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Foundations of Economics, 9e (Global Edition) By Robin Bade, Michael Parkin (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) All Chapters Solutions Manual Supplement files download link at the end of this file.

Getting Started

Chapter

ANSWERS TO CHAPTER CHECKPOINTS

 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.

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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.

1 1

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.

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.

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.

Chapter

Demand and Supply ANSWERS TO CHAPTER CHECKPOINTS

 Problems and Applications 1.

Each of the following four events occurs (one at a time) in the market for air travel. Explain how each of the following events changes the demand for or supply of air travel.  Airfares rise, while train fares don't change. A change in the price of airfares does not change either the demand for or the supply of air travel. (It changes the quantity demanded and the quantity supplied of air travel.)  The price of jet fuel falls The fall in the price of jet fuel increases the supply of air travel because it decreases the cost of producing air travel.  Airlines reduce the number of flights each day The reduction in the number of flights is a decrease in the supply of air travel.  People expect airfares to increase next summer The current demand for air travel increases when people expect airfares to increase next summer because people prefer to fly now, when airfares are relatively cheaper, rather than next summer when it might get more expensive.  A severe winter in New York induces more people to vacation in Florida. More people vacationing in Florida means that there is an increase in the demand for air travel.  With no snow in the Rockies, fewer people travel to the ski slopes. The lack of snow in the Rockies leads to a decrease in the demand for air travel.  The price of train travel rises. Train travel is a substitute for air travel. So, a rise in the price of train travel increases the demand for air travel as consumers would prefer to travel by air instead. © 2023 Pearson Education, Ltd.

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The price of a pound of air cargo rises. Transporting cargo by air is a substitute in production for transporting people by air. Therefore, the rise in the price of air cargo decreases the supply of air travel for people.

[Use the laws of demand and supply to explain whether the statements in Problems 2 and 3 are true or false. In your explanation, distinguish between a change in demand and a change in the quantity demanded and between a change in supply and a change in the quantity supplied.] 2.

In 2016, a wheat fungal outbreak that started in Sicily spread widely and destroyed a large portion of Europe’s wheat crop. The fungal outbreak increased the price of wheat and pasta. The statement is true. The smaller supply of wheat in Sicily resulted in a leftward shift of the supply curve of wheat. The equilibrium price of wheat increased and the equilibrium quantity decreased. The quantity of wheat demanded decreased and there was a movement up along the demand curve. Wheat is a resource used in the production of pasta. When the price of wheat increases, it costs more to produce pasta and the supply of pasta falls. The quantity of pasta demanded decreases and there is a movement up along the demand curve. The equilibrium price of pasta increases and the equilibrium quantity decreases. If the price of coffee falls, the quantity of tea consumed will decrease and the price of tea will rise. The statement is false. Coffee and tea are substitutes for consumers. When the price of coffee falls, people substitute coffee for tea. The demand for tea decreases and the demand curve shifts leftward. The equilibrium quantity of tea decreases but the equilibrium price of tea falls. There is a change in the quantity of tea supplied and a movement down along the supply curve. The table shows the demand and supply schedules for magazines. What is the market equilibrium? If the price of a magazine is $ 3.50, what is the situation in the market? How is market equilibrium restored? If a rise in the price of a newspaper increases the quantity of magazines demanded by 11 a week at each price, how does the market adjust to its new equilibrium?

When floods wiped out the banana crop in Central America, the equilibrium price of bananas and the equilibrium quantity of bananas . A. rose; increased B. rose; decreased C. fell; increased D. fell; decreased Answer: B Figure 4.12(b) illustrates this case of a decrease in supply. 6.

A decrease in the demand for chocolate with no change in supply will create a of chocolate at today’s price, but gradually the price will . A. surplus; fall B. shortage; fall C. surplus; rise D. shortage; rise Answer: A Figure 4.11(b) illustrates this case of a decrease in demand. 7.

