1/2 Semester - Econ 2010

a. Select a reason why some people have negative opinions of price gouging during natural disasters. b. Select a reason why some people have positive opinions of price gouging during natural disasters.

"Gougers" are motivated by greed and leave low-income families with nothing. When "price gouging" takes place, the market is not in equilibrium. "Price gouging" promotes conservation, innovation, and entrepreneurship. High prices attract more resources from outside of the disaster area, where prices are lower. "Price gouging" actually encourages citizens to work harder and secure a faster recovery. High prices allow people to buy extra supplies, regardless of what they previously stored.

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."

Andy enters in a futures contract, allowing him to sell 5,000 troy ounces of gold at $1,000 per ounce in 36 months. After that time passes, the market price of gold is $951 per troy ounce. How much does Andy make or lose?

Andy makes $ 245000

Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. a. What possible prices for the haircut would be beneficial to both Maria and Juan? How much total surplus (i.e., the sum of consumer and producer surplus) would be generated by this haircut? b. If the state where Maria and Juan live instituted a tax on services that included a $5 per haircut tax on stylists and barbers, what happens to the range of haircut prices that benefit both Maria and Juan? Will the haircut still happen? Will this tax alter the total economic benefit of this haircut? c. What if instead the tax was $20?

Any price higher than $25 but lower than $40 will result in a trade. Total surplus will be $15. If the price is higher than $30 but lower than $40 there will still be a trade. Total economic benefit will be $15. There would be no trade because the minimum price Juan would accept is higher than Maria's maximum price. There would be no trade because $20 is less than the minimum price Juan would accept .There would be a trade because the tax is less than both Juan's minimum price and Maria's maximum price. There would be a trade because the tax is greater than the total economic benefit without the tax.

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* .

You run a small firm. Two management consultants are offering you advice. The first says that your firm is losing money on every unit that you produce. To reduce your losses, the consultant recommends that you cut back production. The second consultant says that if your firm sells another unit, the price will more than cover your increase in costs. In order to reduce losses, the second consultant recommends that you should increase production. a. On the accompanying graph, select a combination of the firm's quantity of output and market price at which the facts that the two consultants rely on will both be true.

Both facts that the consultants rely on could be true because the market price is less than average cost but greater than marginal cost. b. The consultant offering the correct advice is the second consultant because in this case, you need to increase quantity to reach the point where P = MC.

The law of one price states that if it's easy to move a good from one place to another, the price of identical goods will be the same because traders will buy low in one region and sell high in another. Speculation is the attempt to profit from future price changes. How are speculators and traders related?

Both speculators and traders have the same objective. Speculators take advantage of price difference across time. Traders take advantage of price difference across regions .

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.

Spend some time driving in Detroit, Michigan—the Motor City—and you're sure to see bumper stickers with messages like "Buy American" or "Out of a job yet? Keep buying foreign!" or "Hungry? Eat your foreign car!" Explain these bumper stickers in light of what you've learned in this chapter. Who is hurt by imported automobiles? Who benefits?

Drivers showing off these bumper stickers are promoting protectionism. They may be auto workers who feel they are hurt by foreign produced cars. Consumers, on the other hand, benefit when free trade is in effect.

"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.

In which cases are the Coase theorem's assumptions likely to be true? In other words, when will the parties be likely to strike an efficient bargain? How do you know? Categorize each scenario by whether an efficient bargain is likely, and complete the sentence.

Efficient bargain likely a. My neighbor wants me to cut down an ugly shrub in my front yard. The ugly shrub, of course, imposes an external cost on him and on his property value. d. A coal‑fired electricity plant dumps its leftover hot water into the nearby river, killing the naturally occurring fish downstream. There is one large fishery one mile downstream affected by this. After that, the water cools enough so it's not a problem. Efficient bargain unlikely b. My neighbors all would love for me to get that broken‑down Willies Jeep off my front lawn. It's been years now, after all. And would it be too much for me to paint the house and fill up that 6‑foot deep ditch in the front yard? The whole neighborhood is just annoyed. c. A coal‑fired electricity plant dumps its leftover hot water into the nearby lake, killing the naturally occurring fish. Thousands of homes line the banks of the lake. An efficient bargain is more likely when there are fewer parties required for the negotiations.

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*

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.

When the government expands the number of pollution allowances, does that increase the cost of polluting or cut it? What about when the government cuts back the number of pollution allowances?

Expanding the number of pollution allowances decreases the cost of polluting. Reducing the number of pollution allowances increases the cost of polluting.

As you learned in the chapter, the elasticities of demand and supply are crucial in determining how the burden of a tax (or the benefit of a subsidy) is divided between buyers and sellers. Under what conditions for supply or demand would a seller actually be able to avoid bearing any of the burden of a tax? Under what conditions would a subsidy benefit only the sellers of a good?

For the seller to completely escape the tax, the elasticity of supply would have to be perfectly elastic. This means that the supply curve would have to be horizontal. Alternately, sellers could avoid the tax if buyers had no ability to escape—that is, if demand was perfectly inelastic, or vertical.

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.

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*.

Let's apply the economics of taxation to romantic relationships. a. What does it mean to have an inelastic demand for your boyfriend or girlfriend? How about an elastic demand?

If you think your boyfriend or girlfriend is the sun, the moon, and the stars, then you have an inelastic demand for your beloved. If, on the other hand, your attitude is that there are plenty of fish in the sea, then your demand is more elastic. The person with the more inelastic demand will do more driving and thereby pay most of the relationship tax.

The Japanese people currently pay about four times the world price for rice. If Japan removed its trade barriers so that Japanese consumers could buy rice at the world price, who would be better off and who would be worse off: Japanese consumers or Japanese rice farmers? If we added all the gains and losses to the Japanese, would there be a net gain or net loss? Who would make a greater effort lobbying, for or against, this reduction in trade barriers: Japanese consumers or Japanese rice farmers?

