaccination has still not been proved. 11. Does vaccination have an opportunity cost? Explain from the point of view of opponents and proponents of vaccination. For opponents of vaccination, the opportunity cost of vaccination is giving up a healthy child to the risk of autism. For proponents of vaccination, the opportunity cost of vaccination is the financial cost of the vaccination itself and maybe a couple of sick days when the effect of the vaccine starts to show itself.

Part 1 . INTRODUCTION

 Multiple Choice Quiz 1.

Which of the following describes the reason why scarcity exists? A. Governments make bad economic decisions. B. The gap between the rich and the poor is too wide. C. Wants exceed the resources available to satisfy them. D. There is too much unemployment. Answer: C Answer C uses the definition of scarcity on page 2. 2.

Which of the following defines economics? Economics is the social science that studies . A. the best way of eliminating scarcity B. the choices made to cope with scarcity, how incentives influence those choices, and how the choices are coordinated C. how money is created and used D. The inevitable conflict between self-interest and the social interest Answer: B Answer B uses the definition of economics on page 2. 3.

Of the three big questions, what, how, and for whom, which of the following is an example of a how question? A. Why do doctors and lawyers earn high incomes? B. Why don’t we produce more small cars and fewer gas guzzlers? C. Why do we use machines rather than migrant workers to pick grapes? D. Why do college football coaches earn more than professors? Answer: C Answer C describes how grapes are picked. 4

Which of the following is not a key idea in the economic way of thinking? A. People make rational choices by comparing costs and benefits. B. Poor people are discriminated against and should be treated more fairly. C. A rational choice is made at the margin. D. Choices respond to incentives. Answer: B Answer B is not part of description of the economic way of thinking on page 8.

Chapter 1 . Getting Started

A rational choice is . A. the best thing you must forgo to get something B. what you are willing to forgo to get something C. made by comparing marginal benefit and marginal cost D. the best for society Answer: C Answer C is part of description of a rational choice on pages 8 and 9. 6.

Which of the following best illustrates your marginal benefit of studying? A. The knowledge you gain from studying 2 hours a night for a month B. The best things forgone by studying 2 hours a night for a month C. What you are willing to give up to study for one additional hour D. What you must give up to be able to study for one additional hour Answer: C Page 10 shows that answer C is the marginal benefit of studying. 7.

The scientific method uses models to . A. clarify normative disagreements B. avoid the need to study real questions C. replicate all the features of the real world D. focus on those features of reality assumed relevant for understanding a cause and effect relationship Answer: D Answer D uses the definition of an economic model from Checkpoint 1.3. 8.

Which of the following is a positive statement? A. We should stop using corn to make ethanol because it is raising the cost of food. B. You will get the most out of college life if you play a sport once a week. C. Competition among wireless service providers across the borders of Canada, Mexico, and the United States has driven roaming rates down. D. Bill Gates ought to spend more helping to eradicate malaria in Africa. Answer: C Answer C is a positive statement because it can, in theory, be tested.

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Chapter

Appendix: Making and Using Graphs

ANSWERS TO APPENDIX CHECKPOINT

 Problems and Applications 1.

Draw a scatter diagram to show the relationship between quantities sold of compact discs and singles downloads. Describe the relationship.

The relationship between the quantities of compact discs sold and singles downloaded is negative, except between the years 2012 and 2014, where it becomes positive. It shows that as the years progress, consumers decreased purchases of compact disks and downloaded more singles instead, except from 2012 to 2014, where sales and downloads both decreased.

Part 1 . INTRODUCTION

Draw a time-series graph of the quantity of singles downloads. Say in which year or years the quantity of singles downloaded (a) was highest, (b) was lowest, (c) increased the most, and (d) increased the least. If the data show a trend, describe it. Highest Singles Downloads: 2012 Lowest Singles Downloads: 2004 Increased the most: The increase from year 2004 to 2006 was 447 single downloads, and from year 2006 to 2008 also 447 downloads. These were the highest increases in downloads. Increased the least: From 2008 to 2010, the increase was the lowest— 129 downloads.

