Econ 120 Midterm (Practice Problems)

Chapter 3 2. In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events. In each case, show the effect on equilibrium price and quantity. e. Hot dog stands cut the price of hot dogs.

A fall in the price of a substitute (hot dogs) causes demand for hamburgers to decrease. This represented by a leftward shift of the DEMAND curve from D1 to D2 and.. This results in a fall in the equilibrium price and quantity as the equilibrium changes from E1 to E2.

Chapter 3 2. In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events. In each case, show the effect on equilibrium price and quantity. a. The price of tacos increases.

A rise in the price for a substitute (tacos) causes the demand for hamburgers to increase. This represents a rightwards shift of the DEMAND curve from D1 to D2 and.. results in a rise in the equilibrium price and quantity as the equilibrium changes from E1 to E2.

Chapter 3 2. In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events. In each case, show the effect on equilibrium price and quantity. b. All hamburgers sellers raise the price of their French fries

A rise in the price of a complement (French fries) cause the demand for hamburgers to decrease. This represents a leftward shift of the DEMAND curve form D1 to D2 and.. results in a fall in the equilibrium price and quantity as the equilibrium changes from E1 to E2

Chapter 8 14. The accompanying diagram shows the inflation rate in the United Kingdom from 1980 to 2016. a. Between 1980 and 1985, policy makers in the United Kingdom worked to lower the inflation rate. What would you predict happened to unemployment between 1980 and 1985?

Because of the disinflation that occurred between 1980 and 1985, one would predict that the unemployment rate rose during this period. Indeed, the unemployment rate rose from 6.5% in 1980 to a high of 11.4% in 1985

Chapter 1 1f. You decide how much cups of coffee to have when studying the night before an exam by considering how much more work you can do by having another cup versus how jittery it will make you feel.

Principle #3 "How much" is a decision at the margin. Your decision is one of "how much: Coffeys to consume, and your evaluate the trade- off between keeping yourself awake and becoming more jittery from one more cup of coffee.

Chapter 1 1a. You choose to purchase your textbooks online through Chegg rather than paying a higher price for the same books through your college bookstore.

Principle #4 People usually exploit opportunities to make themselves better off. In this case, you make yourself better off by buying merchandise at a lower price.

Chapter 1 1j. You are better at performing lab experiments, and your lab partner is better at writing lab reports. So the two of you agree that you will do all the experiments and she will write up all the reports.

Principle #5 There are gains from trade. If each person specials in what he or she is good at, then there will be a gains from specialization and trade.

Chapter 8 8. How will the following changes affect the natural rate of unemployment? b. More teenagers focus on their studies and do not look for jobs until after college.

Since teenagers have a higher rate of frictional unemployment, this will lower the overall amount of frictional unemployment and lower the natural rate of unemployment

Chapter 1 4. Use the concept of opportunity cost to explain the following a. More people choose to get graduate degrees when the job market is poor

The worse the job market, the lower the opportunity cost of getting a graduate degree. One of the opportunity costs of going to the graduate school is not being able to work. But if the job market is bad, the salary you can expect to earn is low or you might be unemployed- so the opportunity cost of going to school is also.

Chapter 3 17. Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his "Blue Period." Picasso is now dead, and all of his Blue Period works are currently on display in museums and private galleries throughout Europe and the United States. a. Draw a supply curve for Picasso Blue Period works. Why is the supply curve different from ones you have seen?

There are no more Picasso Blue Period works available. Hence the supply curve is a vertical line at the quantity 1,000.

Chapter 8 7. In which of the following cases is it likely for efficiency wages to exist? Why? c. Jane speaks Korean and sells ice cream in a neighborhood in which Korean is primarily language. It is difficult to find another worker who speaks Korean

Efficiency wages, because she is valuable to her company

Chapter 8 8. How will the following changes affect the natural rate of unemployment? c. Greater access to the internet leads both potential employers and potential employees to use the internet to list and find jobs.

Greater access to the Internet would facilitate job searches, reducing frictional unemployment and lowering the natural rate of unemployment

Chapter 7 6. Which of the following transaction will included in GDP for United States? b. Delta sells one of its existing airplanes to Korean Air.

If Delta sells on of its airplanes to Korean Air, their transaction is not included in GDP because it foes not represent production during the current time period. The airplane would have been included in GDP when it was produced; now it is just a sale of a used item.

Chapter 7 6. Which of the following transaction will included in GDP for United States? d. A California winery produces a bottle of Chardonnay and sells it to a customer in Montreal, Canada

If a California winery sells a bottle of Chardonnay to a customer in Montreal, it is a U.S export and its entered as such in U.S GDP

Chapter 7 6. Which of the following transaction will included in GDP for United States? f. A book publisher produces too many copies of a new books; the books don't sell this year, so the publisher adds the surplus books to inventories.

If a book publisher produces too many copies of a new book and the books don't sell in the year they are produced, the publisher adds the surplus books to inventories. These books are considered investment spending and added to GDP. It is as if the publisher bought the books itself.

Chapter 8 3. In each of following situation, what type of unemployment is Melanie facing? a. After completing a complex programming project, Melanie is laid off. her prospects for a new job requiring similar skills are good, and she has signed up with a programmer placements service. She has passed up offers for low- paying jobs.

Melaine is frictionally unemployed because she is refusing offers for low paying jobs in favor of engaging in job search for a higher paying job.

Chapter 8 3. In each of following situation, what type of unemployment is Melanie facing? c. Due to the current slump, Melanie has been laid off from her programming job. Her employer promises to rehire her when business picks up.

Melanie is cyclically unemployed because her bout of unemployment is tied to the business cycle. It is likely she will be reemployed once the economy picks up.

Chapter 8 3. In each of following situation, what type of unemployment is Melanie facing? b. When Melanie and her co- workers refused to accept pay cuts, her employer outsourced their programming tasks to workers in another country.

Melanie is structurally unemployed because she is demanding a higher wage than the current equilibrium wage in her industry. In this case, the equilibrium wage has not been lowered by the outsourcing of work to other countries.

Chapter 8 7. In which of the following cases is it likely for efficiency wages to exist? Why? a. Jane and her boss work as a team selling ice cream

No reason for efficiency wages, cuz in theory should work efficiently in front of your boss

Chapter 1 2. Describe some of the opportunity costs when you decide to do the following. a. Attend college instead of taking a job

One of the opportunity costs of going to college is not being able to take a job. By choosing to go to college, you give up the income you would have earned on the job and the valuable on- the- job experiences you would have acquired. Another opportunity cost of going to college is being able to find a better, more highly paid job after graduation in addition to the joy learning.