Japanese consumers would be better off and Japanese rice farmers would be worse off. The theory of trade tells us that Japanese consumers would be better off by more than Japanese rice farmers would be worse off so the net gains would be positive . The theory of politics, however, tells us that Japanese rice farmers would probably spend more effort and money opposing the reduction in trade barriers than consumers would spend supporting the reduction in barriers. The gains to consumers would be small per consumer but the losses to producers would be concentrated so the producers have a greater incentive and ability to oppose reductions in trade barriers.

Simon is a housepainter in a competitive local market. Simon's cost function is given in the accompanying table. a. What is the minimum price per room at which Simon earns a positive economic profit?

Minimum price: $48.34 b. Identify Simon's long‑run plan if prices are below the price identified in part a. If prices are below the price identified in part a, Simon will exit the market and find another way to use his resources

Let's see if we can formulate any real laws about the economics of taxation. Which of the following must be true? More than one may be true. If there is a tax:

Must occur a. The equilibrium quantity must fall, and the price that buyers pay must rise. c. The equilibrium quantity must fall, and the price that sellers receive must fall. Will not occur b. The equilibrium quantity must rise, and the price that sellers pay must rise. d. The equilibrium quantity must rise, and the price that buyers receive must fall.

The following tables show the domestic supply and demand schedules for bushels of flaxseed (used as an edible oil and a nutrition supplement) in the United States and Kazakhstan, with prices measured in U.S. dollars and quantities measured in millions of bushels. e. Suppose the sellers of flaxseed in the importing country successfully lobby for protection in the form of a $4 tariff per bushel of flaxseed. Describe the impact of this tariff on flaxseed trade and on the consumer and producer surpluses buyers and sellers received when there was no trade. How much deadweight loss does this tariff generate? Calculate the following with the tariff in place.

Number of bushels traded: 2 million Kazakh seller's price: $8 per bushel U.S. buyer's price: $12 The benefits and losses of restricted trade (versus no trade) are smaller than for free trade. For the next four calculations, you are asked to determine the change in the value when the policy changes from no trade to restricted trade with the tariff. i. Kazakh buyers' consumer surplus falls by: $8.5 million ii. Kazakh sellers' producer surplus rises by: $10.5 million iii. U.S. buyers' consumer surplus rises by: $13 million iv. U.S. sellers' producer surplus falls by: $11 million Now, compare these gains and losses from restricted trade, as well as the tariff revenue gained by the importing government, to the gains from free trade in part d. Deadweight loss of the tariff: $4 million

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

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

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

In The Fatal Conceit, economist Friedrich A. Hayek, arguing against central planning, wrote: "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." In other words, people generally assume that they can plan out the best procedure for producing a good, but as we learned, that's not true. Please select all of the different roles that the price system plays in creating this order?

Prices dictate the number of firms. Prices create incentives. Prices serve as signals. Prices link markets. Prices are mediums of exchange.

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%

Let's sort the following eight items into private costs, external costs, private benefits, or external benefits.

Private costs the price you pay for an iTunes download the price you pay for a security system for your home External costs the annoyance of your neighbor because she doesn't like your achingly conventional music the crime that is more likely to occur to your neighbor once a criminal sees a "Protected by alarm" sticker on your window Private benefits the pleasure you receive from listening to your iTunes download the safety you enjoy as a result of having the security system External benefits the benefit your neighbor receives from hearing you play your pleasant music the extra safety your neighbor might experience because criminals tend to stay away from neighborhoods that have a lot of burglar alarms

a. Use the variable cost (VC) information in the accompanying table to calculate average variable cost (AVC) and average cost (AC). Assume fixed cost (FC) is $350. b. Consider in which time frame, if any, the firm is willing to produce and sell output at each given price. Place each given price in the appropriate category.

Produce and sell outputin both the short runand the long run $18 Produce and sell outputin neither the short runnor the long run $5 Produce and sell outputin the long run,but not in the short run No price exists for this scenario Produce and sell outputin the short run,but not in the long run $15

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.

Suppose your state government has decided to tax donuts. Currently, in your state, 300,000 donuts are sold every day. Three possible taxes are being considered by lawmakers: a 20‑cent per donut tax, which would decrease donut sales by 50,000 per day; a 25‑cent per donut tax, which would decrease donut sales by 100,000 per day; and a 50‑cent per donut tax, which would decrease donut sales by 150,000 donuts per day. a. Calculate the amount of tax revenue generated by each tax and the deadweight loss caused by each tax. b. If the goal of your state government is to raise tax revenue in the most efficient manner (with the least deadweight loss per dollar of revenue), which tax is preferable?

Revenue from the $0.20 tax: $50000 Deadweight loss from the $0.20 tax: $5000 Revenue from the $0.25 tax: $50000 Deadweight loss from the $0.25 tax: $12500 Revenue from the $0.50 tax: $75000 Deadweight loss from the $0.50 tax: $37500 Which tax is preferred? $0.20 $0.25 $0.50

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. In the opening scene of the classic Eddie Murphy comedy Beverly Hills Cop, Axel Foley, a Detroit police officer, is stopping a cigarette smuggling ring. Which way do you suspect the smugglers were moving the cigarettes, from the high‑tax North to the low‑cost South, or vice versa? b. In our discussion of taxation, we have acted as if it were effortless to pass and enforce tax laws. Who will make the most effort to escape a tax: the party who is elastic or the party who is inelastic?

Smugglers move the cigarettes from North to South. from South to North. There will be more effort to avoid a tax by someone whose response is more inelastic. elastic.

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.