The following data shows the relationship between two variables x and y. x

Is the relationship between x and y positive or negative? Calculate the slope of the relationship when x equals 2 and when x equals 4. How does the slope change as the value of x increases? The relationship is negative: When x increases, y decreases. The slope of the relationship equals the change in y divided by the change in x along the tangent line; that is, the slope of the relationship at a point equals the slope of the tangent line at that point. When x equals 2, the slope of the tangent line equals –4, so the slope of the relationship equals –4. When x equals 4, the slope of the tangent line equals –8, so the slope of the relationship equals –8. The slope of the relationship increases in magnitude (the line becomes steeper) as x increases.

Appendix 1 . Making and Using Graphs

The table provides data on the Price price of a balloon ride, the (dollars temperature, and the number of per ride) rides a day. Draw graphs to 5 show the relationship between 10  The price and the number of 15 rides, when the temperature 20 is 70°F. Figure A1.3 illustrates the relationship between the price and the number of rides when the temperature is 70°F.

Balloon rides (number per day) 50F

70F

90F

32 27 18 10

50 40 32 27

40 32 27 18

 The number of rides and the temperature, when the price is $15 a ride. Figure A1.4 illustrates the relationship between the number of rides and the temperature, when the price is $15 a ride.

Appendix 1 . Making and Using Graphs

Draw a time-series graph of the quantity of music videos sold. Say in which year or years the quantity sold (a) was highest, (b) was lowest, (c) decreased the most, and (d) decreased the least. If the data show a trend, describe it. Figure A1.6 illustrates the time series of music videos sold using the data from the spreadsheet. a. b. c.

The quantity sold was the highest in 2007. The quantity sold was the lowest in 2017. The quantity sold decreased the most between 2007 and 2009, when it decreased by 16 million. d. The quantity sold decreased the least between 2013 and 2015, when it decreased by 1 million. There is a downward trend in the quantity of music videos sold. Use the following data on the relationship between two variables x and y to work Problems 3 and 4. x

5 16

Is the relationship between x and y positive or negative? Explain. The relationship is positive: When x increases, y also increases.

Calculate the slope of the relationship when x equals 2 and x equals 4. How does the slope change as the value of x increases? The slope of the relationship equals the change in y divided by the change in x along the tangent line; that is, the slope of the relationship at a point equals the slope of the tangent line at that point. When x equals 2, the slope of the tangent line equals 4, so the slope of the relationship equals 4. When x equals 4, the slope of the tangent line equals 8, so the slope of the relationship equals 8. The slope of the relationship increases as x increases.

Part 1 . INTRODUCTION

The table provides data on Price the price of hot chocolate, the (dollars temperature, and the cups of per cup) hot chocolate bought. Draw graphs to show the 2.00 relationship between 2.50 3.00  The price and cups of hot 3.50 chocolate bought, when the temperature is constant. Figure A1.7 illustrates the relationship between the price and the number of cups bought holding constant the temperature. Note that there are three relationships, one for each temperature.

Hot chocolate (cups per week) 50F

70F

90F

40 30 20 10

30 20 10 0

20 10 0 0

 The temperature and cups of hot chocolate bought, when the price is constant. Figure A1.8 illustrates the relationship between the number of cups bought and the temperature, holding constant the price. Note that there are four relationships, one for each price.

The U.S. and Global Economies ANSWERS TO CHAPTER CHECKPOINT

 Problems and Applications

1. Explain which of the following items are not consumption goods and services:  A chocolate bar A chocolate bar is a consumption good.  A ski lift A ski lift is not a consumption good. It is capital that produces a service for skiers.  A golf ball A golf ball is a consumption good. 2. Which of the following items are not capital goods? Explain why not.  An auto assembly line An auto assembly line is a capital good.  A shopping mall A shopping mall is a capital good.  A golf ball A golf ball is not a capital good. It is a consumption good. Which of the following items are not factors of production? Explain why not.  Vans used by a baker to deliver bread Vans used to deliver bread are capital, so they are factors of production.  1,000 shares of Amazon.com stock 1,000 shares of Amazon.com stock are not a factor of production. The shares represent partial ownership of Amazon.com and therefore are financial capital.  Undiscovered oil in the Arctic Ocean Undiscovered oil is not a factor of production because it is not used to produce goods or services. Once it is discovered, it will become a factor of production.