Chapter 8 5. A country's labor force is the same of number of employed and unemployed workers. The accompanying table provides data on the size of labor force and the number of unemployed workers for different regions of the United States. Labor force. Unemployed Region July 2015/ July 2016 July 2015/ July 2016 Northeast. 28,397 28,565 1,459 1,377 South. 57, 297 58,022 2,978 2,720 Midwest 34, 489 37,543 1,627 1,585 West 36, 949 37, 543 2,099 1,985 c. Compute unemployment rates in the different regions of country in July 2015 and July 2016.

(Number of unemployed workers/ labor force) x 100 Example: Northeast 2015= (1,459/28,397) x 100

Chapter 3 2. In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events. In each case, show the effect on equilibrium price and quantity. c. Income falls in town. Assume that hamburgers are a normal good for most people.

A fall in income causes the demand for a normal good (hamburgers) to decrease. This represents a leftward shift of the DEMAND curve from D1 to D2 and... results in a fall in the equilibrium price and quantity as the equilibrium changes from E1 to E2.

Chapter 3 2. In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events. In each case, show the effect on equilibrium price and quantity. d. Income falls in town. Assume that hamburgers are an inferior good for most people.

A fall in income causes the demand for an inferior good (hamburgers) to increase. This represents a rightward shift of the DEMAND curve from D1 to D2 and... this results in a rise in the equilibrium price and quantity as the equilibrium changes from E1 to E2.

Chapter 8 5. A country's labor force is the same of number of employed and unemployed workers. The accompanying table provides data on the size of labor force and the number of unemployed workers for different regions of the United States. Labor force. Unemployed Region July 2015/ July 2016 July 2015/ July 2016 Northeast. 28,397 28,565 1,459 1,377 South. 57, 297 58,022 2,978 2,720 Midwest 34, 489 37,543 1,627 1,585 West 36, 949 37, 543 2,099 1,985 d. What can you infer about the fall in unemployment rates over this period? Was it caused by a net gain in the number of jobs or by large fall in the number of people seeking jobs?

Across all four regions there was both a net rise in the number of jobs and the number of people seeking jobs. But the numbers of job increased more than the labor force. and the unemployment rate fell.

Chapter 3 11. Fans of music often bemoan the high price of concert tickets. One rock superstar has argued that it isn't worth hundreds, even thousands, of dollars to hear him and his band play. Let's assume this star sold out arenas around the country at an average ticket price of $75. b. Suppose that due to this stars' protests, ticket prices were lowered to $50. In what sense in this prices too low? Draw a diagram using supply and demand curves to support your argument.

At $50 each, the quantity of tickets demanded exceeds the quantity of tickets supplied. There is shortage of tickets at this price, shown by the difference between the quantity demanded at this price, Qd and the quantity supplied at this price Qs.

Chapter 3 1. A study conducted by Yahoo! revealed that chocolate is the most popular flavor of ice cream in America. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream. d. New technology for mixing and freezing ice cream lowers manufacturers' costs of producing chocolate ice cream.

Because the cost of producing ice cream falls, manufacturers are willing to supply more units of chocolate ice cream at any given price. This is represented by a rightward shift of the supply curve and results in a fall in the equilibrium price and a rise in the equilibrium quantity.

Chapter 3 1. A study conducted by Yahoo! revealed that chocolate is the most popular flavor of ice cream in America. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream. a. A serve drought in the Midwest causes dairy farmers to reduce the number of milk- producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream.

By reducing their herds, dairy farmers reduce the supply of cream, a leftward shift of the SUPPLY curve for cream. As a result, the market price of cream rises, raising the cost of producing a unit of chocolate ice cream. This results in a leftward shift of the SUPPLY curve for chocolate ice cream as ice cream producers reduce the quantity of chocolate supplied at any given price. Ultimately, this leads to a rise in the equilibrium price and a fall in the equilibrium quantity.

Chapter 3 4. Show in a diagram the effect of the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the following events. d. The market for the Krugman and Wells economics textbook Case 1- Your professor makes it required reading for all of his or her students Case 2- Printing costs for textbooks are lowered by the use of synthetic paper.

Case 1- A greater quantity of textbooks will be demanded at any given price, representing a rightward shift of the demand curve from D1 to D2 Equilibrium price and quantity will rise. Case 2- The textbook publisher will offer more textbooks for sale at any given price, representing a rightward shift of the supply curve from S1 to S2 Equilibrium price will fall, and equilibrium quantity will rise.

Chapter 3 4. Show in a diagram the effect of the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the following events. c. The market for bagels Case 1- People realize how fattening bagels are Case 2- People have less time to make themselves a cooked breakfast

Case 1- Consumers will demand fewer bagels at any given price. This represents a leftward shift of the DEMAND curve from D1 to D2, and.. leads to a fall in both the equilibrium price and the equilibrium quantity. Case 2- Consumers will demand more bagels (a substitute for cooked breakfast) at any given price. This represents a rightward shift of the DEMAND curve from D1 to D2 and.. leads to a rise in both the equilibrium price and equilibrium quantity.

Chapter 3 4. Show in a diagram the effect of the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the following events. b. The market for Seattle Seahawks cotton t-shirts Case 1- The Seahawks win the Super Bowl Case 2- The price of cotton increases

Case 1- Fans will demand more Sea Hawks memorabilia at any given price. This represents a rightward shift of the demand curve from D1 to D2 and... leads to a rise in both the equilibrium price and quantity as the equilibrium changes from E1 to E2. Case 2- Cotton is an input to T-shirts; and increase in its price will cause T- shirt manufacturers to reduce the quantity supplied at any given price, representing a leftward shift of the SUPPLY cure from S1 to S2.. this leads to a rise in the equilibrium price and a fall in the equilibrium quantity from E1 to E2.

Chapter 3 4. Show in a diagram the effect of the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the following events. a. The market for news papers in your town Case 1- The salaries of journalist go up Case 2- There is a big news event in your town, which is reported in the newspaper

Case 1- Journalist are an inout in the production of newspapers; an increase in their salaries will cause newspaper publishers to reduce the quantity supplied at any given price. This represents a leftward shift of the SUPPLY curve from S1 to S2 as the equilibrium price changes from E1 to E2 Case 2- Townspeople will wish to purchase more newspapers at any given price. This represents a rightward shift of the demand curve from D1 to D2 and.. leads to a rise in both the equilibrium price and quantity as the equilibrium changes from E1 to E2.

Chapter 3 1. A study conducted by Yahoo! revealed that chocolate is the most popular flavor of ice cream in America. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream. b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits.

Consumers will now demand more chocolate ice cream at any given price, represented by a rightward shift of the DEMAND curve. As a result, both equilibrium price and quantity price rise.