You manage a department store in Florida, and one winter day you read in the newspaper that orange juice futures have fallen dramatically in price. Should your store stock up on more sweaters than usual, or should your store stock up on more Bermuda shorts?

Stock up on sweaters. Bermuda shorts.

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.

How do both taxes and subsidies create deadweight loss?

Taxes create deadweight loss by decreasing quantity, while subsidies create deadweight loss by increasing quantity.

In this chapter, we noted that successful economies are more likely to have many failing firms. If a nation's government instead made it impossible for inefficient firms to fail by giving them loans, cash grants, and other bailouts to stay in business, why is that nation likely to be poor?

That nation is likely to be poor because if inefficient firms are kept from failing, the labor force will move from strong firms to weak firms, leading to a decrease in output. there would be less production, consumption, and output for any given level of investment. there would be more production, consumption, and output for any given level of investment. more workers would be spending their days producing more and consuming more.

Suppose you are bidding on a used car and someone else bids above the highest amount that you are willing to pay. What can you say for sure about that person and you?

That person's monetary value of the car is higher than yours. That person's need for the car is higher than yours. That person's consumer surplus gained by buying the car is higher than yours. That person's amount of money available to buy the car is higher than yours.

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.

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

A flu shot typically costs about $25-$50, but some firms offer their employees free flu shots. Why might a firm prefer to offer its employees free flu shots if the alternative is an equally costly wage increase?

The firm does not want to lose workers because of sick days. Furthermore, flu spreads from person to person within a firm, so flu shots create an external benefit.

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

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.

At indoor shopping malls, who makes sure that no business plays music too loud, that no store is closed too often, and that the common areas aren't polluted with garbage? What incentive does this party have to prevent these externalities? Does your answer help explain why parents are quite happy to let their preteen and teen children stroll the malls?

The mall's management will take care of potential externalities because well‑run malls can charge higher rents. Many parents let their children hang out at the mall because they are relatively safe places.

The supply curve for rice in Japan slopes upward, just like any normal supply curve. If Japan eliminated its trade barriers to rice, what would happen to the number of workers employed in the rice-producing industry in Japan: Would it rise or fall? What would these workers probably do over the next year or so? Will they ever work again?

The number of workers would not change. fall. rise. change in a way that cannot be determined. For a year or so, most of the workers will spend their time looking for work. emigrate to rice‑growing countries. be forced to pay more for rice along with everyone else. enjoy the higher wages for rice‑producing workers. Over time most of the workers will be unable to acquire skills that employers other than rice producers will desire. are doomed because no industries will grow as trade is liberalized. face a bleak future without prospects for any job. will find another job.

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

Some people with diabetes absolutely need to take insulin on a regular basis to survive. Pharmaceutical companies that make insulin could find a lot of other ways to make some money. a. If the U.S. government imposes a tax on insulin producers of $10 per cubic centimeter of insulin, payable every month to the U.S. Treasury, who will bear most of the burden of the tax: insulin producers or people with diabetes? Or can't you tell from the information given? b. Suppose instead that because of government corruption, the insulin manufacturers convince the U.S. government to pay the insulin makers $10 per cubic centimeter of insulin, payable every month from the U.S. Treasury. Who will get more of the benefit of this subsidy: insulin producers or people with diabetes? Or can't you tell from the information given?

The people who will bear most of the burden of the tax on insulin are insulin producers. indeterminate. It is impossible to tell who will bear the burden. people with diabetes. Those who will benefit most from a subsidy for insulin production are people with diabetes. producers of insulin. indeterminate. It is impossible to tell who will enjoy most of the benefits.

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

Suppose new farming techniques drastically increased the productivity of growing wheat. a. Given this change, how would the price of wheat change? b. Given your answer in part a, how would the price of cookbooks specializing in recipes using wheat flour change? c. Given your answer in part b, how would the price of paper change? d. Given your answer in part c, how would the price of pencils change? e. Given your answer in part d, how would the quantity of graphite (used in pencils) consumed change?

The price will rise for cookbooks paper The price will fall for wheat pencils graphite

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.*

a. Suppose you learned that growing political instability in Chile (the largest producer of copper) will greatly reduce the productivity of its mines in two years. Ignoring all other factors, which curve (demand or supply) will shift which way in the market for copper two years from now?

The supply curve will shift to the left. b. Will the price rise or fall as a result of this curve shift? The price will rise. c. Given your answer in part b, would a reasonable person buy copper to store for later? Why or why not? Ignore storage costs. A reasonable person would buy copper, because copper will be more expensive in the future. d. As a result of many people imitating your choice in part c, what happens to the current price of copper? The price of copper will rise. e. Does the action in parts c and d encourage people to use more copper today or less copper today? People will use less copper today.

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.

Of the three conditions that explain why a free market is efficient (from Chapter 4), which condition or conditions cease to hold in the case of a tariff on imported goods?

There are no unexploited gains from trade and no wasteful trades. The goods are bought by the buyers with the highest willingness to pay. The goods are sold by the sellers with the lowest costs.

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 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.

In the following cases, the markets are in equilibrium, but there are externalities. In each case, determine whether there is an external benefit or cost and estimate its size. Finally, decide between a tax or a subsidy as a simple way to compensate for the externality. a. In the market for automobiles, the private benefit of one more small SUV is $20,000 and the social cost of one more small SUV is $30,000.

There is an external cost of $10,000 which could be corrected with a tax. There is an external cost of $400 which could be corrected with a tax. There is an external benefit of $999 million which could be corrected with a subsidy.

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.

Assume carpet manufacturing is a decreasing cost industry. In American homes, carpets are much less popular than they were in the 1960s and 1970s, when "wall-to-wall carpeting" was fashionable. Consider what would happen if carpeting became even less popular than it is today.

