1/2 Semester - Econ 2010

When bad weather in India destroys the crop, does this sound like a fall in the total "supply" of crops or a fall in people's "demand" for crops?

*Supply* Demand Both

In the discussion of Big Idea Five, the chapter says that "self-sufficiency is death" because most of us would not be able to produce for ourselves the food and shelter that we need to survive. In addition to death, however, one could also say that self-sufficiency is boredom or ignorance. How does specialization and trade help you to avoid boredom and ignorance?

*even if you had time to read educational books, there may not be authors with time to write them. even though everyone has some things they enjoy doing and others they consider drudgery, the attitudes about which specific things go in which category differ across people. reading a mystery novel you wrote yourself would not be much fun. most people would have to spend almost all of their time procuring basic necessities even though they may rather do something else. the phrase, "I stand on the shoulders of giants," may disappear as a common refrain when someone is honored for an advance in knowledge or technology, because the giants are now busy gathering and hunting* LITERALLY ALL OF THEM

a. American workers are commonly paid much more than Chinese workers. True or false: This is largely because American workers are typically more productive than Chinese workers. b. Julia Child, an American chef (and World War II spy) who reintroduced French cooking to Americans in the 1960s, was paid much more than most American chefs.

True True

For each of the following, indicate if the supply for the good would become more elastic or less elastic as a result of each change. In each case, the supply curve also shifts, but the focus is on changes in elasticity.

a. The supply curve for diamonds if a new process for manufacturing diamonds is created Supply will become more elastic because the number of diamond‑manufacturing plants can be increased with constant costs. b. The supply curve for food if pesticides and fertilizers were banned Supply will become less elastic because farmers will have fewer ways to respond to price changes. c. The supply curve for plastic if a very large share of oil output was used to make plastic Supply will become less elastic because it would be relatively expensive to increase the amount of oil available for plastic producers. d. The supply curve for nurses after several years of increasing wages in nursing Supply will become more elastic because market participants will be more able to adjust to changes in the market over several years.

What happens to equilibrium price and quantity when there is a change in supply or demand?

a. When demand increases, what happens to price and quantity in equilibrium? Price rises and quantity rises b. When supply increases, what happens to price and quantity in equilibrium? Price falls and quantity rises c. When supply decreases, what happens to price and quantity in equilibrium? Price rises and quantity falls d. When demand decreases, what happens to price and quantity in equilibrium? Price falls and quantity falls

For each blank, select the correct choice:

a. When the government subsidizes an activity, resources such as labor, machines, and bank lending will tend to gravitate toward the activity that is subsidized and will tend to gravitate away from activity that is not subsidized. b. When the government taxes an activity, resources such as labor, machines, and bank lending will tend to gravitate away from the activity that is taxed and will tend to gravitate toward activity that is not taxed.

An important tradition in the Santos family is that they eat the same meal at their favorite restaurant every Sunday. By contrast, the Chen family spends exactly $50 for their Sunday meal at whatever restaurant sounds best.

a. Which family has a more elastic demand for restaurant food? The chen family has a more elastic demand. b. Which family has a unit elastic demand for restaurant food? Hint: How would each family respond to an increase in food prices? The chen family has unit elasticity.

A headline in the New York Times read: "Study Finds Enrollment Is Up at Colleges Despite Recession." How would you rewrite this headline now that you understand the idea of opportunity cost?

"Study Finds Enrollment Is Up at Colleges Because of Recession."

Jessica is an economist. She loves being an economist so much that she would do it for a living even if she only earned $32000 per year. Instead, she earns $103000 per year. How much producer surplus does Jessica enjoy?

71000

Immigration is a fact of life in the United States. This will lead to a big boost in the labor supply. What field would you rather be in: a field where the demand for your kind of labor is elastic or a field where the demand for your kind of labor is inelastic?

A field where demand is elastic

a. Using the given supply curve, fill in the values, moving up along the curve.

A. Quantity supplied: 20 million barrels B. Price: $15 C. Quantity supplied:25 million barrels D. Price: $20 E. Quantity supplied:30 million barrels F. Price: $30 G. Price: $50 H. Quantity supplied:48 million barrels b. If the price for a barrel of oil was $15, how much oil would oil suppliers be willing to supply? 25 million barrels c. What is the lowest price at which suppliers of oil would be willing to supply 20 MBD? Price: $ 12

In Sucrosia, the supply curve for sugar is presented in both the graph and the table. Under pressure from nutrition activists, the government decides to tax sugar producers with a $5 tax per 100 pound bag. Using the graph, draw the new supply curve. After the tax is enacted, what price will bring forth quantities of 10,000? 15,000? 20,000?

A: $ 35 B: $ 55 C: $ 75

As Nobel prize winner and New York Times columnist Paul Krugman has noted, the field of economics is a lot like the field of medicine: They are fields where knowledge is limited, and where many cures are quite painful, but where regular people care deeply about the issues. What are some other ways that economics and medicine are alike?

Alike: It is difficult to run randomized experiments. Charlatans offer useless or damaging remedies for problems Person-on-the-street is over-confident about personal knowledge There is lots more to learn Not alike: Practitioners must be licensed Professionals are well-respected.

Economics is sometimes called "the dismal science." Choose the big ideas which sound dismal.

Big Idea Four: Think on the Margin. *Big Idea Eight: Economic Booms and Busts Cannot Be Avoided but Can Be Moderated.* *Big Idea Ten: Central Banking Is a Hard Job.* Big Idea Five: Trade Makes People Better Off.

Categorize each of the following examples into one of these reasons for trade: division of knowledge or comparative advantage. a. Two recently abandoned cats, Bingo and Tuppy, need to quickly learn how to catch mice in order to survive. If they also remain well groomed, they stand a better chance of surviving, because good grooming reduces the risk of disease and parasites. Each cat could go it alone, focusing almost exclusively on learning to catch mice. The alternative would be for Bingo to specialize in learning how to groom well and for Tuppy to specialize in learning how to catch mice well.