Chapter 9 2. The following table shows the average annual growth rate in real GDP per capita for Argentina, Ghana, and South Korea using data from the World Bank, World Development Indicators, for past few decades. Average annual growth rate of real GDP per capita Years Argentina Ghana S. Korea 1965-1975 1.92% -1.13% 8.29% 1975-1985 -1.42 -2.29 7.08 1985-1995 1.54 1.70 8.06 1995-2005 1.14 2.16 4.28 2005-2015 3.11 4.45 3.02 b. Suppose that the average annual growth rate that each country achieved over the period 2005-2015 continues indefinitely into the future. Starting from 2015, use the Rule of 70 to calculate, where possible. the year in which a country will have doubled its real GDO per capita.

If each nation continues to grow as it did from 2005-2015, real GDP per capita will have doubled in Argentina by 2037, in Ghana by 2030, and in South Korea by 2038.

Chapter 3 11. Fans of music often bemoan the high price of concert tickets. One rock superstar has argued that it isn't worth hundreds, even thousands, of dollars to hear him and his band play. Let's assume this star sold out arenas around the country at an average ticket price of $75. a. How would you evaluate the arguments that ticket prices are too high?

If markets are competitive, the ticket price is simply the equilibrium price: the price at which quantity supplied is equal to quantity demanded. No one is "made" to pay $75 to go to a concert: a potential concert- goer will pay $75 if going to the concert seems worth that amount and will choose to do something else if it isn't

Chapter 8 8. How will the following changes affect the natural rate of unemployment? a. The government reduces the time during which an unemployed worker can receive unemployment benefits.

If the government reduces the time during which an unemployed worker can obtain benefits, workers will be less willing to spend time searching for a job. This will reduce the amount of frictional unemployment and lower the natural rate of unemployment.

Chapter 8 2. In general, how do changes in the unemployment rate vary with changes in real GDP? After several quarters of a severe recession, explain why we might observe a decrease in the official unemployment rate. Explain why we could see an increase in the official unemployment rate after several quarters of a strong expansion.

In general the change in the unemployment rate varies inversely with the rate of growth in real GDP: when the rate of real GDP growth is above average, we expect the unemployment rate to fall rapidly. However, after several quarters of serve recession, unemployed workers may become discouraged and stop looking for work. Since the definition of unemployed persons requires that they will be looking for work, officially measured unemployment falls as workers become discouraged and stop looking. WE could see an increase in the official unemployment rate after several quarters of a strong expansion as existing workers, encouraged by an increase in wages, leave existing jobs to search for new ones and discouraged workers begin to search for jobs again.

Chapter 8 7. In which of the following cases is it likely for efficiency wages to exist? Why? b. Jane sells ice cream without any direct supervision by her boss

Likely for efficiency wages, boss isn't around and he wants to make sure she has an incentive.

Chapter 7 8. The accompanying table shows data on nominal GDP (in billions of dollars), real GDP (in billions of 2009 dollars), and population (in thousands) of United States in 1965, 1975, 1985, 1995, 2005, and 2015. The U.S. price level rose consistently over the period 1965-2015. Year Nominal GDP. Real GDP. Population 1965 $743.7 $3, 976.7 194,250 1975 $1,688.9 $5, 385.4 215, 891 1985 $4, 346.7 $7, 593.8 238,416 1995 $7, 664.1 $10, 174.8 266, 458 2005 $13, 093.7 $14, 234.2 296, 115 2015 $17, 947.0 $16,348.9 321,601 b. Calculate the percent change in real GDP from 1965 to 1975, 1975 to 1985, 1985 to 1995, 1995 to 2005, and 2005 to 2015. Which period had the highest growth rate?

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Chapter 7 8. The accompanying table shows data on nominal GDP (in billions of dollars), real GDP (in billions of 2009 dollars), and population (in thousands) of United States in 1965, 1975, 1985, 1995, 2005, and 2015. The U.S. price level rose consistently over the period 1965-2015. Year Nominal GDP. Real GDP. Population 1965 $743.7 $3, 976.7 194,250 1975 $1,688.9 $5, 385.4 215, 891 1985 $4, 346.7 $7, 593.8 238,416 1995 $7, 664.1 $10, 174.8 266, 458 2005 $13, 093.7 $14, 234.2 296, 115 2015 $17, 947.0 $16,348.9 321,601 c. Calculate real GDP per capita for each of the years in the table.

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Chapter 7 8. The accompanying table shows data on nominal GDP (in billions of dollars), real GDP (in billions of 2009 dollars), and population (in thousands) of United States in 1965, 1975, 1985, 1995, 2005, and 2015. The U.S. price level rose consistently over the period 1965-2015. Year Nominal GDP. Real GDP. Population 1965 $743.7 $3, 976.7 194,250 1975 $1,688.9 $5, 385.4 215, 891 1985 $4, 346.7 $7, 593.8 238,416 1995 $7, 664.1 $10, 174.8 266, 458 2005 $13, 093.7 $14, 234.2 296, 115 2015 $17, 947.0 $16,348.9 321,601 d. Calculate the percent change in real GDP per capita from 1965 to 1975, 1975 to 1985, 1985 to 1995, 1995 to 2005, and 2005 to 2015. Which period had the highest growth rate?

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Chapter 7 8. The accompanying table shows data on nominal GDP (in billions of dollars), real GDP (in billions of 2009 dollars), and population (in thousands) of United States in 1965, 1975, 1985, 1995, 2005, and 2015. The U.S. price level rose consistently over the period 1965-2015. Year Nominal GDP. Real GDP. Population 1965 $743.7 $3, 976.7 194,250 1975 $1,688.9 $5, 385.4 215, 891 1985 $4, 346.7 $7, 593.8 238,416 1995 $7, 664.1 $10, 174.8 266, 458 2005 $13, 093.7 $14, 234.2 296, 115 2015 $17, 947.0 $16,348.9 321,601 e. How do the percent change in real GDP and the percent change in real GDP per capita compare? Which is larger? Do we expect them to have this relationship?

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Chapter 8 5. A country's labor force is the same of number of employed and unemployed workers. The accompanying table provides data on the size of labor force and the number of unemployed workers for different regions of the United States. Labor force. Unemployed Region July 2015/ July 2016 July 2015/ July 2016 Northeast. 28,397 28,565 1,459 1,377 South. 57, 297 58,022 2,978 2,720 Midwest 34, 489 37,543 1,627 1,585 West 36, 949 37, 543 2,099 1,985 a. Calculate the number of workers employed in each of the regions in July 2015 and July 2016. Use your answers to calculate the change in the total number of workers employed between July 2015 and July 2016.