Many Lebanese are now using quinoa instead of the traditional bourghul in their staple foods, like tabbouleh. Other things remaining the same, in the market for bourghul, __________ and in the market for quinoa, __________. A. demand decreases and the price falls; demand increases and the price rises B. demand decreases and the price rises; supply increases and the price falls C. both demand and supply decrease and the price might rise, fall, or not change; demand increases and the price rises D. demand decreases, supply increases, and the price falls; supply increases and the price falls

Answer: A

Chapter

Elasticities of Demand and Supply ANSWERS TO CHAPTER CHECKPOINTS

 Problems and Applications When the price of home heating oil increased by 20 percent, the quantity demanded decreased by 2 percent and the quantity of wool sweaters demanded increased by 10 percent. Use this information to work Problems 1 and 2. 1. Use the total revenue test to determine whether the demand for home heating oil is elastic or inelastic. When the price of home heating oil increased by 20 percent, the total revenue collected by sellers of home heating oil increased because the quantity demanded decreased by only 2 percent. Because the total revenue increased when the price rose, the total revenue test tells us that the demand for home heating oil is inelastic. (To check, the elasticity of demand is (2 percent) ÷ (20 percent), which is 0.10. Recall that when calculating the price elasticity of demand, we use absolute values or magnitudes and ig- nore the minus sign.) 2.

If the price of a wool sweater did not change, calculate the cross elasticity of demand for wool sweaters with respect to the price of home heating oil. Are home heating oil and wool sweaters substitutes or complements? Why? The cross elasticity of demand for wool sweaters with respect to home heating oil is:

 Percentage change in quantity of sweaters demanded  10 percent   = 20 percent = 0.55 Percentage change in price of heating oil   Home heating oil and sweaters are substitutes because as the price of home heating oil rises, you can stay warm by using less home heating oil and putting on a sweater. The cross elasticity of demand for a substitute is positive.

Part 2 . A CLOSER LOOK AT MARKETS

Efficiency and Fairness of Markets ANSWERS TO CHAPTER CHECKPOINTS

 Problems and Applications

In Taiwan, no reservations are accepted for Shilin Official Residence; at National Palace Museum, reservations are accepted; at Kenting National Park, reservations are essential. Use this information to answer Problems 1 to 3. 1. Describe the similarities and differences in allocating resources in these three tourist attractions. All three sites use a first-come, first-serve system. The difference lies in how they use the system. Shilin Official Residence uses this system directly. National Palace Museum uses a first-come, first-serve system because the first person to call to make a reservation at a particular time is allocated a ticket at that time. Kenting National Park uses a combination of the immediate first-come, first-serve system and the reservation based first-come, first-serve system. 2.

Why do you think attractions have similarities and differences in allocating resources? The first-come first-serve systemworks best when a scarce resource can serve just one user at a time in a sequence. By serving the customers who arrive first, there will be fewer people waiting in line for the attractions to be free. The difference in the speed with which tickets turn over at the different attractions and the difference in customers’ values of time are the main reasons why each attraction has different reservation policies. Kenting National Park has a low turnover rate, as each visitor needs to spend at least one day to go around the park, and its customers have a high value of time. Also considering the protection of the environment, the number of visitors needs to be kept in check. If Kenting National Park refused to take reservations, its customers would need to wait an inefficiently long time and would go elsewhere, resulting in Kenting National Park’s profits being lower. At Shilin Official Residence, the turnover rate is high — visitors only need to spend around one hour there. Allowing reservations would be costly for Shilin Official Residence © 2023 Pearson Education, Ltd.

Chapter

Chapter 6 . Efficiency and Fairness of Markets

and would spare its customers only a slight wait at most, so allowing reservations would decrease its profits. At National Palace Museum, the turnover rate is between Shilin Official Residence and Kenting National Park, so it uses a combination of online reservations on a first-come, first served basis and an in-person first-come, first-serve basis. 3.

Under what conditions would the ticket fare be an example of the market price method of allocation resources and why don’t all attractions use the market price to allocate their resources? If the ticket fare is the equilibrium price at which the quantity demanded equals the quantity supplied, it would be an example of the market price method. The price would fluctuate from time to time depending on the number of customers, leading to high uncertainty about the price faced by customers and lowering of demand for tickets to the sites. The decreased demand would lower the attraction’s profit.