Bingo and Tuppy will trade because of *division of knowledge* b. Supreme Court Chief Justice John Roberts hires attorneys who are less skilled than himself to do routine legal work. Justice Roberts hires less‑skilled lawyers because of *comparative advantage* .

Nobel Prize winner Milton Friedman said that a bad central banker is like a "fool in the shower." How does this apply to central banking?

Certain policy measures may be ruled out by the President or Congress for political or philosophical reasons, like leaving your towel out of reach. The economy is like a slippery shower, where any action may lead to unintended consequences. *The temperature of the water is like economic conditions. There is a delay between when the faucet is turned and when the water changes temperature.* A central banker may have "soap in his eyes," causing him to ignore the economic situation that needs to be addressed.

The diagram that follows shows the market for agricultural products. The shift from the old supply curve to the new supply curve is the result of technological and scientific advances in farming. Calculate the change in consumer surplus and the change in producer surplus caused by these technological advances. Are buyers better or worse off as a result of these advancements? What about sellers?

Change in consumer surplus: $ 9.45 million Change in producer surplus: $1.65 million Buyers are Better off worse off Sellers are better off worse off

Is the demand for cigarettes likely to be elastic or inelastic? Explain your reasoning.

Cigarette demand is most likely inelastic because cigarettes are addictive and have few substitutes .

Your roommate just bought a TomTom Spark GPS fitness watch for $120.00. She wanted a device that could improve her morning runs by measuring the speed, distance, and duration of the runs, and calculating her calories burned. She would have been willing to pay $245.00 for a device that could accomplish these tasks. How much consumer surplus does your roommate enjoy from the TomTom Spark watch?

Consumer surplus = $123.00

Henry Ford famously mass-produced cars at the beginning of the twentieth century, starting Ford Motor Company. He made millions because mass production made cars more cheaply, and he passed some of the savings to the consumer in the form of a low price. Cars became a common sight in the United States thereafter. Keeping total revenue and its relationship with price in mind, do you think the demand for cars was elastic or inelastic given the story of Henry Ford?

Demand for cars was elastic

If a snowstorm was forecast for the next day, what would happen to the demand for snow shovels? Is this a change in quantity demanded or a change in demand? This shift in the demand curve would affect the price; would this cause a change in quantity supplied or a change in supply?

Demand for snow shovels would increase.. This is a change in demand- people want a greater number of snow shovels at any price. The subsequent increase in price would cause a change in quantity supplied.

"Opportunity cost" is one of the tougher ideas in economics. Let's make it easier by starting with some simple examples. In the following examples, find the opportunity cost: Your answer should be a rate, as in "1.5 widgets per year" or "6 lectures per month." Assume that these relationships are simple linear ones, so that if you put in twice the time you get twice the output, and half the time yields half the output. a. Erin has a choice between two activities: She can repair one transmission per hour or she can repair two fuel injectors per hour. What is the opportunity cost of repairing one transmission? b. Katie works at a customer service center and every hour she has a choice between two activities: answering 200 telephone calls per hour or responding to 400 emails per hour. What is the opportunity cost of responding to 400 phone calls? c. Deirdre has a choice between writing one more book this year or five more articles this year. What is the opportunity cost of writing half of a book this year, in terms of articles?

Each transmission costs *2* fuel injector(s) per hour. 400 phone calls cost *800* email(s) One‑half of a book costs *2.5* article(s) per year.

12. Suppose the following table shows the number of labor hours needed to produce airplanes and automobiles in the United States and South Korea, but one of the numbers is unknown. a. Without knowing the number of labor hours required to produce an auto in South Korea, you can't figure out which country has the comparative advantage in which good. Can you give an example of a number for the empty cell of the table that would give the United States the comparative advantage in the production of airplanes? What about South Korea? Round all answers to no more than one decimal place.

Enter a number that would give comparative advantage to the U.S.: 12.49 hours South Korea: 12.51 hours b. Who has the absolute advantage in the production of airplanes? What about autos? Absolute advantage in airplanes: *United states* Absolute advantage in autos: *Cannot be determined* c. What exact number would you have to place in the empty cell of the table for it to be impossible that trade between the United States and South Korea could benefit both nations? *12.5*

In recent years, the Paleo diet, which emphasizes eating more meat and fewer grains, has become very popular. What do you suppose that has done to the price and quantity of bread? Use supply and demand analysis to support your answer.

Equilibrium price will decrease and equlibrium quantity will decrease

Nobel laureate Paul Samuelson said that comparative advantage is one of the few ideas in economics that is both "true and not obvious." Since it's not obvious, we should practice with it a bit. In each of the cases, determine the opportunity cost of each worker. Who has the absolute advantage at each task, and who has the comparative advantage? In one hour, Ethan can bake 20 cookies or hang the drywall for two rooms. In one hour, Sienna can bake 100 cookies or hang the drywall for three rooms.

Ethan's opportunity cost of a batch of 20 cookies is *two drywalled rooms*. Ethan's opportunity cost of drywalling two rooms is *20 cookies*. Sienna's opportunity cost of a batch of 100 cookies is *3 drywalled rooms*. Sienna's opportunity cost of drywalling three rooms is *100 cookies* *Sienna* has absolute advantage in baking cookies. *Sienna* has absolute advantage in drywalling. *Sienna* has comparative advantage in baking cookies. *Ethan* has comparative advantage in drywalling.

Some people worry that machines will take jobs away from people, making people permanently unemployed. Only 150 years ago in the United States, most people were farmers. Now, machines do almost all of the farm work and fewer than 2% of Americans are farmers, yet that 2% produce enough food to feed the entire country while still exporting food overseas. a. What happened to all of those people who used to work on farms? b. Some people say that it's okay for machines to take jobs, because we'll get jobs fixing the machines. Just from looking around, do you think that most working Americans are earning a living by fixing farm equipment? If not, what do you think most working people are doing instead? (We'll give a full answer later in this book.)

Former farm workers are now: a reason for our declining population. living and working in other countries. *working in other industries.* unemployed. No, most people do not work fixing farm equipment because high productivity in the agricultural sector frees resources for other desirable activities.