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Chapter 8 5. A country's labor force is the same of number of employed and unemployed workers. The accompanying table provides data on the size of labor force and the number of unemployed workers for different regions of the United States. Labor force. Unemployed Region July 2015/ July 2016 July 2015/ July 2016 Northeast. 28,397 28,565 1,459 1,377 South. 57, 297 58,022 2,978 2,720 Midwest 34, 489 37,543 1,627 1,585 West 36, 949 37, 543 2,099 1,985 b. For each region, calculate the growth in the labor force from July 2015 to July 2016.

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Chapter 1 1d. After a hurricane did extensive damage to homes on the island of St. Crispin, homeowners wanted to purchase many more worker than were available on the island. As. result, prices for goods and services rose dramatically across the board.

Principle #1 Overall spending sometimes gets out of line with the economies productive capacity. The spending by St. Crispin homeowners on building materials and workers fells short of the economy's ability to produce those goods and services. As a result, prices on the island rose across the board (inflation).

Chapter 1 1b. On your spring break trip, your budget is limited to $35 a day.

Principle #1 Resources are scare, since you only have $35 a day your resources are limited (scare).

Chapter 1 1e. You buy a used textbook from your roommate. Your roommate uses the money to buy songs from iTunes.

Principle #10 One persons spending is another income. Your spending on the used textbook is your roommates income

Chapter 1 1l. Your parents' after tax income has increased because of the tax cut passed by Congress. there therefore increase your allowance, which you spend on a spring break vacation.

Principle #12 Government policies can change spending. In this case, a tax cut has increased spending.

Chapter 1 1h. You realize that you can gradate a semester early by forgoing a semester of study abroad.

Principle #2 The real cost of something is what you must give up to get it. The real cost of a semester abroad is giving up the opportunity to graduate early.

Chapter 1 1i. At the student center, there is a bulletin board on which people advertise used items for sale, such as bicycles. Once you have adjusted for differences in quality, all bikes sells for about the same price.

Principle #6 Markets move toward equilibrium. Any bicycle a buyer chooses will leave him or equally wells off. That is, a buyer who chooses a particular bicycle cannot change actions and find another bicycle that makes him or her better off. Also, no seller can take a different action that makes him or her better off: no seller can change a higher prices for a bicycle of insular quality, since no one would buy that bicycle.

Chapter 1 1g. There is limited lab space available to do the project required in Chem 101. The lab supervisor assigns lab time to each student based on when that student is able to come.

Principle #7 Resources should be used as efficiently as possible to achieve society's goals. Allocating scare lab space according to when each student can use that space is efficient.

Chapter 1 1c. Craigslist allows departing students to sell items such as a used textbooks, appliances and furniture rather than give them away as they formerly did

Principle #8 Markets usually lead to efficiency. the market here is represented by the buyers and sellers who use the student union website to trade goods, in contrast the "non market" of simply giving items away to one's roommate. The market is efficient because it enables people who want to sell items to fond those who want to buy those items. This is in contrast to a system in which items are simply left with a roommate, who may have little or no desire to have them.

Chapter 1 1k. State governments mandate that it is illegal to drive without passing a driving exam

Principle #9 When markets don't achieve efficiency, government intervention can improve society's welfare. Unsafe drivers don't take into account the dangers they pose to others and often to themselves. So when unsafe drivers are allowed to drive, everyone is made worse off. Government intervention improves Society's welfare by assuring a minimum level of competence in driving.

Chapter 1 2. Describe some of the opportunity costs when you decide to do the following. c. Ride the bus instead of driving your car

Riding the bus gets you where you need to go more cheaply than, but probably not as conveniently, as driving your car. that is, some of the opportunity costs of taking the bus involve waiting for the bus, having to walk from the bus stop to where you need to go rather than parking right outside the building, and probably a slower journey.

Chapter 8 8. How will the following changes affect the natural rate of unemployment? d. Union membership declines.

Since strong unions negotiate wages above the equilibrium level, they are a source of structural unemployment. A decline in union membership will reduce structural unemployment, and with it, the natural rate of unemployment.

Chapter 3 17. Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his "Blue Period." Picasso is now dead, and all of his Blue Period works are currently on display in museums and private galleries throughout Europe and the United States. b. Given the supply curve from part a, the price of a Picasso Blue Period work will be entirely dependent on what factor(s)? Draw a diagram showing how the equilibrium price of such work is determined.

Since the supply is fixed, the price of a Picasso Blue Period work is entirely determined by demand. Any change in demand is fully reflected in a change in price.

Chapter 9 1. The accompanying table shows data from the World Bank, World Development Indicators, for real GDP per capita in 2010 U.S dollars for Argentina, Ghana, South Korea, and the United States for 1960, 1980, 2000, and 2015 b. How does the growth in the living standard from 1960 to 2015 compare across these four nations? What might account for these differences?

South Korea experienced the greatest increase in living standards from 1960 to 2015; in 2015 it produced 2,270% ($25,023/$1,103 × 100) of what it produced in 1960. Argentina experienced only a modest growth in living standards over the same period, and Argentina's path was less consistent than that of Ghana. Compared with real GDP per capita in 1960, the United States in 2015 produced 302% ($51,486/$17,037 × 100) of what it produced in 1960. The growth in living standards in Argentina, Ghana, and South Korea reflects the pattern for their different regions of the world. South Korea, like many other East Asian countries, had high productivity growth because of high savings and investment rates, a good education system, and substantial technological progress. Living standards grew more modestly in Argentina, as in other Latin American countries, because of low savings and investment spending rates, underinvestment in education, political instability, and irresponsible government policies. Ghana, in particular recently, has made some progress. Living standards in Africa suffered because of major political instabilities, poor education and infrastructure, and disease.

Chapter 9 2. The following table shows the average annual growth rate in real GDP per capita for Argentina, Ghana, and South Korea using data from the World Bank, World Development Indicators, for past few decades. Average annual growth rate of real GDP per capita Years Argentina Ghana S. Korea 1965-1975 1.92% -1.13% 8.29% 1975-1985 -1.42 -2.29 7.08 1985-1995 1.54 1.70 8.06 1995-2005 1.14 2.16 4.28 2005-2015 3.11 4.45 3.02 a. For each 10- year period and for each country, use the Rule 70 where possible to calculate how long it would take for that country's real GDP per capita to double.

The accompanying table shows the number of years it would take for real GDP per capita to double according to the Rule of 70 using the average annual growth rate in real GDP per capita per decade in each country. Values corresponding to years with negative growth rates are left uncalculated because we cannot apply the Rule of 70 to a negative growth rate.