The table shows the demand and supply schedules for sandwiches. Use the table to work Problems 4 to 7. 4. Calculate the equilibrium price of a sandwich, the consumer surplus, and the producer surplus. What is the efficient quantity of sandwiches? The equilibrium quantity is 200 sandwiches and the equilibrium price is $4 a sandwich. Figure 6.1 can be used to calculate the consumer surplus. The consumer surplus equals the area of the light gray triangle above the price and below the demand curve. The area of the triangle is 1/2 × base × height, so the consumer surplus is 1/2 × (200 sandwiches) × ($4 a sandwich), which is $400. Figure 6.1 also can be used to calculate the producer surplus. The producer surplus equals the area of the dark gray triangle below the price and above the supply curve. This area is 1/2 × (200 sandwiches) × ($4 a sandwich), which is $400. The efficient quantity is 200 sandwiches. 5.

Price (dollars per sandwich) 0 1 2 3 4 5 6 7 8

If the quantity demanded decreases by 100 sandwiches an hour at each price,

Quantity Quantity demanded supplied (sandwiches per week) 400 0 350 50 300 100 250 150 200 200 150 250 100 300 50 350 0 400

Government Actions in Markets

Chapter

ANSWERS TO CHAPTER CHECKPOINTS

 Problems and Applications The table shows the demand and supply Rent Quantity Quantity schedules for on-campus housing. Use the (dollars per demanded supplied table to work Problems 1 to 3. month) (rooms) 500 2,500 2,000 1. If the college puts a rent ceiling on 550 2,250 2,000 rooms of $650 a month, what is the rent, 600 2,000 2,000 how many rooms are rented, and is the on650 1,750 2,000 campus housing market efficient? 700 1,500 2,000 The equilibrium rent is $600 a month 750 1,250 2,000 and the equilibrium quantity of rooms is 2,000 rooms. The rent ceiling of $650 a month is above the equilibrium rent and does not change the market equilibrium. The rent remains the equilibrium rent of $600 a month, the quantity of rooms rented remains 2,000 rooms, and the market remains efficient. 2.

If the college puts a strictly enforced rent ceiling on rooms of $550 a month, what is the rent, how many rooms are rented, and is the oncampus housing market efficient? Explain why or why not. The rent ceiling of $550 a month is below the equilibrium rent, so the rent is $550 a month. At this rent 2,250 rooms are demanded and the quantity supplied is only 2,000 rooms, so 2,000 rooms are rented. The on-campus housing market is efficient because the supply is perfectly inelastic so the quantity remains equal to the efficient quantity.

Suppose that with a strictly enforced rent ceiling on rooms of $550 a month, a black market develops. How high could the black market rent be and would the on-campus housing market be fair? Explain your answer. The black market rent could be as high as $600 a month, which is the maximum rent someone is willing to pay for the 2,000th room. If a black market develops, using the “fair results” approach, the market is not fair be-

Part 3 . HOW GOVERNMENTS INFLUENCE THE ECONOMY

cause the poorest students cannot afford the higher black market rent. Using the “fair rules” approach, the market is not fair because the rent ceiling blocks some voluntary exchanges unless the buyers and sellers are willing to participate in the black market. Use the table, which shows the demand and Wage rate Quantity Quantity supply schedules for student workers at on(dollars per demanded supplied hour) (student workers) campus venues, to work Problems 4 to 6. 4. If the college introduces a minimum 10.00 600 300 10.50 500 350 wage of $10.50 an hour, how many stu11.00 400 400 dents are employed at on-campus ven11.50 300 450 ues and how many are unemployed? 12.00 200 500 The equilibrium wage rate is $11.00 an 12.50 100 550 hour and 400 workers are employed. If the minimum wage is set at $10.50 an hour, the minimum wage is below the equilibrium wage rate, so the minimum wage does not affect the market equilibrium. The wage rate remains $11.00 an hour, 400 student workers are employed, and no student workers are unemployed. 5.