Income increases, and the demand for good X shifts as shown in the figure.

Good X is a normal good. an inferior good. The good most likely to be the same type of good as good X is public transportation. a Ferrari.

Suppose that drug addicts pay for their addiction by stealing. So the higher the total revenue of the illegal drug industry, the higher the amount of theft. If a government crackdown on drug suppliers leads to a higher price of drugs, what will happen to the amount of stealing if the demand for drugs is elastic? What if the demand for drugs is inelastic?

If demand is elastic, the amount of stealing will fall If demand is inelastic, the amount of stealing will rise

In the computers and shirts example from the chapter, the United States traded one computer to Mexico in exchange for three shirts. This is not just an arbitrary ratio of shirts to computers, however. Let's explore the terms of trade a little bit more. a. Why is trading away a computer for three shirts a good trade for the United States? Why is it also a good deal for Mexico? b. What if, instead, the agreed‑upon terms of trade were one computer for eight shirts. Would this trade still benefit both the United States and Mexico? c. What is the maximum (and minimum) number of shirts that a computer can trade for if the United States and Mexico are both to benefit from the trade?

If the United States 'traded' one computer domestically by shifting resources into shirt production, there would be *one more shirt* available as a result. If Mexico 'traded' three shirts domestically by reallocating resources, it would get *one‑half more* computers as a result. It would benefit *the United States.* For the United States, a *minimum* of *one shirt*. For Mexico, a *maximum* of *six shirts*.

Here's a quick problem to test whether you really understand what producer surplus and consumer surplus mean, rather than just relying on the geometry of demand and supply. For each of the two diagrams that follow, calculate producer surplus, consumer surplus, and total surplus. Assume the curves are perfectly vertical and perfectly horizontal.

In the diagram on the left, the consumer surplus is infinite, and the producer surplus is also infinite. In the diagram on the right, the consumer surplus is $0, and the producer surplus is also $0. In the diagram on the left, the consumer surplus is $100, and the producer surplus is $0. In the diagram on the right, the consumer surplus is $0, and the producer surplus is $100. In the diagram on the left, the consumer surplus is infinite, and the producer surplus is $0. In the diagram on the right, the consumer surplus is $0, and the producer surplus is $100. In the diagram on the left, the consumer surplus is $0, and the producer surplus is $100. In the diagram on the right, the consumer surplus is infinite, and the producer surplus is $0.

It has been reported that John Lennon was once asked whether Ringo Starr was the best drummer in the world, and he quipped, "He's not even the best drummer in the Beatles!" (Paul McCartney also drummed on some of the White Album.) Assuming that this story is true and that Lennon was correct, explain, using economics, why it could still make sense to have Ringo on drums.

John's quote suggests that Paul had *an absolute* advantage playing the drums but Ringo had *a comparative* advantage playing the drums.

Nobel laureate Paul Samuelson said that comparative advantage is one of the few ideas in economics that is both "true and not obvious." Since it's not obvious, we should practice with it a bit. In each of the cases, determine the opportunity cost of each worker. Who has the absolute advantage at each task, and who has the comparative advantage? In 30 minutes, Kana can either make miso soup or she can clean the kitchen. In 15 minutes, Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen.

Kana's opportunity cost of a batch of soup is *one clean kitchen*. Kana's opportunity cost of a clean kitchen is *one batch of soup*. Mitchell's opportunity cost of a batch of soup is *one‑fourth of a clean kitchen*. Mitchell's opportunity cost of a clean kitchen is *four batches of soup* *Mitchell* has absolute advantage in making soup. *Kana* has absolute advantage in cleaning kitchens. *Mitchell* has comparative advantage in making soup. *Kana* has comparative advantage in cleaning kitchens.

Nobel laureate Paul Samuelson said that comparative advantage is one of the few ideas in economics that is both "true and not obvious." Since it's not obvious, we should practice with it a bit. In each of the cases, determine the opportunity cost of each worker. Who has the absolute advantage at each task, and who has the comparative advantage? Kara can build two glass sculptures per day or she can design two full‑page newspaper advertisements per day. Sara can build one glass sculpture per day or design four full‑page newspaper ads per day.

Kara's opportunity cost of two sculptures is *two newspaper ads*. Kara's opportunity cost of two ads is *two sculptures*. Sara's opportunity cost of a sculpture is *four ads*. Sara's opportunity cost of four newspaper ads is *one sculpture*. *Kara* has absolute advantage in sculpting. *Sara* has absolute advantage in designing ads. *Kara* has comparative advantage in sculpting. *Sara*has comparative advantage in designing ads.

How much did national output fall during the Great Depression? According to the chapter, which government agency might have helped to avoid much of the Great Depression had it acted more quickly and appropriately?

Output fell by about 30% The Federal Reserve might have been able to limit the damage with more appropriate policies.

According to the Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high‑tech developed countries of East Asia, North America, and Western Europe, while "South" is shorthand for the rest of the world. Let's use that shorthand here. One million hours of labor are available for making cars in the North, and another 1 million hours of labor are available for making cars in the South. In a no‑trade world, let's assume that two‑thirds of the auto industry labor in each region is used to make high‑quality cars and one‑third is used to make low‑quality cars. Solve for how many of each kind of car will be produced in North and South, and add up to determine total global output of each type of car. (Why will both kinds of cars be made? Because the low‑quality cars will be less expensive.)

Output of high‑quality cars in the North: 22222 South:11111 Output of low‑quality cars in the North: 16667 South: 11111 Global output High-quality cars: 33333 Low-quality cars:27778

According to the Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high‑tech developed countries of East Asia, North America, and Western Europe, while "South" is shorthand for the rest of the world. Let's use that shorthand here. One million hours of labor are available for making cars in the North, and another 1 million hours of labor are available for making cars in the South. If each region completely specializes in the type of car in which it holds the comparative advantage, what will global output of high‑quality cars be? Of low‑quality cars? Is global output in each kind of car higher than before? (We'll solve a problem with the final step of trade in the Thinking and Problem Solving section.)