Chapter 3 11. Fans of music often bemoan the high price of concert tickets. One rock superstar has argued that it isn't worth hundreds, even thousands, of dollars to hear him and his band play. Let's assume this star sold out arenas around the country at an average ticket price of $75. c. Suppose the superstar really wanted to bring down ticket prices. Since he and his band control the supply of there services, what do you recommend they do? Explain using a supply and demand diagram.

The band can lower the average price of a ticket by increasing supply: give more concerns. This is shown as a rightward shift of the supply curve from S1 to S2... resulting in a lower equilibrium price and a higher equilibrium quantity, shown by the change of the equilibrium from E1 to E2

Chapter 3 1. A study conducted by Yahoo! revealed that chocolate is the most popular flavor of ice cream in America. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream. c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream.

The price of a substitute (vanilla ice cream) has fallen, leading consumers to substitute it for chocolate ice cream. The demand for chocolate ice cream decreases, represented by a leftward shift of the demand curve. Both equilibrium price and quantity fall.

Chapter 7 8. The accompanying table shows data on nominal GDP (in billions of dollars), real GDP (in billions of 2009 dollars), and population (in thousands) of United States in 1965, 1975, 1985, 1995, 2005, and 2015. The U.S. price level rose consistently over the period 1965-2015. Year Nominal GDP. Real GDP. Population 1965 $743.7 $3, 976.7 194,250 1975 $1,688.9 $5, 385.4 215, 891 1985 $4, 346.7 $7, 593.8 238,416 1995 $7, 664.1 $10, 174.8 266, 458 2005 $13, 093.7 $14, 234.2 296, 115 2015 $17, 947.0 $16,348.9 321,601 a. Why is real GDP greater than nominal GDP for all years until 2005 and lower for 2015?

The base year is 2009, and from 1965-2005, prices rose. To calculate real GDP for the years 1965, 1975, 1985, 1995, 2005, we would multiply output in this years by the higher prices that existed in 2009. To calculate nominal GDP, we would multiply output by the lower prices that existed in those particular years. Therefore, real GDP (which values the output in 2015 using the higher 2015 prices) will result in a lower number than nominal GDAP (which values the output in 2015 using the higher 2015 prices). Note that real GDP would equal nominal GDP in 2009 since 2009 is the base year, and we use the same set of prices to value both real and nominal GDP in that year.

Chapter 3 8. The following table shows a demand schedule for a normal good. Price. Quantity Demanded 23. 70 21. 90 19. 110 17. 130 a. Do you think that the increase in quantity demanded (say, from 90 to 110 in the table) when price decreases (from 21 to 19) is due to a rise in consumers' income? Explain clearly (and briefly) why or why not.

The increase in quantity demanded from 90 to 110 when the price declines from $21 to $19 is not due to a rise in consumers' income.. but rather it represents a movement along the demand curve as the price falls In contrast, a rise in consumers' income causes the demand curve to shift rightward for a normal good; as a result, the quantity demanded will increase at any given price.

Chapter 1 4. Use the concept of opportunity cost to explain the following e. fewer students enroll in class that meet before 10:00 a.m

The opportunity cost is very high- it means giving up an extra hour's sleep. That extra hour is much more valuable before 10:00 A.M than later in the day.

Chapter 1 4. Use the concept of opportunity cost to explain the following c. there are more parks in suburban than in urban areas

The opportunity cost of parkland is lower in suborn areas. the prices per square foot of land is much higher in urban than in suborn areas. By creating parkland, you therefore give up the opportunity to make much more money in cities than in suburbs.

Chapter 1 4. Use the concept of opportunity cost to explain the following d. Convenience stores, which have higher prices than supermarkets, cater to busy people

The opportunity cost of time is higher for busy people. Driving long distances to supermarkets takes time that could be spent doing other things.

Chapter 7 9. Eastland College is concerned about the rising price of textbooks that students must purchase. To better identify the increase in the price of textbooks, the dean asks you, the Economics Department's star student, to create an index of textbook prices. The average student purchases three English, two math, and four economics textbooks per year. The prices of these books are given the accompanying table. 2014 2015 2016 English textbook. $100 $110 $114 Math textbook. $140 $144 $148 Economics textbooks. $160 $180 $200 e. What is the percent change in the price index from 2014 to 2016?

The percent change in price index for textbooks from 2014 to 2016 is 17.9% ((107.5- 91.2)/ 91.2) x 100

Chapter 7 9. Eastland College is concerned about the rising price of textbooks that students must purchase. To better identify the increase in the price of textbooks, the dean asks you, the Economics Department's star student, to create an index of textbook prices. The average student purchases three English, two math, and four economics textbooks per year. The prices of these books are given the accompanying table. 2014 2015 2016 English textbook. $100 $110 $114 Math textbook. $140 $144 $148 Economics textbooks. $160 $180 $200 a. What is the percent change in the price of an English textbook from 2014 to 2016?

The percent change in the price of an English textbook from 2014 to 2016 is 14.0% (($114-$100)/$100) x 100)

Chapter 7 9. Eastland College is concerned about the rising price of textbooks that students must purchase. To better identify the increase in the price of textbooks, the dean asks you, the Economics Department's star student, to create an index of textbook prices. The average student purchases three English, two math, and four economics textbooks per year. The prices of these books are given the accompanying table. 2014 2015 2016 English textbook. $100 $110 $114 Math textbook. $140 $144 $148 Economics textbooks. $160 $180 $200 c. What is the percent change in the price of an economics textbook from 2014 to 2016?

The percent change in the price of an economics textbook from 2014 to 2016 is 25% ($200-$160)/$160) x 100)

Chapter 7 9. Eastland College is concerned about the rising price of textbooks that students must purchase. To better identify the increase in the price of textbooks, the dean asks you, the Economics Department's star student, to create an index of textbook prices. The average student purchases three English, two math, and four economics textbooks per year. The prices of these books are given the accompanying table. 2014 2015 2016 English textbook. $100 $110 $114 Math textbook. $140 $144 $148 Economics textbooks. $160 $180 $200 b. What is the percent change in the price of a math textbook from 2014 to 2016?

The percent change in the price of math textbook from 2014 to 2016 is 5.7% (($148-$140)/$140) x 100)

Chapter 3 3. The market for many goods changes in predictable ways according to the time of year, in response to events such as holidays, vacation times, seasonal changes in production, and so on. Using supply and demand, explain the change in price in each of the following cases. Note that supply and demand may shift simultaneously. c. The price of a round- trip ticket to Paris on Air France falls by more than $200 after the end of the school vacation in September. This happens despite the fact that generally worsening weather increases the cost of operating flights to Paris, and Air France therefore reduces the number of flights to Paris at any given price.