This fall in demand would probably cause the price of carpet to increase in the long run, and society would lose scale efficiencies.

As we learned in Chapter 4, the competitive market equilibrium maximizes gains from trade. Taxes and subsidies, by altering the market outcome, reduce the gains from trade.

This happens primarily because of the impact that taxes and subsidies have on quantities due to there being too few transactions under taxes and too many transactions under subsidies.

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* .

Sometimes speculators get it wrong. In the months before the Persian Gulf War, speculators drove up the price of oil: The average price in October 1990 was $36 per barrel, more than double its price in 1988. Despite the fact that Saddam Hussein set fire to many of Kuwait's oil fields, the price of oil plummeted to about $20 per barrel after the very short war. The price of oil remained at this level for years. a. Is buying oil for $36 a barrel and selling it for $20 per barrel a good business plan? How much profit did speculators earn, or how much money did they lose, on each barrel?

This is a daft plan. Earnings per barrel: $-16 b. Why did the speculators follow this plan? Saddam Hussein tried to take over the Kuwaiti oil fields so he could expand the supply of oil. Speculators believed Saddam Hussein's forces would win the war. Speculators bet that the war would lead to the collapse of the Oil Producing and Exporting Countries (OPEC) cartel. Speculators thought the price would stay high. c. When the speculators sold their stored oil in the months after the war, did this massive resale tend to increase the price of oil or decrease it? Selling the oil drove the price down . d. Do you think that many consumers complained about speculators, or even realized that speculators were influencing the price of oil, in spring 1991? It is unlikely that consumers understood the role of speculators, so they probably did not complain.

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

This chapter pointed out that trade restrictions on sugar cause U.S. consumers to pay more than twice the going world price for sugar. However, you are very unlikely to ever encounter bumper stickers that say things like "Out of money yet? Keep taxing foreign sugar!" or "Hungry? It's probably because domestic sugar is so expensive!" Why do you think these bumper stickers are not popular?

U.S. consumers do not demand sugar, thus they are not interested in sugar prices. U.S. sugar consumers benefit from sugar tariffs, since they can buy sugar from other countries. Domestic buyers of sugar are not hurt by the sugar tariff, thus they are indifferent to higher prices. The costs of the tariff are relatively small and spread out among many people.

a. Consider a factory, located in the middle of nowhere, producing a nasty smell. When the factory was built, no one was around to experience the unpleasant odor. b. Suppose that a family moves in next door to the smelly factory. Do we now have an externalities problem? If so, who is causing it: the factory by producing the smell, the family by moving in next door, or both? c. Suppose that the family clearly possesses the right to a pleasant‑smelling environment. Does this mean that the factory will be required to stop producing the bad smell? What could happen instead? Select the possible outcomes.

Were any externalities produced? yes no There is an externalities problem caused by the factory. no externalities problem. an externalities problem caused by both. an externalities problem caused by the family. The family could demand the factory shut down. could demand the factory use a cleaner technology. and the factory could negotiate an agreement that allows the factory to operate but compensates the family.

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

Frequent moviegoers often note that movies are rarely based on original ideas. Most of them are based on a television series, a video game, or, most commonly, a book. Consider why this is the case.

a. A movie has a higher fixed cost of production. b. Hollywood releases about 100 new movies every year while just one publisher, Penguin Random House, releases about 15,000 book titles a year. Your answer in part a can help explain such a wide difference because movies are riskier, making them less likely to be produced. c. Many movies are based on successful books because a successful book can help mitigate the risk . As a result, you expect to see more innovative plots, dialogues, and characters in books

Robin is planning to ask Peggy to the Homecoming dance. Before he asks her, he wants to know the chances that she'll say yes. Robin is a scientist, so he considers two paths to estimate the probability that Peggy will say yes. I. Ask 10 of his friends, "Do you think she'll really say yes?" II. Tell another 10 of his friends, "I'm starting a betting market. I'll pay $10 if she says yes, $0 if she says no. I'm offering this bet only once, to the highest bidder. Start bidding against each other for a chance at $10!"

a. According to the evidence in this chapter, one of these methods will work better. Which one, and why? Method II will work better because his friends will be more objective about the chances she will say yes. b. If the highest bid from Group II is $1 (along with a few lower bids of $0.75, $0.50, and $0), then what's roughly the chance that Peggy will say yes to Robin? No higher than 10%. c. If the highest bid from Group II quickly shoots up to about $9, then what's the chance that Peggy will say yes to Robin? No higher than 90%

Two major-party presidential candidates are running against each other in the presidential election. The Democratic Party candidate promises more money for corn-based ethanol research, and the Republican Party candidate promises more money for defense contractors. In the weeks before the election, defense stocks take a nosedive. b. We talked about how price signals are sometimes noisy. Which of the following markets might you want to look at to see if your answer to part a. is correct?

a. Based on the change in defense stocks, the Democratic candidate will probably win the election. Select all of the following markets which could be helpful to look at. commodities market real estate market automobile market natural gas market

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.

Maxicon is opening a new coal‑fired power plant, but the government wants to keep pollution down.

a. Based on what we've seen in this chapter, select which option is a more efficient way to reduce pollution by 25%. It is more efficient to mandate that Maxicon reduce pollution by 25%. b. Suppose a corrupt government just grants Maxicon all of the tradable pollution permits in the entire nation even though there are many energy companies. Does this guarantee that Maxicon will engage in an enormous amount of pollution? Why or why not? Maxicon may not produce excessive pollution because it may be more profitable to reduce its pollution and sell some of the permits.