Output of high‑quality cars in the North:33333 South: 0 Output of low‑quality cars in the North: 0 South:33333 Global output High‑quality cars:33333 Low‑quality cars: 33333

Let's think about the demand for LED TVs. a. If the price for a 60-inch LED TV is $800, and Newhart would be willing to pay $3,000, what is Newhart's consumer surplus? b. Consider the following figure for the total demand for LED TVs. At $800 per TV, 12,000 TVs were demanded. What would be the total consumer surplus (CS)? Calculate the total, and identify it on the diagram with the points A, B, and C. c. Where is Newhart in the figure? Use the line segment N to show his position.

Newhart's consumer surplus: $2200 Total consumer surplus: $25200000

The chapter lists four things that entrepreneurs save and invest in. Which of the four are actual objects, and which are more intangible, like concepts or ideas or plans?

Objects: Physical capital Intangibles: Human capital Efficient organization Innovation

Nobel laureate Paul Samuelson said that comparative advantage is one of the few ideas in economics that is both "true and not obvious." Since it's not obvious, we should practice with it a bit. In each of the cases, determine the opportunity cost of each worker. Who has the absolute advantage at each task, and who has the comparative advantage? Omar can write 12 excellent poems per day or solve 100 difficult physics problems per day. Riker can write one excellent poem per day or solve 0.5 difficult physics problems per day.

Omar's opportunity cost of a dozen poems is *100 physics problems*. Omar's opportunity cost of 100 physics problems is *12 poems*. Riker's opportunity cost of a poem is *0.5 physics problems*. Riker's opportunity cost of 0.5 physics problems is *one poem* *Omar* has absolute advantage in writing poems. *Omar* has absolute advantage in solving physics problems. *Riker* has comparative advantage in writing poems. *Omar* has comparative advantage in solving physics

On average, old cars pollute more than newer cars. Therefore, every few years, a politician proposes a cash-for-clunkers program: The government offers to buy up and destroy old, high‑polluting cars. If a cash‑for‑clunkers program buys 1,000 old, high‑polluting cars, is this the same as saying that there are 1,000 fewer old, high‑polluting cars on the road? Why or why not?

One cannot assume that drivers will drive 1,000 fewer clunkers around. The cars turned in were probably being used very little if at all

Consider the following demand curve for oil: a. Using this demand curve, fill in the appropriate values. Be sure to list prices in a logical order.

Price: $10 , Quantity demanded:55 MBD Price: $15 , Quantity demanded:40 MBD Price: $25 , Quantity demanded:20 MBD Price: $40 , Quantity demanded:10 MBD b. If the price was $10, how much oil would be demanded? Quantity demanded:55 MBD c. What is the maximum price (per barrel) that demanders will pay for 20 million barrels of oil? Price: $25

Let's work out an example to get a sense of what elasticity of demand means in practice. The elasticity of demand for spring break packages to Cancun is −5. If you notice that this year in Cancun the quantity of packages demanded increased by 10%, then what happened to the price of Cancun vacation packages?

Prices for Cancun spring break packages fell by -2%

Using the following diagram, identify and calculate total producer surplus if the price of oil is $50 per barrel.

Producer surplus: $ 1350

Let's work out a few examples to get a sense of what elasticity of demand means in practice. f. If the elasticity of demand for ballpoint pens with blue ink is −20, and the price of ballpoint pens with blue ink rises by 1%, what happens to the quantity demanded? g. What's an obvious substitute for ballpoint pens with blue ink? (This obvious substitute explains why the demand is so elastic.)

Quantity demanded changes by -20 An obvious substitute is a typewriter. a word‑processing computer. a notebook. pens with black ink.

Let's work out an example to get a sense of what elasticity of demand means in practice. a. If the elasticity of demand for college textbooks is −0.1, and the price of textbooks increases by 20%, how much will the quantity demanded change, and in what direction?

Quantity demanded changes by 2% In which direction? down b. In your answer to part a, was your answer in percentages or in total number of textbooks? The answer is the number of textbooks. a percentage.

Robin is in Japan, trying to get a job as a full-time translator; he wants to translate English TV shows into Japanese and vice versa. Robin notices that the wage for translators is very low. Who is the "competition" pushing the wage down?

Robin and other translators businesses who hire the translators watchers of English TV programs watchers of Japanese TV programs

a. Why does the text say that elasticity = escape? b. Which two groups of workers did we say have a relatively high elasticity of labor supply? Keep this in mind as politicians debate raising or lowering taxes on different types of workers: These two groups are the ones most likely to make big changes in their behavior.

Someone with high elasticity can easily escape to another market. bounces back to the same market over time. knows how to bargain and can escape paying high prices. can avoid any volatility in markets. Middle‑aged men and married women Men near retirement and middle‑aged men Men near retirement and stay‑at‑home mothers or fathers Men near retirement and married women Middle‑aged men and stay‑at‑home mothers or fathers Married women and stay‑at‑home mothers or fathers

In The Wealth of Nations, Adam Smith said that one reason specialization makes someone more productive is that "a man commonly saunters a little in turning his hand from one sort of employment to another." How can you use this observation to improve your pattern of studying for your four or five college courses this semester?

Spending a *longer* time on one subject before moving on to the next is a *good* strategy to maximize the benefits of the time spent studying.

In the world of fashion, the power to imitate a trendy look is the power to make money. Stores like H&M and Forever 21 focus on imitating fashions wherever possible. As soon as they see a new look coming along that people are willing to pay a high price for, they start cranking out that look. Do these imitation‑centered stores make the supply of clothing more elastic or more inelastic? How can you tell?

Stores like these make supply more elastic. The increase in the price of popular styles is followed by a substantial increase in quantity supplied.

According to the Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high‑tech developed countries of East Asia, North America, and Western Europe, while "South" is shorthand for the rest of the world. Let's use that shorthand here. a. Consider the productivity table. Which region has an absolute advantage at making high‑quality cars? And low‑quality cars? b. Using the information in the productivity table, estimate the opportunity cost of making high‑ or low‑quality cars in the North and in the South. Which region has a comparative advantage, i.e., lowest opportunity cost, for manufacturing high‑quality cars? For low‑quality cars?