There is a leftward shift of the demand curve for the tickets to Paris in September, after the end of the school vacation, from D1 to D2. Other things equal, this leads to a fall in the price of tickets. At the same time, as the costs of operating flights increases, Air France decreases the number of flights, shifting the supply curve leftward from S1 to S2. Other things equal, this leads to a rise in price. Given the simultaneous leftward shifts of both the demand and supply curves, the equilibrium price changes from E1 to E2. The fall in price indicates that the leftward shift of the demand curve exceeds the leftward shift of the supply curve

Chapter 3 3. The market for many goods changes in predictable ways according to the time of year, in response to events such as holidays, vacation times, seasonal changes in production, and so on. Using supply and demand, explain the change in price in each of the following cases. Note that supply and demand may shift simultaneously. a. Lobster prices usually fall during the summer peak lobster harvest season, DESPITE the fact that people like to eat lobster during the summer more than at any other time of the year.

There is a rightward shift of the demand curve from D1 to D2 during the summer because consumers prefer to eat more lobster during the summer than at other times of the year.. Other things equal, this leads to a rise in the price of lobster. Simultaneously, lobster fisherman produce more lobster during the summer peak harvest time, when it is cheaper to harvest lobster, representing a rightwards shift of the SUPPLY curve of lobster from S1 to S2. Other things equal, this leads to a fall in the price. Given the simultaneous rightward shifts of both the demand and supply curves, the equilibrium changes from E1 to E2. The fall in price indicates that the rightward shift of the supply cure exceeds the rightward shift of the demand curve.

Chapter 8 14. The accompanying diagram shows the inflation rate in the United Kingdom from 1980 to 2016. b. Policy makers in the UK react forcefully when the inflation rate rises above a target rate of 2%. Why would it be harmful if inflation rose from 0.7% (the level in 2016) to, say, a level of 5%?

There is not much evidence that 5% of inflation would do a great deal of harm to the economy. However, policy makers in the UK usually move forcefully to bring inflation back to 2%, whenever it rises above this level because experience has shown that disinflation is very difficult and costly, once a higher rate of inflation has become all established in the economy.

Chapter 3 8. The following table shows a demand schedule for a normal good. Price. Quantity Demanded 23. 70 21. 90 19. 110 17. 130 b. Now suppose that the good is an inferior good. Would the demand schedule still be valid for an inferior good?

This demand schedule is valid for an inferior good because inferior goods obey the law of demands: a rise in the prices leads to a fall in the quantity demanded, other things equal

Chapter 3 3. The market for many goods changes in predictable ways according to the time of year, in response to events such as holidays, vacation times, seasonal changes in production, and so on. Using supply and demand, explain the change in price in each of the following cases. Note that supply and demand may shift simultaneously. b. The price of Christmas tree is lower after Christmas than before but fewer trees are sold.

This is a leftward shift in the demand curve for the Christmas trees after Christmas from D1 to D2, as fewer consumers want Christmas trees at any given price. The supply curve dose not shift; the reduction in the quantity of trees supplied is a movement along the SUPPLY curve. This leads to a fall in the equilibrium price and quantity, as the equilibrium changes from E1 to E2.

Chapter 8 10. In the following examples, is inflation creating winners and losers at no net cost to the economy or is inflation imposing a net cost on the economy? if a net cost is being imposed, which type of cost is involved? c. Hector Homeowner has a mortgage with a fixed nominal 6% interest rate that he took out five years ago. Over the year, the inflation rate has crept up unexpectedly to its presents level of 7%

This is an example of inflation creating winners and losers. As inflation rate creeps up unexpectedly, the real value of the funds that Hector says to the mortgage company falls. So Hector us better off as inflation increases, and the lender of his mortgage is worse off. At present, the real interest rate on his mortgage is negative: 6%- 7%= -1%. So he is now financing his house virtually cost- free

Chapter 8 10. In the following examples, is inflation creating winners and losers at no net cost to the economy or is inflation imposing a net cost on the economy? if a net cost is being imposed, which type of cost is involved? d. In response to unexpectedly high inflation, the manager of Cozy Cottages of Cape Cod must reprint and resend expensive color brochures correcting the price of rentals this season.

This is an example of menu costs, a net cost of inflation to the economy. The manager of Cozy Cottages of Cape Cod must reprint and resend an expensive brochure because it is necessary to raise the price of rentals due to unexpectedly high inflation

Chapter 8 10. In the following examples, is inflation creating winners and losers at no net cost to the economy or is inflation imposing a net cost on the economy? if a net cost is being imposed, which type of cost is involved? a. When inflation is expected to be high, workers get paid more frequently and make more trips to the bank

This is an example of the effect of shore- leather costs, a net cost of inflation to the economy. Workers spend valuable resources going to the bank more frequently, firms spend valuable resources (such as bookkeepers' time) in saying workers more frequently, and banks spend more resources in processing the greater volume of transactions.

Chapter 8 10. In the following examples, is inflation creating winners and losers at no net cost to the economy or is inflation imposing a net cost on the economy? if a net cost is being imposed, which type of cost is involved? b. Lanwei is reimbursed by her company for her work- related travel expenses. Sometimes, however, the company takes a long time to reimburse her. So when inflation is high, she is less willing to travel for her job.

This is an example of unit- of- accounts costs. A dollar when Lanwei spends it on a work related expense, is worth more than a dollar she receives much later in reimbursement from her company. Because she is less willing to travel for her job, there is a net cost to the economy of her forgone output.

Chapter 1 8. Which of the following situations describes an equilibrium ? Which does not? If the situation does not describe an equilibrium, what would an equilibrium look like? a. Many people regularly comment from the suburbs to downtown Pleasantville. Due to traffic congestion, the trip takes 30 mins via highway but only 15 mins via side streets

This is not an equilibrium. Assume that all people care about is the travel time to work (not, for instance, how many turns they need to make or what the scenery is like). Some people could be better off using the side streets, which would cut down their travel time. Eventually, as the situation moves to equilibrium (that is, as more people use the side streets), travel times on highway and along the side streets will equalize.

Chapter 1 9. For each of the following, explain whether you think the situation is efficient or not. If it is not efficient, why not? What actions would make it efficient? a. Electricity is included in the rent at your dorm. Some residents in your dorm leave lights, computers, and appliances on when they are not in their rooms

This is not efficient. If the lights were turned off, some students could be made better off without making other students worse off because the college would save money on electricity that it could spend on student programs. By leaving lights and appliances on when leaving their rooms, residents do not take into account the negative side effect they impose on their college- the higher cost of electricity. If students were forced to pay their own individual electricity costs (that is, if they fully took into account the cost of their actions), then they would turn the lights and appliances off when leaving their rooms. This situation would be efficient.