If the college introduces a strictly enforced minimum wage of $11.50 an hour, how many students are employed, how many are unemployed, and what is the lowest wage at which some students would be willing to work? If the minimum wage is set at $11.50 an hour, the minimum wage is above the equilibrium wage rate, so the minimum wage has an impact. The wage rate is $11.50 an hour and 300 student workers are employed. At $11.50 an hour, the quantity of labor supplied is 450 student workers, the quantity demanded is 300 student workers, so 150 student workers are unemployed. Some workers are willing to work for $10.00 an hour.

If the college introduces a strictly enforced minimum wage of $11.50 an hour, who gains and who loses from the minimum wage, and is the campus labor market efficient or fair? The workers who retain their jobs and are paid the higher wage rate gain from the minimum wage. The employer, the workers who lose their jobs, and workers who must undertake extensive search for a job lose from the minimum wage. The minimum wage of $11.50 an hour is not efficient. There is a surplus of workers and the marginal benefit to firms exceeds the marginal cost to workers. A deadweight loss is created. The minimum wage is unfair under the “fair results” approach because some student workers lose their jobs. The minimum wage is unfair under the “fair rules” approach because it blocks voluntary exchange.

Chapter 7 . Government Actions in Markets

A minimum wage set above the market equilibrium wage rate . A. increases both employment and the quantity of labor supplied B. decreases unemployment and raises the wage rate of those employed C. raises the wage rate of those employed and increases the supply of jobs D. increases unemployment and decreases employment Answer: D By raising the wage rate above the equilibrium wage rate, a minimum wage creates unemployment and decreases employment.

A minimum wage is . A. efficient if the wage paid rises and more people look for jobs B. inefficient if workers’ surplus decreases and firms’ surplus increases C. inefficient if job search increases and total surplus decreases D. efficient if workers’ surplus increases and firms’ surplus decreases Answer: C The minimum wage decreases total surplus and hence creates inefficiency.

A production quota set below the market equilibrium quantity . A. increases the price, increases producer surplus, and is inefficient B. creates a shortage and increases farmers’ total revenue but is unfair C. is inefficient because farmers’ marginal cost exceeds consumers’ marginal benefit D. is efficient because farmers’ surplus increases Answer: A Production quotas set below the equilibrium quantity force the market price and quantity to change, raising the price and increasing the producer surplus. 8.

An effective production quota for peanuts with no imports of peanuts will . A. lower the peanut growers’ costs, raise the market price of peanuts, and decrease consumer surplus B. raise the price of peanuts, which will decrease the demand for peanuts C. make the peanut market more efficient if the demand for peanuts is inelastic D. decrease the quantity of peanuts produced, decrease the quantity consumed, and increase the total surplus from peanuts Answer: A Figure 7.9(b) in the text illustrates all three of the results.

Chapter

Taxes

ANSWERS TO CHAPTER CHECKPOINTS

 Problems and Applications 1.

In Florida, sunscreen and sunglasses are vital items. If the tax on sellers of these items is doubled from 5.5 percent to 11 percent, who will pay most of the tax increase: the buyer or the seller? Will the tax increase halve the quantity of sunscreen and sunglasses bought? Because sunscreen and sunglasses are necessities, the demand for them is inelastic. So, most of a tax imposed on them will be paid by the buyer. Even though the tax doubles, the quantity purchased is not halved because the demand is inelastic.

Suppose that the government imposes a $2 a cup tax on coffee. What determines by how much Starbucks will raise its price? How will the quantity of coffee bought in coffee shops change? Will this tax raise much revenue? The price elasticities of demand and supply determine how much more Starbucks charges for a coffee. The smaller the price elasticity of demand and the larger the price elasticity of supply, the more Starbucks will raise the price of a coffee. The quantity of coffee bought will decrease. The amount of revenue the government raises depends on the size of the tax and the size of the decrease in the quantity of coffee purchased. For a given tax, the government collects more revenue the smaller the price elasticities of demand and supply because the smaller these elasticities, the smaller the decrease in the quantity purchased.