The *North* has an absolute advantage in high‑quality cars. The *North* has an absolute advantage in low‑quality cars. The *North* has a comparative advantage in high‑quality cars. The *South* has a comparative advantage in low‑quality cars.

According to the United Nations, there were roughly 300 million humans on the planet a thousand years ago. Essentially all of them were poor by modern standards. Today, between 1 and 3 billion humans are poor out of about 7 billion total humans. Over the last thousand years, what has happened to the fraction of humans who are poor: Did it rise, fall, or stay about the same? What happened to the total number of people living in deep poverty: Rise, fall, or no change?

The fraction of poor people rose. *fell.* stayed about the same The number of people in deep poverty *rose.* fell. did not change

In recent years, there have been news reports that toys made in China are unsafe. When those news reports show up on CNN and Fox News, what probably happens to the demand for toys made in China? What probably happens to the equilibrium price and quantity of toys made in China? Are Chinese toymakers probably better or worse off when such news comes out?

The demand for Chinese‑made toys falls . The equilibrium price falls . The equilibrium quantity falls . Chinese toymakers are worse off as a result.

a. When the price of olive oil goes up, what probably happens to the demand for corn oil? b. When the price of petroleum goes up, what probably happens to the demand for natural gas? To the demand for coal? To the demand for solar power?

The demand for corn oil will rise.. The demand for natural gas will rise. The demand for coal will rise. The demand for solar power will rise.

Decades ago, Washington, D.C., a fairly small city, wanted to raise more revenue by increasing the gas tax. a. How elastic is the demand for gasoline sold at stations within Washington, D.C.? In other words, if the price of gas in D.C. rises, but the price in Maryland and Virginia stays the same, will gasoline sales at D.C. stations fall a little, or will they fall a lot? b. Take your answer in part a into account when answering this question. So, when Washington, D.C., increased its gasoline tax, how much revenue did it raise: Did it raise a little bit of revenue, or did it raise a lot of revenue? c. How would your answer to part b change if D.C., Maryland, and Virginia all agreed to raise their gas tax simultaneously?

The demand for gasoline within Washington, D.C., is elastic. . Drivers are able to avoid high prices in the city, so if D.C. raises the tax, gasoline sales will fall a lot. The tax raised little revenue. The amount of revenue raised by the tax would be much higher.

During the Middle Ages, the African city of Taghaza quarried salt in 200‑pound blocks to be sent to the salt market in Timbuktu, in present-day Mali. Travelers reported that Taghazans used salt instead of wood to construct buildings. Compared with other towns without big salt mines, was the demand for wood more elastic or less elastic in Taghaza? How do you know?

The demand for wood was more elastic because there were readily available substitutes

For many years, it was illegal to color margarine yellow (margarine is naturally white). In some states, margarine manufacturers were even required to color margarine pink! Who do you think supported these laws? Why?

The diary industry supported laws like this to make margarine less of a substiute for butter

For each of the following examples, calculate how much money each consumer spends at the low price and at the high price and decide whether the right answer for a question asking for the price elasticity of demand on a multiple‑choice exam would be (a) −2.33, (b) −1.17, (c) −1.00, or (d) −0.56. a. When the price of a movie ticket rises from $6 to $8 for senior citizens, Gary (a senior citizen) decides to go to the movies every other day (15 times per month) instead of every day (30 times per month). b. When the price of a large specialty coffee drink rises from $3 to $4, Martha reduces her weekly consumption from 7 to 5. c. When PX = $10.00, QDX = 30. When PX = $7.50, QDX = 40.

The elasticity is (a) −2.33. (d) −0.56. (b) −1.17. (c) −1.00. The elasticity is (a) −2.33. (b) −1.17. (c) −1.00. (d) −0.56. The elasticity is (a) −2.33. (b) −1.17. (c) −1.00. (d) −0.56.

The market for sugar is diagrammed: a. What would happen to the equilibrium quantity and price if the wages of sugar cane harvesters increased? b. What if a new study was published that emphasized the negative health effects of consuming sugar?

The equilibrium price would increase The equilibrium quantity would decreased The equilibrium price would decreased The equilibrium quantity would decreased

Let's revise the question: Why do businesses sometimes try to make their employees happy? a. If a business can make the job seem fun (by offering inexpensive pizza lunches) or at least safe (by nagging the city government to put police patrols around the factory), what probably happens to the supply of labor? b. What happens to the equilibrium wage if a factory or office or laboratory becomes a great place where people "really want to work"? c. How does this explain why the hourly wage for the median radio or television announcer is only $14.88 per hour, lower than almost any other job in the entertainment or broadcasting industry?

The labor supply rise The equilibrium wage fall Because jobs on TV or on the radio are a highly desirable

In the following example, there is a major event and a minor event. Determine whether each change relates to demand or to supply, adjust the graph accordingly, and then describe the impact on price and quantity and the relative magnitudes of the price and quantity changes. Major event: The proliferation of fast, reliable, affordable (or free) wi-fi and cellular signals increases the usability of smartphones. Minor event: The production of smartphones is marked by modest technological advances.

The major event leads to an increase in demand, and the minor event leads to an increase in supply. Therefore equilibrium quantity will go up substantially and equilibrium price will rise less substantially.

Consider the farmers talked about in the chapter who have land that is suitable for growing both wheat and soybeans. Suppose all farmers are currently farming wheat but the price of soybeans rises dramatically. a. Does the opportunity cost of producing wheat rise or fall? b. Does this shift the supply curve for wheat, or is it a movement along a fixed supply curve? What direction is this shift or movement? Illustrate your answer in the graph.