Chapter 1 9. For each of the following, explain whether you think the situation is efficient or not. If it is not efficient, why not? What actions would make it efficient? b. Although they cost the same amount to prepare, the cafeteria in your dorm consistently provides too many dishes that diners don't like, such as tofu casserole, and too few dishes that diners do like, such as roast turkey with dressing.

This is not efficient. Instead of serving dishes that many that many diner do not like, the cafeteria should serve more of the equal- cost dishes that diner do like. That way, some students could be made better off without other students being made worse off.

Chapter 1 8. Which of the following situations describes an equilibrium ? Which does not? If the situation does not describe an equilibrium, what would an equilibrium look like? b. At the intersection of Main and Broadway are two gas stations. One station charges $3.00 per gallon for regular gas and the other charges $2.85 per gallon. Customers can get service immediately at the first station but must wait in a long line at the second.

This might be an equilibrium. Those who buy gas at the first station would be worse off by buying gas at the second if the value of their time spent waiting exceeded the savings at the pump: they would save 15 cents per gallon but would incur the opportunity cost of waiting exceeded the savings at the pump: they would save 15 cents per gallon but would incur the opportunity cost of waiting in a long line. You should expect very busy people (a high opportunity cost of time) to buy gas at the first station. Those who buy gas at the second station might be worse off by buying gas at the first: they would not have to wait in line but would pay 15 cents more per gallon. You should expect people with a lot of free time (a low opportunity cost of time) to buy gas at the second station.

Chapter 1 11. Governments often adopt certain policies in order to promote desired behavior among their citizens, For each of the following policies, determine what the incentive is and what behaviors the governments wishes to promote. In each case, why do you think that the government might wish to change people's behavior, rather than allow their actions to be solely determined by individual choice. a. A tax of $5 per pack is imposed on cigarettes.

This policy creates an incentive to smoke less by making a pack of cigarettes more costly. This is exactly what policy makers wish to promote. Cigarettes have undesirable side effects on other people, which smokers do no (or only insufficiently) take into account. One is that other people have to breathe in second- hand smoke. Another is the cost of health care: when smokers who need treatment for lung cancer are covered by Medicare or Medicaid, the rest of society has to foot the bill. Since individuals do not take these costs (costs that arise for other people) into accounts in deciding whether or not (or how much) to smoke, the amount of cigarettes smoked will be insufficiently high. The tax is a way to make people take these costs into account in deciding whether or not to smoke.

Chapter 1 11. Governments often adopt certain policies in order to promote desired behavior among their citizens, For each of the following policies, determine what the incentive is and what behaviors the governments wishes to promote. In each case, why do you think that the government might wish to change people's behavior, rather than allow their actions to be solely determined by individual choice. b. The government pays parents $100 when their child is vaccinated for measles.

This policy creates an inceptive to have children vaccinated: it increases the benefit to parents from vaccination of their children. Getting vaccinated means not only that a child will not contract the measles but also that he or she cannot pass the measles on to other children. That is, there is a side effect for other people (their children get sick less often) that parents do not take into account in their decision of whether or not to have their own child vaccinated. The subsidy is a way to make individuals take into account in their decisions the benefit they can create for other people.

Chapter 1 11. Governments often adopt certain policies in order to promote desired behavior among their citizens, For each of the following policies, determine what the incentive is and what behaviors the governments wishes to promote. In each case, why do you think that the government might wish to change people's behavior, rather than allow their actions to be solely determined by individual choice. c. The government pays college students to tutor children from low-income families.

This policy creates incentives for low- incomes families to get college students to tutor their children, since getting a tutor is now cheaper or free. This results in better performance in school by these children and higher levels of educational attainment. this has positive side effects for the rest of society: the better children do in school, the more productive, happier, and healthier citizens they will be.

Chapter 3 17. Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his "Blue Period." Picasso is now dead, and all of his Blue Period works are currently on display in museums and private galleries throughout Europe and the United States. c. Suppose the rich art collectors decide that it is essential to acquire Picasso Blue Period art for they collections. Show the impact of this on the market for these paintings.

This results in a rightward shift of a demand curve for these works from D1 to D2, and the equilibrium changes from E1 to E2. But since no more works are available, this increases in demand simply results in an increase in the equilibrium price.

Chapter 3 7. Find the flaws in reasoning in the following statements, paying particular attention to the distinction between shifts of and movements along the supply and demand curves. Draw a diagram to illustrate what actually happens in each situation. a. "A technological innovation that lowers the cost of producing a good might seem at first to results in a reduction in the price of the good of consumers. But a fall in the price will increase demand for the good, and higher demand will send the price up again. It is not certain, therefore, that an innovation will really reduce price in the end."

This statement confuses a shift of a curve with a movement along a curve. A technological innovation lowers the costs of producing the good, leading producers to offer more of the good at any given price. This represented by a rightward shift of the supply curve from S1 to S2. As a result, the equilibrium price falls and the equilibrium quantity rises. The statement, "but a fall in price will increase demand fro the good, and higher demand will send the price up again" is wrong for the following reasons - A fall in price does increases quantity demanded and leads to an increase in the equilibrium quantity as one moves down along the demand curve, but it does not lead to an increase in demand- a rightward shift of the demand curve- and therefore does not cause the price to go up again

Chapter 1 11. Governments often adopt certain policies in order to promote desired behavior among their citizens, For each of the following policies, determine what the incentive is and what behaviors the governments wishes to promote. In each case, why do you think that the government might wish to change people's behavior, rather than allow their actions to be solely determined by individual choice. d. The government imposes a tax on the amount of air pollution that a company discharges

This tax creates the incentive to emit fewer air pollutants. Pollution has negative side effect for others: it decreases air quality (for instance, it contributes to the formation of ozone smog) and results in a variety of health complications (for instance, asthma). In deciding how much pollution to discharge, a company does not take these negative side effects sufficiently into account. The tax is a way to make pollution more expensive, that is, to make the company face the cost it imposes on others.

Chapter 7 4. The small economy of Pizzania produces three goods (breads, cheese, and pizza), each produced by a separate company. The bread and cheese companies produce all inputs they need to make bread and cheese respectively. The pizza company uses the bread and cheese from the other companies to make its pizzas. All three companies employ labor to help produce their goods, and the difference between the value of goods sole and the sum of labor and inout costs is the firm's profit. The accompanying table summarizes the activities of the three companies when all the bread and cheese produced are sold to the pizza company as inputs in the production of pizzas. Bread company. Cheese company. Pizza Comp. Cost of inputs 0$. 0$. 50$(bread), 35 Wages. 15. 20. 75 Value of output. 50 35. 200 c. Calculate GDP as factor income.