Chapter

Part 1 . INTRODUCTION

Which factor of production earns the highest percentage of total U.S. income? Define that factor of production. What is the income earned by this factor of production called? Labor earns by far the largest percentage of total U.S. income, 68 percent of total income in 2017. Labor consists of the work time and the work effort that people devote to producing goods and services. The income earned by labor is a wage.

5. Lebanon has been suffering from brain drain, which is the emigration of its highly-educated labor force, for a long period of time due to lack of job opportunities and political insecurity. Which factor of production is decreasing in this country? Brain drain is when highly educated and trained people leave their country for a better life or better job opportunities abroad. Therefore, Lebanon is losing its human capital. 6.

Define the factor of production called capital. Give three examples of capital, different from those in the chapter. Distinguish between the factor of production capital and financial capital. Capital is the tools, instruments, machines, buildings, and other items that have been produced in the past and that businesses now use to produce goods and services. Capital includes railroad engines and cars, servers, and ATMs. The factor of production “capital” is the actual good itself; “financial capital,” such as stocks and bonds, are the funds that provide businesses with their financial resources which can be used to acquire capital goods. 7. The Australian government supports its small businesses and startups to a great extent. They provide numerous grants ranging from the Entrepreneurs' Programme and the R&D tax Incentive to the Export Market Development Grant scheme. Source: smartcompany.com.au, October Explain how you would expect these grants and incentives to influence what, how, and for whom goods and services are produced in Australia. The what question would depend on the nature of work of these small businesses and startups; by being able to increase their investments, more of their products and services will be produced. By receiving grants and incentives, small businesses and startups can enhance their production processes and technology used, which answers the how question. Entrepreneurs and owners of the small businesses would have more profits as a result of this government support, so they would be able to buy more of the goods and services produced—this would answer the whom question.

Chapter 2 . The U.S. and Global Economies

In the circular flow model, explain the real and/or money flow in which each item in List 1 belongs. Illustrate your answers on a circular flow diagram.  The government pays unemployment benefits to the unemployed. This payment is a type of transfer, which is a money payment from the government to households. It flows from the government to households.  A firm pays its business taxes. The firm’s business tax payments fall under the category of money flow from firms to the government.  Your friend buys a T-shirt from the mall. In Figure 2.1, your friend’s expenditure is a money flow represented by the black arrow from households to firms through the goods market. The T-shirt is a flow from firms through the goods market to households, represented by the grey arrow.  The government in the Netherlands decides to build another animal bridge for wildlife crossing. The building of the animal bridge by the government represents a flow from construction firms through the goods market to the government. The payment made by the government for the construction of the bridge is represented by the black arrow going from the government to firms through the goods market.  You take a summer job at your local library. The student working at Kinko is a factor of production, so the flow is a flow of the services of the factor of production from households to the factor markets, labeled as c in the figure. Why you can get a free college education in Germany but not in CaliforniaEven American students can get a free college degree in Germany, where

Part 1 . INTRODUCTION

high taxes pay for colleges. Despite college being free, fewer students in Germany earn college degrees than in the United States and more enter vocational apprenticeships. Source: Los Angeles Times, October 29, 2015 If California adopted the German model of higher education, how would that change for whom goods and services are produced? The students in California who otherwise would not have gone to college but who take advantage of the “free” college education will have higher incomes than otherwise. Consequently, more goods and services will be produced for them. The taxpayers who must pay the taxes necessary to fund these college educations will have less income to spend on goods and services, so fewer goods and services will be produced for them. 10. Read Eye on the Dreamliner on p. 43 and then answer the following questions:  How many firms are involved in the production of the Dreamliner and how many are identified in the figure on p. 43? Over 400 firms are involved in the production of the Dreamliner. Only 15 of them are identified in the figure.  Is the Dreamliner a capital good or a consumption good? Explain why? The Dreamliner is a capital good because it will be used to produce services (airline travel) throughout many future years.  State the factors of production that make the Dreamliner and provide an example of each. All the factors of production—land, labor, capital, and entrepreneurship—are used to make the Dreamliner. The copper used for wiring is an example of the land used; the engineer who helped design the landing gear is an example of labor; the huge cranes that lift the various pieces of the Dreamliner to assemble them is an example of capital; and the creative and imaginative input of Boeing’s top managers who organize the resources used to produce the Dreamliner exemplify entrepreneurship.  Explain how the production of the Dreamliner influences what, how, and for whom, goods and services are produced. Dreamliner influences “what” goods and services are produced by creating a demand for components manufactured around the world. It influences “how: goods are produced because Boeing and the other 400 firms all determine the best way to produce each particular part of the Dreamliner. It influences “for whom” because factors of production employed to make the Dreamliner receive income from this