Concerned about the political fallout from rising gas prices, the government cuts the tax on gasoline. Use this information to work Problems 3 and 4. 3. Explain the effect of this tax cut on the price of gasoline and the quantity bought if, at the same time, the oil producing nations increase production. The tax cut increases the supply of gasoline. If the oil-producing nations increased their production, the supply of gasoline increases for this rea-

Global Markets in Action ANSWERS TO CHAPTER CHECKPOINTS

 Problems and Applications Use Figures 9.1 and 9.2 to work Problems 1 to 4. Figure 9.1 and Figure 9.2 show the markets for shoes if there is no trade between the United States and Brazil.

Which country has a comparative advantage in producing shoes? With international trade, explain which country would export shoes and how the price of shoes in the importing country and the quantity produced by the importing country would change. Explain which country gains from this trade. Brazil has the comparative advantage in producing shoes because, with no international trade, the price in Brazil is less than the price in the Unit© 2023 Pearson Education, Ltd.

Chapter

Part 3 . HOW GOVERNMENTS INFLUENCE THE ECONOMY

ed States. With international trade, Brazil will export shoes to the United States. The price of a pair of shoes in the United States will fall and the quantity of shoes produced in the United States will decrease. Both countries will gain from this trade. In Brazil producers of shoes gain (consumers of shoes lose, but the gain to the producers exceeds the loss to consumers) and in the United States consumers of shoes gain (producers of shoes lose, but the gain to the consumers exceeds the loss to producers). 2.

The world price of a pair of shoes is $20. Explain how consumer surplus and producer surplus in the United States changes as a result of international trade. On the graph, show the change in U.S. consumer surplus (label it A) and the change in U.S. producer surplus (label it B). The consumer surplus of U.S. consumers increases because the price U.S. consumers pay for a pair of shoes falls. As a result of the fall in price, U.S. consumers increase the number of shoes they buy. Consumer surplus increases because the price falls and because the quantity of shoes purchased increases. The producer surplus of U.S. producers decreases because of the fall in the price of a pair of shoes. As a result of the fall in price, U.S. producers decrease the quantity of shoes they produce. Producer surplus decreases both because the price falls and because the quantity of shoes produced decreases. Figure 9.3 shows the change in consumer surplus and the change in producer surplus. The increase in consumer surplus equals the area A + B (the part of the light colored gain that lies beneath area B is not visible). The loss of producer surplus equals the dark gray area B.

The world price of a pair of shoes is $20. Explain how consumer surplus and producer surplus in Brazil change as a result of international trade. Show the change in Brazil’s consumer surplus (label it C) and the change in Brazil’s producer surplus (label it D). The consumer surplus of Brazilian consumers decreases because the price Brazilian consumers pay for a pair of shoes rises. As a result of the rise in price, Brazilian consumers decrease the number of shoes they buy. Consumer surplus decreases both because the price rises and because the quantity of shoes purchased decreases. The producer surplus of Brazilian producers increases because of the rise in the price of a pair of shoes. As a result of the rise in price, Brazilian producers increase the quantity of shoes they produce. Producer surplus increases both because the price

Chapter

Externalities ANSWERS TO CHAPTER CHECKPOINTS

 Problems and Applications Quantity Price The first table shows the demand schedule for electricity (cents per demanded from a coal-burning utility. The second table shows the utilikilowatt) (kilowatts per day) ty’s cost of producing electricity and the external cost of the 4 500 pollution created. Use this information to work Problems 1 8 400 to 3. 12 300 16 200 1. With no pollution control, calculate the quantity of elec20 100 tricity produced, the price of electricity, and the margin24 0 al external cost of the pollution generated. With no pollution control, the quantity of elecQuantity Marginal Marginal tricity produced is the amount at which the (kilowatts cost external cost per day) quantity demanded equals the quantity sup(cents per kilowatt) plied as determined by the marginal private cost 0 0 0 100 2 2 of producing electricity. In this case, the quanti200 4 4 ty is 400 kilowatts per day and the price is 8¢ per 300 6 6 kilowatt. At this quantity, the marginal external 400 8 8 cost is (also) 8¢ per kilowatt. 500 10 10 2. With no pollution control, calculate the quantity of electricity produced, the marginal social cost of the electricity generated, and the deadweight loss. With no pollution control, the quantity of electricity produced is the amount at which the quantity demanded equals the quantity supplied as determined by the marginal private cost of producing electricity. In this case, the quantity is 400 kilowatts per day. At this quantity the marginal external cost is (also) 8¢ per kilowatt so the marginal social cost is 16¢ per kilowatt. The deadweight loss equal to the area of the triangle whose height is the marginal external cost at the equilibrium quantity and whose base is the difference between the efficient quantity and the privatemarket equilibrium quantity. The efficient quantity is 300 kilowatts and at