Paulette, Camille, and Hortense each own wineries in France. They produce inexpensive, mass-market wines. Over the last few years, such wines sold for 7 euros per bottle, but with a global recession, the price has fallen to 5 euros per bottle. Given the information below, let's find out which of these three winemakers, if any, should shut down temporarily until times get better. Remember: Whether or not they shut down, they still have to keep paying fixed costs for at least some time—that's what makes them "fixed." To keep things simple, let's assume that each winemaker has calculated the optimal quantity to produce if they decide to stay in business; your job is simply to figure out if she should produce that amount or just shut down.

a. Calculate each winemaker's profit. Paulette's profit, entry A, is -10000 euros. Camille's profit, entry B, is -70000 euros. Hortense's profit, entry C, is -250000 euros. b. Which of these women, if any, earned a profit? None c. Paulette and Camille should stay in business in the short run. Hortense should shut down. d. Even if profit is negative, if revenues are greater than variable cost, then it's best to stay open in the short run. e. P > AC for nobody's winery. You don't need to calculate any new numbers to answer this.

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 .

One question that economics students often ask is, "In a market with a lot of buyers and sellers, who sets the price of the good?" There are two possible correct answers to this question: "Everyone" and "No one." Make selections to fill in the blanks to make sense of both answers.

a. Everyone sets the price because everyone has small influence in the market. b. No one sets the price because all suppliers want a higher price and all consumers want a lower price.

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

With electricity, taxing the pollutant rather than the final product itself was important. In the following cases, will the proposed taxes actually hit at the source of the external cost, or will they only land an inefficient glancing blow? What kind of tax might be better?

a. Gas‑guzzling cars create more pollution, so the government should tax big SUVs at a higher rate. The government should tax gasoline. b. All‑night liquor stores seem to generate unruly behavior in nearby neighborhoods, so owners of all‑night liquor stores should pay higher property taxes. The government should tax liquor stores. c. Bell‑bottom jeans insist on coming back every few years, and their ugliness creates external costs for all who see them. Therefore, bell‑bottom jeans should be taxed heavily. The government should tax bell‑bottom jeans. d. American parents are worried about their children seeing too much profanity on television. Congress decides to tax TV shows based on the number of profane words used on the shows. The government should tax all but late‑night profanity‑laced programs.

Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece. Around this time, blacksmiths developed iron- and steel-making techniques. c. How do your answers in questions a and b help explain why iron and steel became more common around the same time as the increase in price?

a. How is the increasing price of bronze a signal? because it tells producers and consumers that bronze is getting harder to produce and needs to be conserved because it provides a prediction about the future, including when wars will start and end because it clears the market, where both consumers and producers are satisfied b. How is the increasing price an incentive? because it clears the market and both sellers and buyers are satisfied because it discourages people about the future of the economy because it rewards people who make bronze less scarce An increase in the price of bronze encouraged innovation to produce substitutes such as iron and steel. d. After the development of iron, did the supply or demand for bronze shift? The demand for bronze shifted to the left because of the availability of iron and steel. The supply for bronze shifted to the right because of higher incentives to produce it. The demand for bronze shifted to the right because of the availability of iron and steel.

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

Whenever money is used to purchase capital, interest costs are incurred. Sometimes, those costs are explicit. For example, if Alex borrows money from the bank, the interest he pays is an explicit cost. Sometimes, interest costs are implicit. For example, if Tyler uses his savings to start a business, he forgoes the interest he could have earned had he left his funds in a savings account. The interest he gives up is an implicit cost.

a. If an economist and an accountant both calculate Alex's costs, the costs calculated by the economist will be the same as the costs calculated by the accountant. b. If an economist and an accountant both calculate Tyler's costs, the costs calculated by the economist will be higher than the costs calculated by the accountant.

Suppose your state government has decided to tax donuts. Currently, in your state, 300,000 donuts are sold every day. Three possible taxes are being considered by lawmakers: a 20‑cent per donut tax, which would decrease donut sales by 50,000 per day; a 25‑cent per donut tax, which would decrease donut sales by 100,000 per day; and a 50‑cent per donut tax, which would decrease donut sales by 150,000 donuts per day.

a. If the goal of your state government is simply to raise the most tax revenue, which tax is preferable? $0.50 $0.25 $0.20 b. What other goal might your state government have when creating this kind of tax besides raising tax revenue? reduce donut consumption. balance the federal budget. redistribute income. benefit donut producers.

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 a new device about the size of a washing machine can bleach, re-weave, and re-dye cotton fabric to closely imitate any cotton item you see in a fashion magazine.

a. If you think of the "market for clothing" as "the market for new clothing," does this shift the demand or the supply, and in which direction? The demand curve shifts to the left. b. If you think of the "market for clothing" as "the market for clothing, whether it's new or used," does this shift the demand or the supply, and in which direction? The supply curve shifts to the right. c. What will this do to the price of new, unrecycled clothing? The price will fall. d. After this invention, will society's scarce productive resources (machines, workers, retail space) flow toward the "new clothing" sector or away from it? Resources will flow away from the sector.

Let's look at the case in which the world price is above the domestic no-trade price. Consider the market for airplanes shown in the accompanying graph.

a. In the graph, use the Quantity axis to label 𝑄𝐹𝑟𝑒𝑒𝑇𝑟𝑎𝑑𝑒𝑠 and 𝑄𝐹𝑟𝑒𝑒𝑇𝑟𝑎𝑑𝑒𝑑. b. The gap between QFreeTrades and QFreeTraded is called exports. c. In the graph, QFreeTraded is Domestic consumption, and QFreeTrades is Domestic production. d. Under free trade, compared with the no-trade alternative, domestic airplane buyers pay a higher price and purchase a lower quantity of planes. e. Based on the answer to part d, one would expect domestic airplane demanders to oppose free trade.