Chapter 2 . The U.S. and Global Economies

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production, thereby increasing the quantity of goods and services they can purchase. Use a graph to show where in the circular flow model of the global economy the flows of the components listed on p. 43 appear and where the sales of Dreamliners appear. Except for the components built in the United States, spending on the other components appear in the flow of expenditure on U.S. imports. Sales of Dreamliners appear in the flow of expenditure on U.S. exports.

Part 1 . INTRODUCTION

 Additional Problems and Applications 1.

Read Eye on the Dreamliner on p. 43 and then answer the following questions:  Why doesn’t Boeing manufacture all the components of the Dreamliner at its own factory in the United States? Boeing wants to manufacture the Dreamliner at the lowest possible cost. It would be more expensive for Boeing to manufacture Dreamliners at its own factory in the United States because Boeing does not have the expertise possessed by its subcontractors and because the wages Boeing pays U.S. workers exceed the wages its subcontractors pays their workers.  Describe some of the changes in what, how, and for whom, that would occur if Boeing manufactured all the components of the Dreamliner at its own factories in the United States. If Boeing manufactured all the components of the Dreamliner at its own factories in the United States, more components would be produced in the United States and more capital would have been used in their production. U.S. workers and investors would have received higher incomes but the Dreamliner would cost more to produce so Boeing would have earned a lower profit.  State some of the tradeoffs that Boeing faces in making the Dreamliner. Boeing faced a huge number of tradeoffs. For example, when designing the plane, Boeing’s engineers had to make decisions about fuel economy and passenger load. Increasing the passenger load decreased fuel economy, so the engineers traded passenger load for fuel economy. Another example revolves around the construction of the Dreamliner. Boeing could have constructed the plane using just a few companies but instead it used over 400. Boeing was trading off the simplicity of dealing with just a handful of companies for the increased specialization by dealing with many specialized companies.  Why might Boeing’s decisions in making the Dreamliner be in the social interest? Building the Dreamliner itself advances the social interest because it increases the quantity of comfortable, rapid transportation. The amount of high-quality transportation available in the economy increases, which benefits society. The decisions in making the Dreamliner advance the social interest because they were designed to make the Dreamliner at low cost and thereby avoid wasting resources.

Chapter 2 . The U.S. and Global Economies

The global economy has seen a fall in the number of landlines and rapid growth in the number of smartphones. In the United States, 51 percent of households have no landline and 95 percent have a smartphone. In Africa, 70 percent have a smartphone. Describe the changes in what, how, and for whom telecommunication services are produced in the global economy. What: As the number of cell phone users increases, the global economy has been producing more cell phone telecommunication services. More cell phones are produced, fewer land phones are produced, and presumably more cell phone frequencies are used. How: More telecommunication services are being produced using cell phones rather than fixed-line phones. For whom: While the amount of telecommunication services has been rising throughout the world, it has been increasing most rapidly in Africa. So more telecommunication services are being produced for residents of Africa as well as for residents in the rest of the world.

Which of the entries in the list are con- List sumption goods and services? Explain your  An interstate highway choice.  An airplane A pack of bubble gum and a movie are  A school teacher consumption goods. They are purchased  A stealth bomber by consumers.  A garbage truck Which of the entries in the list are capital  A pack of bubble gum goods? Explain your choice.  President of the United States An airplane, a garbage truck, and an ATM  A strawberry field are capital goods. All provide services to  A movie produce other goods and services. The in An ATM terstate highway and the stealth bomber also are capital goods. They also provide services (transportation and defense) that help produce other goods and services. Which of the entries in the list are factors of production? Explain your choice. An interstate highway, an airplane, a school teacher, a stealth bomber, a garbage truck, the President of the United States, a strawberry field, and an ATM are factors of production. A school teacher and the President are labor; an interstate highway, an airplane, a stealth bomber, a garbage truck, and an ATM are capital; and, a strawberry field is land.