108

Part 4 . MARKET FAILURE AND PUBLIC POLICY

the equilibrium quantity the marginal external cost is 8¢ per kilowatt. The difference between the efficient quantity and the equilibrium quantity is 100 kilowatts. So the deadweight loss equals 1/2  100 kilowatts  8¢ per kilowatt, or $4.00. 3.

If the government levies a pollution tax such that the utility generates the efficient quantity of electricity, calculate the quantity of electricity generated, the price of electricity, the size of the pollution tax, and the tax revenue. The efficient quantity of electricity is the amount at which the quantity demanded (which reflects the marginal social benefit) equals the marginal social cost. The marginal social cost is the sum of the marginal cost and the marginal external cost. The efficient quantity is 300 kilowatts because at this quantity the marginal social cost, 12¢ per kilowatt, equals the price, also 12¢ per kilowatt. The pollution tax must equal the marginal external cost, 6¢ per kilowatt. The tax revenue equals 6¢ per kilowatt  300 kilowatts, which is $18.00.

Use the following information to work Problems 4 and 5. Tom and Larry must spend a day working together. Tom likes to smoke cigars and the price of a cigar is $2. Larry likes a smoke-free environment. 4. If Tom’s marginal benefit of a cigar a day is $20 and Larry’s marginal benefit of a smoke-free environment is $25 a day, what is the outcome if they meet at Tom’s home? What is the outcome if they meet at Larry’s home? Larry is willing to pay Tom up to $25 to not smoke. Tom’s net benefit of smoking is $18 (the marginal benefit minus the price of the cigar). The Coase theorem says that in this case, with Tom and Larry meeting at Tom’s home, Larry pays Tom some amount between $18 to $25 not to smoke and Tom does not smoke. If Tom and Larry meet at Larry’s house, Tom is willing to pay up to $18 to be allowed to smoke. But Larry will accept nothing less than $25 to allow Tom to smoke. Tom cannot offer enough to Larry, so Tom does not smoke. In both questions, the efficient outcome, Tom not smoking, is attained regardless of who is given the property right, that is, regardless of who owns the house in which the meeting occurs. 5.

If Tom’s marginal benefit of a cigar a day is $25 and Larry’s marginal benefit of a smoke-free environment is $20 a day, what is the outcome if they meet at Tom’s home? What is the outcome if they meet at Larry’s home? Larry is willing to pay Tom up to $20 to not smoke. Tom’s net benefit of smoking is $23 (the marginal benefit minus the price of the cigar). When Tom and Larry meet at Tom’s house, Larry cannot offer enough to Tom to make Tom quit smoking, so Tom smokes. If Tom and Larry meet at Lar-

Chapter 10 . Externalities

Steel production creates pollution. If a tax is imposed on steel production equal to the marginal external cost of the pollution it creates, . A. steel producers will cut pollution to zero B. the deadweight loss created by steel producers will be cut to zero C. the market price of steel will rise by the amount of the tax D. steel producers will continue to produce the inefficient quantity of steel Answer: B The tax makes the producers’ marginal cost equal to the marginal social cost and eliminates the deadweight loss. 5.

A good or service with a positive externality is one which . A. everyone wants to have access to B. is produced in the social interest C. the marginal social benefit exceeds the marginal private benefit D. the marginal external benefit exceeds the marginal private benefit Answer: C The definition of marginal social benefit on page 261 shows that answer C is correct.

Because education generates a positive externality, . A. everyone who wants a college education should get one B. graduates’ marginal benefit exceeds the society’s value of the education C. the quantity of education undertaken will achieve the social interest if it is free D. subsidies to colleges or vouchers to students are means of achieving the efficient number of graduates Answer: D Figures 10.8 and 10.9 show how subsidies and vouchers increase the number of students to be equal to the efficient number.