The opportunity cost of wheat rises This is a shift in supply to a lower supply

Jules wants to purchase a Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). a. How large are the potential gains from trade if Jules and Vincent agree to make this trade? In other words, what is the sum of producer and consumer surplus if the trade happens? b. If the trade takes place at $4, how much producer surplus goes to Vincent? How much consumer surplus goes to Jules? c. If the trade takes place at $7, how much producer surplus goes to Vincent? How much consumer surplus goes to Jules?

The potential gains from trade = $5 Producer surplus = $1 Consumer surplus = $4 Producer surplus = $4 Consumer surplus = $1

If the price of a one-bedroom apartment in Washington, D.C., is currently $1,000 per month, but the supply and demand curves look as follows, then is there a shortage or surplus of apartments? What would we expect to happen to prices? Why?

There is a shortage of apartments. We would expect rents to rise because there are renters who are willing to pay more than $1,000 for an apartment.

Many economists have estimated elasticities of oil demand. Let's see if a rise in the price of oil hurts oil revenues in the long run. Cooper, the author cited in this chapter, found that in the United States, the long‑run elasticity of oil demand is −0.5. a. If the price of oil rises by 10%, by how much will the quantity of oil demanded fall? b. Does a 10% rise in oil prices increase or decrease total revenues to the oil producers? c. Some policymakers and environmental scientists would like to see the United States cut back on its use of oil in the long run. We can use this elasticity estimate to get a rough measure of how high the price of oil would have to rise in order to get people to make big cuts in oil consumption. How much would a permanent rise in the price of oil have to be to cut oil consumption by 50%?

The quantity demanded will fall by 5%. 0.5% 2%. 20%. Revenue will fall. rise. The price would have to rise by 100 d. France has the largest long‑run elasticity of oil demand (−0.6) of any of the large, rich countries. This suggests that France is better at responding to long‑run price changes than other rich countries.

Who has a better incentive to work long hours in a laboratory researching new cures for diseases: a scientist who earns a percentage of the profits from any new medicine she might invent, or a scientist who will get a handshake and a thank you note from her boss if she invents a new medicine?

The scientist who receives a percentage of the profits will be more motivated.

In the chapter, you saw how to create a production possibilities frontier for the United States and Mexico. Let's take a look at how to combine these PPFs to make one PPF for the U.S.-Mexico trade alliance. a. If both the United States and Mexico produced only computers, how many would they produce? Move point A to plot this point. What if they only produced shirts? Move point Z to plot this point. b. Starting at point A, if citizens of the United States or Mexico decided they wanted more shirts, where would those shirts be produced? Why? c. Starting at point Z, if citizens of the United States or Mexico decided they wanted more computers, where would those computers be produced? Why? d. Move point B to plot the point at which each country is completely specializing in the good for which it has the comparative advantage. e. Suppose now that a third nation, Haiti, enters the trade alliance. In Haiti, the opportunity cost of a computer is 12 shirts, and Haiti has the labor necessary to produce 1 computer or 12 shirts. Indicate the segments of a new PPF for the U.S.-Mexico-Haiti trade alliance using points H1, H2, H3, and H4. f. What will happen to the PPF as more and more countries join the trade alliance? What would it look like with an infinite number of countries?

The shirts would be made in Mexico because each shirt has an opportunity cost of six computers. the United States because it can produce more shirts than Mexico can. the United States because each shirt has an opportunity cost of one computer. *Mexico because each shirt has an opportunity cost of 1616 computer.* The computers would be made in Mexico because each computer has an opportunity cost of 1616 shirt. the United States because it can produce more computers than Mexico can. Mexico because each computer has an opportunity cost of six shirts. *the United States because each computer has an opportunity cost of one shirt.* With more countries the PPF becomes more segmented and straighter. smoother and more convex, or bowed in. more segmented and shifted in towards the origin. *smoother and more concave, or bowed out.*

For each of the following pairs, which of the two goods is more likely to be elastically supplied? a. Supply of apples over the next growing season vs. supply of apples over the next decade b. Supply of construction workers in Binghamton, New York, vs. supply of construction workers in New York State c. Supply of breakfast cereal vs. supply of food d. Supply of gold vs. supply of computers

The supply of apples over the next decade is more elastic. The supply of construction workers in Binghamton is more elastic. The supply of breakfast cereal is more elastic. The supply of computers is more elastic.

Many clothing stores often have clearance sales at the end of each season. Which of the following provides the best explanation for this?

There is a tradition in the clothing retail industry to decrease prices at the end of every season to attract new customers. At the end of the season, the quantity demanded on some items is less than the quantity supplied. At the end of the season, the demand for last-season items increases, leading clothing stores to decrease prices. At the end of the season, the quantity demanded on some items is greater than the quantity supplied.

Use the idea of the "division of knowledge" to answer the following questions. a. Which country has more knowledge: Utopia, where in the words of Karl Marx, each person knows just enough about hunting, fishing, and cattle raising to "hunt in the morning, fish in the afternoon, [and] rear cattle in the evening," or Drudgia, where one‑third of the population learns only about hunting, one‑third only about fishing, and one‑third only about cattle raising? b. Which planet has more knowledge: Xeroxia, each of whose 1 million inhabitants knows the same list of 1 million facts, or Differentia, whose 1 million inhabitants each know a different set of 1 million facts? How many facts are known on Xeroxia? How many facts are known on Differentia?

There is more knowledge in *Drudgia* There is more knowledge on *Differentia*. On Xeroxia, there is a total of *one million* facts known, whereas on Differentia, there is a total of *one trillion* facts known.

The federal education reform law known as No Child Left Behind requires every state to create standardized tests that measure whether students have mastered key subjects. The same test is given to all students in the same grade in the state. This encourages all schools within a state to cover the same material. According to the division of knowledge model, what are the costs of this approach?

This is a costly strategy because it results in *duplication* rather than *specialization* . If each of a million students knows the same set of facts, it is as if there *is really only one brain being used* .

11. Many people talk about manufacturing jobs leaving the United States and going to other places, like China. Why isn't it possible for all jobs to leave the United States and go overseas (as some people fear)?