To calculate GDP as factor income, we need to sum factor income (wages and profits) for each firm. For the bread company, factor income is $50: labor earns $15 and profit is $35. For the cheese company, factor income is $35: labor earns $20 and profit is $15. For the pizza company, factor income is $115: labor earns $75 and profit is $40 ($200- $75- $50- $35). factor income is $200 ($50+ $35+ $115).

Chapter 7 4. The small economy of Pizzania produces three goods (breads, cheese, and pizza), each produced by a separate company. The bread and cheese companies produce all inputs they need to make bread and cheese respectively. The pizza company uses the bread and cheese from the other companies to make its pizzas. All three companies employ labor to help produce their goods, and the difference between the value of goods sole and the sum of labor and inout costs is the firm's profit. The accompanying table summarizes the activities of the three companies when all the bread and cheese produced are sold to the pizza company as inputs in the production of pizzas. Bread company. Cheese company. Pizza Comp. Cost of inputs 0$. 0$. 50$(bread), $35 (cheese) Wages. $15 $20 $75 Value of output. $50 $35 $200 a. Calculate GDP as the value added in production.

To calculate GDP as the value added in production, we need to sum all value added (value of output less input costs) for each company. Value added in the bread company is $50: in the cheese company, $35 and in the pizza coma, $115 ($200-$50- $35). The total value added in production is $200 ($50+ $35+ $115).

Chapter 7 4. The small economy of Pizzania produces three goods (breads, cheese, and pizza), each produced by a separate company. The bread and cheese companies produce all inputs they need to make bread and cheese respectively. The pizza company uses the bread and cheese from the other companies to make its pizzas. All three companies employ labor to help produce their goods, and the difference between the value of goods sole and the sum of labor and inout costs is the firm's profit. The accompanying table summarizes the activities of the three companies when all the bread and cheese produced are sold to the pizza company as inputs in the production of pizzas. Bread company. Cheese company. Pizza Comp. Cost of inputs 0$. 0$. 50$(bread), 35 Wages. 15. 20. 75 Value of output. 50 35. 200 b. Calculate GDP as spending on final goods and services.

To caudate GDP as spending on final goods and services, we only need to estimate the value of pizzas because all bread and cheese produced are intermediate goods used in the production of pizzas. Spending on final goods and services is $200.

Chapter 7 9. Eastland College is concerned about the rising price of textbooks that students must purchase. To better identify the increase in the price of textbooks, the dean asks you, the Economics Department's star student, to create an index of textbook prices. The average student purchases three English, two math, and four economics textbooks per year. The prices of these books are given the accompanying table. 2014 2015 2016 English textbook. $100 $110 $114 Math textbook. $140 $144 $148 Economics textbooks. $160 $180 $200 d. Using 2015 as a base year, create a price index for these books for all years.

To create an index of textbook prices, you must first calculate the cost of the market basket (three English, two math, and four economics textbooks) in each of the three years; then normalize it by dividing the cost of the market basket in a given year by the cost of the market basket in the base period; and then multiply by 100 to get an index value (base period of 2015= 100) Cost of textbooks in 2014= (3x $100) + (2 x $140) + (4 x $160)- $1,220 Cost of textbooks in 2015= (3 x $110) + (2 x $144) + (4 x $180)= $1,338 Cost of textbooks in 2016= (3 x $114) + (2 x $148) + (4 x $200)= $1,438 Index value for 2014= ($1,220/ $1,338) x 100= 91.2 Index value for 2015= ($1,338/ $1,338) x 100= 100 Index value for 2016= ($1,438/ $1,338) x 100= 107.5

Chapter 1 2. Describe some of the opportunity costs when you decide to do the following. b. Watch a movie instead of studying for an exam

Watching the movie gives you certain benefit, but allocating your time (a scare resource) to watching the movie involves the opportunity cost of not being able study for exam. As a result, you will likely get a lower grade on the exam- and all that implies.

Chapter 7 6. Which of the following transaction will included in GDP for United States? a. Coca- Cola builds a new bottling plant in the United States.

When Coca- Cola builds a new bottling plant, it is investment spending and included GDP.

Chapter 7 6. Which of the following transaction will included in GDP for United States? e. An American buys a bottle of French perfume in Tusla.

When an American buys a bottle of French perfume, it is a consumption expenditure as measured by GDP. But since it does not represent production in the United States of either perfume manufacture or perfume retailing, it is also deducted from GDP as an import. The net effect of the transaction does not change GDP in the United States.

Chapter 7 6. Which of the following transaction will included in GDP for United States? c. Ms. Moneybags buys an existing share of Disney stock.

When an individual buys an existing share of stock, the transaction is not included in GDP because there is no production

Chapter 1 4. Use the concept of opportunity cost to explain the following b. More people choose to get a graduate degrees when the job market is poor

When the economy is slow, the opportunity of cost of people's time is also lower: the wages they could earn by working loner hours are lower than when the economy is booming. As a result, the opportunity cost of spending time doing your own repairs is lower- so more people will decide to do their own repairs.

Chapter 1 6. This morning you made the following individual choices: you brought a bagel and coffee at the local café, you drove to school in your car during rush hour, and you typed your course notes for your roommate because she was texting in class- in return for which she will do your laundry for a month. -For each action, describe how your individual choices interacted with the individual choices made by others. Were other people left better off or worse off by your choices in each case?

When you bought the bagel and coffee, you paid a price for them. You would not have bought that breakfast if your enjoyment of it (your welfare) had not been greater than the price you paid. Similarly, the café owner would not have sold you the bagel and coffee if the price he received from you were less than the cost to him of making them. This is an example of how everybody gains from trade: both you and café owner are better off. When you chose to drive your car during the rush hour, you added to congestion on the road. Your choice had a side effect for other motorists: your driving slowed everybody else down just a little bit more. Your choice made other motorists worse off. Typing your roommate's term paper in exchange for her doing your laundry is another example of the gains that come from trade. Both of you voluntarily agreed to specialize in task that each is comparatively better at because you expected to gain from this interaction. Your choice made both you and your roommate better off.

Chapter 3 8. The following table shows a demand schedule for a normal good. Price. Quantity Demanded 23. 70 21. 90 19. 110 17. 130 c. Lastly, assume you do not know whether the good is normal or inferior. Devise an experiment that would allow you to determine which one it was. Explain.

You can determine whether a good is normal good or inferior only by examining what happens to the demand after consumers' income changes. A rise in income leads to an increase in demand for a normal good and a decrease in demand for an inferior good. A fall in income leads to a decrease in demand for a normal good and an increase in demand for an inferior good. So a suitable experiment would be to raise consumers' incomes: if the quantity demanded at any given price rises, the good is normal; if the quantity demanded at any given price falls, the good is inferior. If you experiment by reducing consumers' incomes, the results are reversed for the two types of goods.