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Public Goods and Common Resources ANSWERS TO CHAPTER CHECKPOINTS

 Problems and Applications Use the following list of items to work Problems 1 and 2.  New Year’s Eve celebrations in Times Square, New York  A city’s sewer system  New York subway system  A skateboard  Cable TV  Niagara Falls 1. Classify each of the items in the list as a private good, a public good, a common resource, or a club good. Explain each classification.  New Year’s Eve celebrations in Times Square, New York New Year’s Eve celebrations in Times Square are a public good because they are nonexcludable and, as long as Times Square is not too crowded, nonrival.  A city’s sewer system A sewer system is a club good because it is nonrival and is excludable.  New York subway system The New York subway system as a private good. It is excludable because you have to buy a ticket and it is rival because when you get a seat or a spot to stand no one else can occupy the same space.  A skateboard A skateboard is a private good.  Cable TV Cable TV is a club good because it is nonrival and excludable.  Niagara Falls Niagara Falls is a common resource. It is nonexcludable because neither the United States nor Canada charge admission and it is rival be-

Chapter

126

Part 4 . MARKET FAILURE AND PUBLIC POLICY

A renewable common resource is used sustainably if . A. private benefits and public benefits are equal B. private benefits equal private costs C. the rate of renewal of the resource equals its rate of use D. the rate of use of the resource equals the social benefit of its use Answer: C If the rate of renewal equals the rate of use, the stock of the resource does not change.

Overfishing occurs if, at the quantity caught, . A. marginal social cost equals marginal private cost plus marginal external cost B. marginal social benefit equals the fishers’ marginal private cost C. marginal social benefit equals marginal social cost D. marginal social benefit equals marginal private cost plus marginal external cost Answer: B The fisher’s marginal cost is less than the marginal social cost, so overfishing occurs.

All the following can achieve an efficient use of a common resource except . A. a production quota equal to the marginal external cost B. individual transferable quotas that total the efficient quantity C. assigning property rights to convert the common resource to private use D. individual transferable quotas that trade at marginal external cost Answer: A The production quota must be set to equal the efficient quantity not the marginal external cost.

When ITQs are assigned, the market price of an ITQ equals the . A. marginal benefit consumers receive from the fish caught B. marginal private cost of fishing C. marginal external cost of fishing D. marginal social cost of fishing Answer: C As Figure 11.10 shows, because the price of an ITQ equals the marginal external cost, once the government introduces ITQs, the market equilibrium is the same as the efficient quantity.

Markets with Private Information ANSWERS TO CHAPTER CHECKPOINTS

 Problems and Applications 1.

Judy knows that her car is a lemon and offers it for sale. If the used-car market is working efficiently, will buyers know whether her car is a lemon? Why or why not? If the used car market is working efficiently, then buyers will know that her car is a lemon. Knowing the car is a lemon, the price is lower than the price of a good car and Judy offers no warranty. If buyers did not know that her car was a lemon, then a buyer might mistakenly take it for a good car, which would lead the buyer to pay more than the car’s marginal benefit.

Some car dealers offer used cars for sale with warranties and some offer them without warranties. Describe the equilibrium in the market for used cars. Is the market efficient? The cars with warranties—the good cars—sell for a higher price than the cars without warranties—the lemons. The used car market is efficient.

G.M. recalls 6,800 pickups for inaccurate shift-lever reading General Motors is recalling 6,800 pickups from the 2011 model year because a defective clip could allow the automatic transmission’s selector to appear to be in Park when it was not. A worker at the assembly plant discovered the problem. Source: The New York Times, July 1, 2011 Did G.M. sell 6,800 lemons to people who bought the pickups? If G.M. did, what was the private information that it had that buyers did not know? If G.M. didn’t, explain why not. G.M. sold defective cars. G.M. did not have private information about the quality of the car because the defect was unknown to G.M. until discovered by a worker. As G.M. did not know it was selling defective cars, they are not defined as lemons.

Chapter