This is not possible because every nation has to have *a comparative* advantage in something. The greater China's *comparative* advantage in *manufacturing* , for example, the greater the United States' *comparative* advantage must be in *some other type of production* . The more that firms want to locate manufacturing processes in countries like China, the more that those countries would give up. That is, the higher the *opportunity cost* if they pursued other *nonmanufacturing* activities. Even if it were cheaper to produce everything in China—thus giving China something like *an absolute* advantage in all production — trade is based on *comparative* advantage, not *absolute* advantage.

a. If oil executives read in the newspaper that massive new oil supplies have been discovered under the Pacific Ocean but will likely only be useful in 10 years, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today? b. If oil executives read in the newspaper that new solar-power technologies have been discovered but will likely only become useful in 10 years, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today? c. What's the short version of scenarios a and b?

Today's supply of oil will likely rise. . The equilibrium price will probably fall and the equilibrium quantity will probably rise Today's supply of oil will likely rise. The equilibrium price will probably fall and the equilibrium quantity will probably rise. If we learn today about promising future energy sources, today's price of energy will fall and today's quantity of energy will rise

The market for marbles is represented in the graph. What is the total producer surplus? The total consumer surplus? What are the total gains from trade?

Total consumer surplus: $150 Total producer surplus: $100 Total gains from trade: $250

Suppose that 200,000 Uber trips are taken every day in New York City. Additionally, suppose that the elasticity of demand for an Uber trip is −0.5. If the price increased by 10%, how many Uber trips would be taken in a day?

Uber trips: 190000 daily

Some problems that economists try to solve are easy as economic problems but hard as political problems. Medical doctors face similar kinds of situations: Preventing most deaths from obesity or lung cancer is easy as a medical problem (eat less, exercise more, don't smoke), but hard as a self-control problem. With this in mind, how is ending hyperinflation like losing 100 pounds?

We lack understanding of the cause of the problem. *We know the cure but lack the will to pursue it.* Both are always good things to do. They are both simple tasks to accomplish.

Now that you've mastered interpreting shifts in demand and supply, it's time to add another wrinkle: simultaneous shifts in both demand and supply. Most of the time, when we explore simultaneous shifts of demand and supply, we can determine the impact on either equilibrium price or equilibrium quantity, but not both. Select the appropriate responses in the following passages to see why.

When demand increases price rises and quantity rises When supply decreases price rises and quantity falls When demand increases and supply decreases price rises and quantity ? When demand decreases price falls and quantity falls When supply increases price falls and quantity rises When demand decreases and supply increases price falls and quantity ?

For most young people, working full‑time and going to school are substitutes: You tend to do one or the other. When it's tough to find a job, does that raise the opportunity cost of going to college or does it lower it? When it's tough to find a job, does the demand for college rise or fall?

When it is tough to find a job, the opportunity cost of college falls and the demand for college goes up

Let's work out a few examples to get a sense of what elasticity of demand means in practice. d. In your college town, real estate developers are building thousands of new student‑friendly apartments close to campus. If you want to pay the lowest rent possible, should you hope that demand for apartments is relatively elastic or relatively inelastic? e. In your college town, the local government decrees that thousands of apartments close to campus are uninhabitable and must be torn down next semester. If you want to pay the lowest rent possible, should you hope that demand for apartments is relatively elastic or relatively inelastic?

You hope demand is relatively inelastic You hope demand is relatively elastic

Think about two products, "safe cars" (a heavy car such as a BMW 530xi with infrared night vision, four-wheel antilock brakes, and electronic stability control) and "dangerous cars" (a lightweight car such as _ [name removed for legal reasons, but you can fill in as you wish]).

a. Are these two products substitutes or complements? They are substitutes b. If new research makes it easier to produce safe cars, what happens to the supply of safe cars? What will happen to the equilibrium price of safe cars? The supply of safe cars rises. The price of safe cars falls c. Now that the price of safe cars has changed, how does this impact the demand for dangerous cars? The demand for dangerous cars falls. d. Now let's tie all these links into one simple sentence: "In a free market, as engineers and scientists discover new ways to makes cars safer, the number of dangerous cars sold will tend to decrease

The U.S. Department of Agriculture (USDA) has been concerned that Americans aren't eating enough fruits and vegetables, and they've considered ways to encourage people to eat these healthier foods. Use the information about the elasticity of demand for a selection of fruits in the table to answer the questions.

a. Based on these demand elasticity estimates, apples are most inelastically demanded. Oranges are most elastically demanded. b. A 10% drop in price would cause an increase in total revenue from the sale of grapefruit and oranges. c. If the government could offer "10% off " coupons for only three of these fruits, and it wanted to have the biggest possible effect on quantity demanded, which three fruits should get the coupons? The best three choices are grapefruit.apples.grapes.bananas.oranges. d. Overall, the authors found that for the average fruit, the elasticity of demand was about ‑0.5. The demand for fruit is inelastic.

In this chapter, we've often emphasized how specialization and exchange can create more output. But sometimes the output from voluntary exchange is difficult to measure and doesn't show up in GDP statistics. In each of the following cases, explain how the two parties involved might be able to make themselves both better off just by making a voluntary exchange.

a. Dana received two copies of Gears of War as birthday gifts. Evan received two copies of Halo Infinite as birthday gifts. Dana could give one copy of *Gears* to Evan, who could offer one of his copies of *Halo* to Dana. b. Jeb, who lives in Florida, has a free subscription to Field and Stream but isn't interested in hunting. George, an outdoorsman, has a free subscription to the Miami Herald but isn't all that interested in Florida news. They could *swap free subscriptions* and both be better off, especially if both men have the last name Bush. At the very least, both parties are no worse off after the exchange. c. Pat has a lot of love to give, but it is worthless unless received by another. Terry is in the same sad situation. If they *offer love to each other* , both will be better off at no cost.