Part 1 . INTRODUCTION

In the African nation of Senegal, to enroll in school a child needs a Birth Certificate that costs $25. This price is several weeks’ income for many families. Explain how this requirement is likely to affect the growth of human capital in Senegal. Human capital growth depends, in part, on the extent of schooling: More schooling means more human capital. Because of Senegal’s hefty fee for a required Birth Certificate, fewer children will enroll in school, thereby decreasing Senegal’s human capital growth.

China’s race to the top in income inequality China has lifted millions out of poverty, but inequality has also increased. In 2017, 8 million students graduated from Chinese universities, 10 times more than two decades ago and double the number at U.S. universities. But the gap in graduation rates between rural to urban areas and richer and poorer people widened. Source: Bloomberg, September 23, 2018 Explain how the distribution of personal income in China can be getting more unequal even though the poorest are getting richer. The distribution of income in China can be getting more unequal even when the poorest are getting richer if the richest are getting richer even faster. If the rich are getting richer faster, the fraction of the nation’s total income received by the poorest 20 percent falls, which makes the personal distribution of income more unequal.

Compare the scale of agricultural production in the advanced and developing economies. In which is the percentage higher? In which is the total amount produced greater? Agricultural is a small part of total production in advanced economies. It is a much larger part in developing economies. Even though advanced economies devote only a small part of their total production to agriculture, they still produce about one third of the world’s total production of food. The remaining two thirds is produced in the developing nations.

Chapter 2 . The U.S. and Global Economies

On a graph of the circular flow model, indicate in which real or money flow each entry in List 2 belongs. Explain how you would expect these grants and incentives to influence what, how, and for whom goods and services are produced in Australia.  General Motors pays its workers’ wages. General Motors wage payment is a money flow that is a payment for use of the services of a factor of production. It flows out of the factor market to households (it flowed into the factor market from General Motors, a firm). In Figure 2.3, the dark arrows represent money flows and the grey arrows represent flows of goods and services and factors. The flow of wage payments to households is labeled a in the figure in Figure 2.3.

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IBM pays a dividend to its stockholders. IBM’s dividend payment is a money flow that is a payment for use of the services of a factor of production. It flows out of the factor market to households (it flowed into the factor market from IBM, a firm). The flow to households is labeled b in the figure. You buy your groceries. Your purchase of groceries represents a money flow from households to the goods market, labeled c in the figure. Chrysler buys robots. The robots are factors of production, so the flow is the services from these factors of production from the factor markets to firms, labeled d in the figure. Southwest rents some aircraft. The aircraft are factors of production, so the flow is the services from these factors of production from the factor markets to firms, labeled e in the figure. Nike pays Roger Federer for promoting its sports shoes. Roger Federer is a factor of production, so the flow is a money flow from the factor markets to households in exchange for Mr. Federer’s services of promoting the sports shoes. The flow is labeled f in the figure.

Part 1 . INTRODUCTION

10. Led by China, a new billionaire is created in Asia every other day Billionaire wealth in Asia increased 17 percent to $6 trillion in 2016. Led by China, the number of the region’s billionaires surpassed the United States for the first time. Source: The Straits Times, October 26, 2017 How is the personal distribution of income in Asia changing? If the number of billionaires is growing more rapidly than the number of other income groups, it will be the case that the personal distribution of income in Asia is becoming less equally distributed.

Chapter 2 . The U.S. and Global Economies

 Multiple Choice Quiz 1.

Which of the following classifications is correct? A. City streets are consumption goods because they wear out with use. B. Stocks are capital goods because when people buy and sell them they make a profit. C. The coffee maker in the coffee shop at an airport is a consumption good because people buy the coffee it produces. D. White House security is a government service because it is paid for by the government. Answer: D Answer D is correct.

Which of the following statements about U.S. production is correct? A. Construction accounts for a larger percentage of total production than does manufacturing. B. Real estate services account for 14.5 percent of the value of total production, larger than any other item of services or goods. C. Consumption goods and services represent 78.5 percent of U.S. production by value and that percentage doesn’t fluctuate much. D. The manufacture of goods represents more than 50 percent of total production. Answer: C Answer C is correct as the data on page 34 show.