The following tables show the domestic supply and demand schedules for bushels of flaxseed (used as an edible oil and a nutrition supplement) in the United States and Kazakhstan, with prices measured in U.S. dollars and quantities measured in millions of bushels.

a. In which country is flaxseed cheaper to produce?Kazakhstan In which country do the consumers of flaxseed value it more?U.S. b. At a price of $2, the U.S. would be willing to import 12 million bushels and Kazakhstan would be willing to import 4 million bushels. At a price of $8, the U.S. would be willing to import 6 million bushels and Kazakhstan would be willing to export 2 million bushels. At a price of $10, the U.S. would be willing to import 4 million bushels and Kazakhstan would be willing to export 4 million bushels. At a price of $16, the U.S. would be willing to export 2 million bushels and Kazakhstan would be willing to export 10 million bushels.

Suppose Sam sells apples, picked from his apple tree, in a competitive market. Assume all apples are equal in quality but grow at different heights on the tree. Sam, being fearful of heights, demands greater compensation the higher he goes. So for him, the cost of grabbing an apple rises higher and higher, the higher he must climb, as shown in the Total Cost column in the accompanying table. The market price of an apple is $0.50. Complete the table on a separate piece of paper or in a spreadsheet.

a. Sam's marginal revenue for selling apples is $0.5 . b. Sam would first pick apples that are low because they are the cheapest to pick. c. The data suggest that the marginal cost of apples is increasing. d. The value of entry J is $0.73 . The value of entry F is $ 0.22 . The value of entry M is $1.05 . e. To maximize profit, Sam picks 4 apples.

Sofia owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000.

a. Sofia's accounting profit is $100000 b. Suppose that instead of being an entrepreneur, Sofia could get a job with one of the following annual salaries: (i) $50,000, (ii) $100,000, or (iii) $250,000. Assume that a job would be as satisfying to Sofia as being an entrepreneur. i. Sofia's economic profit under scenario (i): $50000 ii. Sofia's economic profit under scenario (ii): $0 iii. Sofia's economic profit under scenario (iii): $-150000

On January 27, 2011, the price of Ford Motor Company stock hit an almost 10-year high at $18.79 per share. (Two years prior, in January 2009, Ford stock was trading for about a tenth of that price.)

a. Suppose that on January 27, 2011, you owned 10,000 shares of Ford stock (a small fraction of the almost 3.8 billion shares). Suppose you offered to sell your stock for $18.85 per share, just slightly above the market price. You would have been able to sell none of your shares by offering this higher price. b. What if, on January 27, 2011, you wanted to sell your 10,000 shares of Ford stock, but you reduced your asking price to $18.75 per share? You would have been able to sell 10,000 of your shares at this lower price. c. Your answers for parts a and b tell you that the demand curve you, as an individual seller of Ford stock, face is horizontal

A government is deciding between command and control solutions versus tax and subsidy solutions to solve an externality problem. In each case, explain why you think one is better, using arguments from the chapter.

a. Suppose that whales are threatened with extinction because a large number of people like to eat whale meat. Governments are torn between banning all whaling except for certain religious ceremonies and heavily taxing all whale meat. Assume that only a few countries in the world consume whale meat, and that they have fairly efficient governments. Command and control might work best here. If the tax is set too low, then whales may become extinct and there is no turning back from that result. b. Fires create external costs because they spread from one building to another. Should governments encourage subsidies to install sprinklers or should they just mandate that everyone have sprinklers? A subsidy would be more flexible. That is important because the external benefits of fire prevention are much greater in densely populated neighborhoods. c. Pets who procreate can create external costs due to problems with stray animals. Strays are extremely common on the streets of poor countries. Sterilization can solve the problem, but is a tax/subsidy or command and control a better method to encourage sterilization? Does the best solution depend on the sex of the animal? A command and control system might work better with male pets, but a tax and subsidy system might work better with female pets.

Suppose Sam likes to do five different things, each of which requires exactly one orange. The accompanying table shows Sam's ranking of the highest-valued orange-related activity (1) to her lowest-valued activity (5).

a. Suppose the price per orange is high enough that Sam buys only four. What activity does Sam not do? Use the orange as decorative fruit. Throw the orange at a person she doesn't like. Squeeze the orange to drink the juice. Give a friend the orange. Eat the orange. b. What does the price at which Sam would just purchase the fifth orange tell us about the value she receives from the fifth-ranked activity? The price she pays is the value of the fifth-ranked activity.

When government is trying to raise tax revenue, it sometimes attempts to target higher‑income people. However, it can be very difficult to earn tax revenue from wealthy people.

a. The U.S. federal income tax system is designed so that higher incomes are taxed at higher rates. This tends to be difficult at times due to wealthy individuals generally having a more elastic labor supply than poorer individuals. b. Another way that governments try to collect taxes from the wealthy is by using luxury taxes. Luxury taxes are taxes on goods that are considered luxuries, like jewelry or expensive cars and real estate. The demand for luxuries is necessarily elastic. In the context of jewelry, a luxury tax is more likely to hurt the sellers of jewelry. c. The chapter began by discussing another tax that targets wealthy individuals: the estate tax. Considering the demand of wealthy individuals for leaving an inheritance, an estate tax is more effective than (as) an income tax or luxury tax.