1. For each of the following pairs, which of the two goods is more likely to be inelastically demanded and why?

a. Demand for tangerines vs. demand for fruit Fruit will be more inelastically demanded because there are fewer substitutes for a broadly defined good. b. Demand for beef next month vs. demand for beef over the next decade The demand for beef will be more inelastic next month because the less time people have to change their behavior, the less they will be able to adjust to price changes c. Demand for Exxon gasoline at the corner of 7th and Grand vs. demand for gasoline in the entire city Demand will be more inelastic in the entire city because there are many substitutes for a specific brand at a single gas station. d. Demand for insulin vs. demand for vitamins Insulin will be more inelastically demanded because it is more of a necessity .

Suppose that the state of Oklakansas imposes a tax on junk food.

a. For the tax to actually deter people from eating junk food, junk food demand should be elastic. b. If the Oklakansas government wants to strongly discourage people from eating junk food, it will need to set a higher tax rate when junk food demand is inelastic than when it is elastic. c. The supply side matters as well. If junk food supply is highly elastic that means that a junk food tax will have a bigger effect on quantity than if supply were inelastic. d. If a government is hoping that a small tax can actually discourage a lot of junk food purchases, it should hope for: III. Inelastic supply and elastic demand II. Elastic supply and elastic demand I. Elastic supply and inelastic demand IV. Inelastic supply and inelastic demand

The economist Bryan Caplan recently found a pair of $10 arch supports that saved him from the pain of major foot surgery. As he stated on his blog (econlog.econlib.org), he would have been willing to pay $100,000 to fix his foot problem. Instead, he paid only a few dollars.

a. How much consumer surplus did Bryan enjoy from this purchase? $ 99990 b. If the sales tax was 5 percent on this product, how much revenue did the government raise when Bryan bought his arch supports? .50 c. If the government could have taxed Bryan based on his willingness to pay rather than on how much he actually paid, how much sales tax would Bryan have had to pay? 5000

In the textbook, we claim that the Great Depression was so destructive partly because economists did not understand how to use government policy very well in the 1930s.

a. If you had asked economists at the time for their opinion of why the Great Depression was so disastrous, what would have been their reply? "The Depression was so bad because the government ignored our wise advice." b. The answer in part a tells you that economists and other experts have a great deal of confidence in their work.

Suppose that the price of margarine decreases and that margarine and butter are perfect substitutes. a. Use the graph to illustrate what happens to the demand for butter.

b. According to the graph, what happens to the equilibrium quantity and price for butter? The equilibrium quantity decreased and the equilibrium price decreased c. Now suppose that butter and margarine are not substitutes. What would happen to the equilibrium quantity and price for butter? The equilibrium quantity would not change and equilibrium price would not change

Suppose you decided to follow in Vernon Smith's footsteps and conducted your own experiment with your friends. You give out 10 cards: 5 cards to buyers with the figures for willingness to pay of $1, $2, $3, $4, and $5, and 5 cards to sellers with the amounts for costs of $1, $2, $3, $4, and $5. The rules are the same as Vernon Smith implemented. a. Use the graph to draw the supply and demand curves for this market.

b. At a price of $3.50, how many units are demanded? 2 c. At a price of $3.50, how many units are supplied? 3 d. Assuming the market works as predicted, and the market moves to equilibrium, will the buyer who values the good at $1 be able to purchase? No, because in equilibrium no one will be willing to offer the good for $1. Yes, because quantity demand equals quantity supplied at the price of $1. No, because the buyer does not have a card indicating a willingness to pay of $1.

Consider the following supply and demand tables for bread. Draw the supply and demand curves for this market. What are the equilibrium price and quantity? a. Draw the supply and demand curves for this market. Market for BreadPrice of bread ($/loaf)Quantity of bread price of one loaf 0.5,1,2,3,5 quantity supplied 10,20,35,50,60 quantity demanded 75,55,35,25,10

b. What are the equilibrium price and quantity? The equilibrium price is $2 The equilibrium quantity is 35

When supply falls, what happens to quantity demanded in equilibrium? (This should get you to notice that both suppliers and demanders change their behavior when one curve shifts.) Quantity demanded

does not change. falls. may change in either direction. rises.

In recent years, Zimbabwe has had hyperinflation, with prices tripling (or more!) every month. According to what you learned in this chapter, what do you think the government can do to end this hyperinflation? The government of Zimbabwe should

expand the money supply. raise tariffs on imports. *reduce the money supply.* institute price controls.

What's the best way to think about the rise in oil prices in the 1970s, when wars and oil embargoes wracked the Middle East? Was it a rise in demand, a fall in demand, a rise in supply, or a fall in supply? The price of oil rose due to a

fall in supply. fall in demand. rise in supply. rise in demand.

Let's connect Big Ideas Six and Nine: Could a country get richer by printing more pieces of paper called "money" and handing those out to its citizens? Printing and distributing money would

not necessarily intice people to spend the extra money, so no. *cause prices to rise but not increase purchasing power, so no.* increase people's actual purchasing power, so yes. allow people's incomes to catch up with high prices, so yes.

Economists often say that prices are a "rationing mechanism." If the supply of a good falls, how do prices "ration" these now-scarce goods in a competitive market? Prices "ration" these now-scarce goods because

only people with a lower willingness to pay will get the good. only suppliers with a lower willingness to sell will participate in the market. the government will be the only entity to be able to get the good. only people with a higher willingness to pay will get the good.

Determine the equilibrium quantity and price without drawing a graph.

quantity 150 price 32

A movie theater owner runs an experiment. She decreases prices by 2% and discovers that ticket sales increase by 5%. Also, she increases prices by 1% and discovers that sales decrease by 2%. What should the owner do to maximize revenue? She should

raise the price. not change the price. lower the price.

In the short run, the price elasticity of the demand and supply of electricity can be very low. a. How might revenue for the electricity industry change if one power plant were shut down for maintenance, reducing supply? b. If one power company owned many power plants, would it have a short-term incentive to keep all of its plants running, or could it have a short-term incentive to shut down a power plant now and then?

revenue will increase. The power company will have no incentive to shut plants down without another reason. periodically shut down all of its plants to maximize revenue by driving the price up. be tempted to shut a plant down arbitrarily now and then. always want to keep as many plants operational as possible to maximize the quantity of electricity sold.