Which of the following is a factor of production? A. Stocks and bonds bought by a Japanese citizen. B. A bank loan given to the owner of the small shop in your street. C. Coal extracted from mines in China. D. Amount of money deposited in a savings account by a British citizen. Answer: C Answer C is correct. Stocks, bank loans, and savings accounts are not factors of productions. However, coal is a natural resource that is used in production, so option C is the correct answer.

What is human capital? A. A fruit picker B. Unskilled labor C. Your professor’s knowledge of the economy D. An auto assembly line robot Answer: C Answer C uses the definition of human capital on page 37.

Part 1 . INTRODUCTION

Which of the following statements is correct? A. Labor earns wages and entrepreneurship earns bonuses. B. Land earns interest and capital earns rent. C. Entrepreneurship earns interest and capital earns profit. D. Capital earns interest and labor earns wages. Answer: D Page 39 shows that answer D is correct.

How are goods and services produced in the global economy? A. Developing countries use less human capital but just as much physical capital as advanced economies. B. Emerging economies use more capital-intensive technology than do developing economies. C. Human capital in all economies is similar. D. Advanced economies use less capital than developing economies. Answer: B Developing countries have less capital than emerging economies.

In the circular flow model, which of the following items is a real flow? A. The flow of government expenditures to firms for the goods bought B. The flow of income from firms to households for the services of the factors of production hired C. The flow of U.S. borrowing from the rest of the world D. The flow of labor services from households to firms Answer: D Answer D is a real flow because it is a labor service.

The Economic Problem

Chapter

ANSWERS TO CHAPTER CHECKPOINTS

Problems and Applications Use the following information to work Problems 1 to 4. The World Bank is backing the modernization of brick kilns towards more efficient and cleaner ones in Bangladesh. Traditional kilns, operated seasonally, produced an estimated 10 million tons of CO2 and other pollutants killing the environment and causing health problems to workers and citizens. Thanks to the World Bank backed technology, Hybrid Hoffman Kiln, new kilns produced 15 million bricks per year instead of 4 million produced by traditional kilns but they cost 15 times more. CO2 emissions are decreased by 75,000 tons per year, and full-time, less hard work is provided for laborers as mechanization increased. The challenge is mainly the cost: $3 billion are needed to construct enough new kilns to replace all traditional ones in terms of output. However, Bangladesh will be able to sell the certified carbon credits (CERs) resulting from reduced CO2 emissions to the World Bank; so far credits for 67,000 tons of CO2 were issued. Source: worldbank.org, July 20, 2016 1.

Would Hybrid Hoffman Kilns achieve production efficiency? As the news clip states that the modern brick kilns are more productive, we can safely assume that higher efficiency can be achieved. Use a PPF showing the tradeoff between producing bricks and clean air. Production efficiency requires producing on the PPF, so gaining more clean air results in reducing the number of bricks produced. The PPF using traditional kilns resulted in a given curve and the new technology of HHK kilns resulted in a rightward shift of the PPF; hence, productive efficiency has increased.

Is the price of the 67,000 CERs that Bangladesh received from the World Bank part of the opportunity cost of the HHK project kilns? The price of the 67,000 CERs received by Bangladesh for reducing CO2 emissions is part of the opportunity cost of not introducing the new technology to the kiln industry. If Bangladesh doesn’t adopt the new HHK technology, it would lose the © 2023 Pearson Education, Ltd.

opportunity to reduce CO2 emissions and decrease the value of the CERs it could sell to the World Bank. 3.