In March 2002, then President George W. Bush put a tariff on imported steel as a means of protecting the domestic steel industry. In February, before the tariff went into effect, the United States produced 7.4 million metric tons of crude steel and imported about 2.8 million metric tons of steel products at an average price of $363 per metric ton. Two months later, after the tariff was in effect, U.S. production increased to 7.9 million metric tons. The volume of imported steel fell to about 1.7 million metric tons, but the price of the imported steel rose to about $448 per metric ton. The supply and demand diagram shows this situation (along with an estimated no-trade domestic equilibrium at a price of $625 per metric ton and a quantity of 8.9 million metric tons). For each of the four areas listed, calculate the values of these areas in dollars. How much of the deadweight loss is due to the overproduction of steel by higher-cost U.S. steel producers, and how much is due to the underconsumption of steel by U.S. steel consumers?

a. The increase in producer surplus gained by U.S. steel producers as a result of the tariff $650.25 million b. The loss in consumer surplus suffered by U.S. steel consumers as a result of the tariff $841.5 million c. The revenue earned by the government because of the tariff $144.5 million d. The gains from trade that are lost (the deadweight loss) because of the tariff $46.75 million Overproduction deadweight loss $21.25 million Underconsumption deadweight loss $25.5 million

In March 2002, then President George W. Bush put a tariff on imported steel as a means of protecting the domestic steel industry. In February, before the tariff went into effect, the United States produced 7.4 million metric tons of crude steel and imported about 2.8 million metric tons of steel products at an average price of $363 per metric ton. Two months later, after the tariff was in effect, U.S. production increased to 7.9 million metric tons. The volume of imported steel fell to about 1.7 million metric tons, but the price of the imported steel rose to about $448 per metric ton. The supply and demand diagram below shows this situation (along with an estimated no-trade domestic equilibrium at a price of $625 per metric ton and a quantity of 8.9 million metric tons). Determine which areas on the graph represent each of the following.

a. The increase in producer surplus gained by U.S. steel producers as a result of the tariff A B C D E F G b. The loss in consumer surplus suffered by U.S. steel consumers as a result of the tariff A B C D E F G c. The revenue earned by the government because of the tariff A B C D E F G d. The gains from trade that are lost (the deadweight loss) because of the tariff A B C D E F G

Consider what happens in the long run when demand falls in a constant cost industry. For instance, think about the market for pizza in a small city after the city's biggest textile mill shuts down. The accompanying graph begins in a long-run equilibrium. Move the appropriate curve or curves on the graph to illustrate the fall in demand and the resulting change that returns the market to long-run equilibrium. Finally, move point E to the new equilibrium position. Market for PizzaPrice of pizzaQuantity of pizzaDemandESupply Also, answer the following questions about the market's response to this fall in demand.

a. The marginal cost of production is lowest at the short-run equilibrium . b. When firms cut prices, they often do so in dramatic ways. The local pizza shops are most likely to offer "Buy one, get one free" in the short-run equilibrium. c. The market price is less than the firm's average cost of production in the short-run equilibrium . The market price is equal to the average cost of production in the initial and final long-run equilibrium d. Restating the previous statements: Profits are negative at the short-run equilibrium . Profits are zero at the initial and final long-run equilibrium. e. Roughly speaking, there are fewer firms in the final long-run equilibrium than the number of firms in the initial long-run equilibrium.

You've been hired as a management consultant to four different companies in competitive industries. They're each trying to figure out if they should produce a little more output or a little bit less in order to maximize their profits. The firms all have typical marginal cost curves: They rise as the firm produces more. Your staff did all the hard work for you of figuring out the price of each firm's output and the marginal cost of producing one more unit of output at their current level of output. However, they forgot to collect data on how much each firm is actually producing at the moment. Fortunately, that doesn't matter. In your final report, you need to decide which firms should produce more output, which should produce less, and which are producing just the right amount:

a. WaffleCo, maker of generic-brand frozen waffles Price = $4 per box, marginal cost = $2 per box. WaffleCo should produce more to maximize profit. b. Rio Blanco, producer of copper Price = $32 per ounce, marginal cost = $45 per ounce. Rio Blanco should produce less to maximize profit. c. GoDaddy.com, domain name registry Price = $5 per Web site, marginal cost = $2 per Web site. GoDaddy.com should produce more maximize profit. d. Luke's Lawn Service Price = $80 per month, marginal cost = $120 per month. Luke's Lawn Service should produce less to maximize profit.

In 1980, University of Maryland economist Julian Simon bet Stanford entomologist Paul Ehrlich that the price of any five metals of Ehrlich's choosing would fall over 10 years. The price of all five metals that Ehrlich chose (nickel, tin, tungsten, chromium, and copper) fell over the next 10 years and Simon won the bet.

a. What does the falling price tell us about the relative scarcity of these metals? The relative scarcity rose. fell. b. What could have shifted to push these prices down: demand or supply? And would demand have increased or decreased? And supply? Demand could have decreased due to the development of close substitutes. Supply could have increased due to the discovery of new mineral deposits.

Green Pastures Apartments wants to build a playground to increase demand for its larger‑sized apartments but is worried that it will be overcrowded with tenants from the Still Waters Mobile Estates and Twin Pines Townhomes developments nearby.

a. What type of externality is the playground? It is an external benefit. cost. b. What type of compromise might Green Pastures be able to make with Still Waters and Twin Pines so that all three developments will benefit from the playground? More than one answer is possible. Green Pastures could keep track of how many non‑residents use the playground and send a bill to the other complexes. negotiate with the other developments to share the costs. fence the playground and charge non‑residents for entry.

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.

In the competitive electrical motor industry, the workers at Galt Inc. threaten to go on strike. To avoid the strike, Galt Inc. agrees to pay its workers more. At all other factories, the wage remains the same. a. Illustrate the changes in the accompanying graph as a result of Galt Inc. paying its workers more.

b. As a result of the Galt Inc. labor agreement, the price of motors will stay the same. c. Surely, more workers will want to work at Galt Inc. now that it pays higher wages. Fewer workers will work at Galt Inc. after the labor agreement because the marginal cost of workers is higher, which leads to fewer motors produced.