As per the news clip, new kilns cost 15 times more than traditional kilns. Explain if this cost is part of the opportunity cost of not implementing the modernization. If not, what is the corresponding opportunity cost? If Bangladesh does not implement the modernization, it wouldn’t incur the cost of the new kilns, which is 15 times the cost of the traditional ones. So, this cost is not the opportunity cost of not modernizing the kilns. The opportunity cost of not implementing the modernization includes losing the opportunity to decrease CO2 emission and benefitting from the value of the 67,000 CERs plus the value of the extra output that would be lost (in the case of those kilns already replaced, the value lost would be the value of 15 – 4 = 11 million bricks per year) and the sacrifice of the easier life and better work conditions provided for those working in the new kilns. Use the following information to work Problems 4 to 6.Is a cure for Aids within reach? More than 50 years after one of the most devastating viruses to affect man- kind, HIV remains a stubborn adversary. Treatment has improved dramatically over the past 20 years and now, a cure could be in sight. Source: The Guardian, November 30, 2018

Is the $3 billion cost part of the opportunity cost of implementing the HHK project? The $3 billion is part of the opportunity cost of implementing the kiln-modernization project because it is the actual cost of the process of changing the technology used and constructing new kilns.

How does the opportunity cost of treating HIV/AIDS changes as the number of casestreated increases with no change in technology? With no change in technology, moving along a PPF as the number of cases treated rises the opportunity cost of treating a case increases.

How has the opportunity cost of treating HIV/AIDS changed as the technology for treating it has advanced? With advances in technology in HIV/AIDS treatments, along the New PPF resources are more productive and fewer other goods and services must be given up to increase production of HIV/AIDS treatments. So the opportunity cost of producing HIV/AIDS treatments decreases. 7.

Explain how the following events influence U.S. production possibilities:  Some retail workers are re-employed building dams and wind farms. When these former retail workers are re-employed at their new occupations, more dams and wind farms are produced and fewer retail services are produced. The opportunity cost of the increased numbers © 2023 Pearson Education, Ltd.

of dams and wind farms is the forgone production of retail services. There is a movement along the PPF.  More people take early retirement. As more people retire, the quantity of labor available in the economy shrinks. As a result, the nation’s PPF shifts inward.  Drought devastates California’s economy. The nation’s PPF shifts inward as a result of the drought. The drought decreases the amount of productive land, thereby decreasing production of agricultural products and shifting the PPF inward Use the following information to work Problems 8 and 9. Figure 3.3 (on the next page) shows Tom’s production possibilities and Figure 3.4 (on the next page) shows Abby’s production possibilities. Tom uses all hisresources and produces 2 rackets and 20 balls an hour. Abby uses all her resources and produces 2 rackets and 40 balls an hour. 8.

What is Tom’s opportunity cost of producing a racket? What is Abby’s opportunity cost of a racket? Who has a comparative advantage in producing rackets? Who has a comparative advantage in producing balls? If Tom increases his production by 1 racket, he forgoes 10 balls. So his opportunity cost of 1 racket is 10 balls  1 racket, or 10 balls per racket.

If Abby increases her production by 1 racket, she forgoes 20 balls. So her opportunity cost of 1 racket is 20 balls  1 racket, or 20 balls per racket. Tom has the comparative advantage in producing rackets. Tom’s opportunity cost of a racket is 10 balls per racket and Abby’s opportunity cost of a racket is 20 balls per racket. Abby has © 2023 Pearson Education, Ltd.

the comparative advantage in producing balls. Tom’s opportunity cost of a ball is 0.10 rackets per ball and Abby’s opportunity cost of a ball is 0.05 rackets per ball. Use the following information to work Problems 9 to 11. Cheap broadband’s a winner Inexpensive broadband access has created a new generation of television producers and the Internet is their native medium. Source: The New York Times, December 2, 2007 9. How has inexpensive broadband changed the production possibilities of video entertainment and other goods and services? Inexpensive broadband means that the production of video entertainment increases when all available resources are used for this purpose. It does not change the production of other goods and services when all available resources are used for that purpose. 10. Sketch a PPF curve with video entertainment on the xaxis and other goods and services before broadband on the y-axis. As illustrated in Figure 3.5 by the production possibilities frontier labeled “Initial PPF,” the PPF has video entertainment on one axis and other goods and services on the other. The PPF is bowed outward as a conventional PPF. 11. Explain how the arrival of inexpensive broadband has changed the PPF. The arrival of inexpensive broadband shifts the PPF outward as shown by the change from the initial PPF to the new PPF in Figure 3.5. The intersection of the new PPF along the axis measuring video entertainment increases and the intersection of the new PPF along the axis measuring other goods and services does not change.