Let's see if the forces of the market can be as efficient as a benevolent dictator. Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, an all-wise benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. a. Since it's become much easier to build better laptop computers in recent years, laptop supply has increased. Use the graph to show this change in the market for laptop computers. c. Laptop and desktop computers are substitutes. Use the graph to show how the change in the price of laptops affected the market for desktop computers. Market for Desktop ComputersPrice per desktop computerQuantity of desktop computersDemandSupply

b. What did this do to the price of laptops? The price of laptops decreased . d. How did that affect the quantity supplied of desktop computers? The change in price of laptops resulted in a decrease in the quantity supplied of desktop computers. e. Now let's look at the final result: Once it became easier to build good laptops, the "invisible hand" forces did push more of society's resources into making laptops and push resources away from making desktops.

Suppose your grade in your economics class is composed of six quizzes of equal weight. Your six quiz grades, in order, are: 100, 80, 70, 65, 70, and 90. a. Graph your marginal grades, along with your average grade, after each quiz. Round to the nearest 5.

b. When the marginal score is less than the average score, then the average score is decreasing . Your marginal quiz grades start improving with your fifth quiz grade, and your average quiz score starts increasing with your sixth quiz grade. Your marginal and your average scores started increasing at different quizzes, first with marginal, then with average because when the marginal started increasing, it was less than the average.

The following tables show the domestic supply and demand schedules for bushels of flaxseed (used as an edible oil and a nutrition supplement) in the United States and Kazakhstan, with prices measured in U.S. dollars and quantities measured in millions of bushels.

c. If the United States and Kazakhstan entered into free trade with only one another, what would be the price of flaxseed, and what quantity of flaxseed would be traded? Price of flaxseed : $ 10 per bushel Quantity of flaxseed:4 million bushels d. For each of the following four constituent groups, determine whether free trade between the United States and Kazakhstan would help or harm the members of that group. Calculate the change in consumer or producer surplus in each country as necessary to support your claim. i. The buyers of flaxseed in Kazakhstan are hurt by this trade. Their consumer surplus falls by... 16 million dollars. ii. The sellers of flaxseed in Kazakhstan benefit from this trade. Their producer surplus rises by... 24 million dollars. iii. The buyers of flaxseed in the United States benefit from this trade. Their consumer surplus rises by... 28 million dollars. iv. The sellers of flaxseed in the United States are hurt by this trade. Their producer surplus falls by... 20 million dollars.

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.

This chapter emphasized the ability of an orderly system to emerge without someone explicitly designing the entire system. How does the evolution of language illustrate a type of spontaneous order? Like markets...

language is the result of involuntary and directed cooperation. no one wrote out all the rules for any given language beforehand. a central planner wrote out all the rules for any given language. everyone is being forced to speak the same language.

In the text, we discuss sugar farmers in Florida who use unusually large amounts of fertilizer to produce their crops; they do so because their land isn't all that great for sugar production. If we translate this into the language of the supply curve, would these Florida sugar farms be those on the lower-left part of a supply curve or those along the upper right of the supply curve? Why? The farmers are on the

lower‑left of the supply curve because the fertilizer makes them so productive it lowers their marginal cost. upper‑right of the supply curve because of the extra cost of using so much fertilizer. lower‑left of the supply curve because they can sell sugar at a relatively low price and still make a profit. upper‑right of the supply curve because the sugar market has a very high supply elasticity.

Before Coase presented his theorem, economists who wanted economic efficiency argued that people should be responsible for the damage they do and pay for the social costs of their actions. This advice fits nicely with notions of personal responsibility. Explain how the Coase theorem refutes this older argument. Coase pointed out that

no one is really responsible for externalities because externalities just happen. both the offender and those impacted are responsible for creating the externality. society at large should be responsible for moving markets to efficient equilibria. holding the offender responsible is unfair because damage might be accidental.

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.

Palm Springs, California, was once the playground of the rich and famous. For example, the town has a Frank Sinatra Drive, a Bob Hope Drive, and a Bing Crosby Drive. The city once had a law against building any structure that could cast a shadow on anyone else's property between 9 am and 3 pm. Select potential alternatives to this command and control solution. An alternative would be to

prohibit the use of sunglasses during those hours. tax shadow‑casting buildings that encroach on neighboring property. outlaw all multi‑story buildings. give property owners the right not to have shadows on their property.

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.

In Chapter 6, we said that taxes create deadweight losses. When we tax goods with external costs, should we worry about deadweight losses? Why or why not? Any deadweight losses

should concern us. If there is a negative externality associated with a good, the deadweight loss from a tax simply exacerbates society's welfare costs. should not conern us. Deadweight losses are the result of transactions that no longer occur and the problem with negative externalities is that too many transactions occur. should concern us. Deadweight losses sound bad because they are bad; we should always avoid deadweight losses. from a tax are counter‑productive. Why would we tax goods with negative externalities when the remedy for a negative externality is a subsidy?

Which of the following defines the opportunity cost of doing this homework?

the financial cost of taking this class no opportunity cost for doing this homework the activity one could reasonably be doing in place of doing homework the value of the grade one will receive from doing this homework

A classic essay about how markets link each other is entitled "I, Pencil," written by Leonard E. Read (his real name). It is available for free online at the Library of Economics and Liberty. As you might suspect, it is written from the point of view of a pencil. One line is particularly famous: "No single person on the face of this earth knows how to make me." Based on what you've learned in this chapter about how markets link the world, how is this true? No single person knows how to make a pencil because...

the market for pencils has disappeared over the years. no one knows how to perform all of the steps in making a pencil. the raw materials used for pencil production are unknown. there are many perfect substitutes for a pencil.

What is the opportunity cost of the economics profession?

the total tuition fees for getting an economics degree the next best thing that economists could be doing with their time the life salary economists receive throughout their professional careers total tuition plus books and housing expenses associated with attending college

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

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.

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

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.

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.

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

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

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.

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

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

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.