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101/11/11 經濟作業
名稱	經濟作業
日期	101/11/11
課程名稱	經濟

Answer to Chapter 3 Checkpoint (Exercises)
1. The people of Foodland have 40 hours of labor a day to bake pizza and bread. The table shows the maximum quantities of either pizza or bread that Foodland can produce with different quantities of labor. Can Foodland produce 30 pizzas and 30 loaves of bread a day? If it can, is this output efficient, do the people on Foodland face a tradeoff, and what is the opportunity cost of producing an additional pizza?
Producing 30 pizzas and 30 loaves of bread is attainable and efficient. The opportunity cost of one pizza is 1 loaf of bread.
There is a tradeoff because the nation is operating on its production possibilities frontier. As a result, if the production of pizza increases, less bread can be produced and if the production of bread increases, less pizza can be produced.
For the nation to produce 10 more pizzas requires 10 more hours of labor devoted to making pizza, which means that it must give up 10 loaves of bread. The opportunity cost of another pizza equals the loaves of bread forgone, 10, divided by the pizzas obtained, 10, or 10  10, or 1 loaf of bread per pizza.
2. Figure 3.3 illustrates the PPF in each of three economies: Atlantis, Bikini, and Cyber. Atlantis has no economic growth, Bikini is growing slowly and Cyber is growing rapidly. Mark on the graph three points:
• A point that shows the situation in Atlantis—label this point A.
This point is marked in Figure 3.4. At this production point, Atlantis produces no capital goods.
• A point that shows the situation in Bikini—label this point B.
This point is marked in Figure 3.4. Bikini produces some capital goods.
• A point that shows the situation in Cyber—label this point C.
This point is marked in Figure 3.4. Cyber produces a large quantity of capital goods.
What is the cost of the economic growth in Bikini and Cyber?
The opportunity cost of economic growth in Bikini and Cyber is the forgone production of (current) consumption goods. As the economy produces more capital goods and thereby grows more rapidly, it forgoes more consumption goods.
3. A farm grows wheat and produces pigs. The opportunity cost of producing each of these products increases as more of it is produced. If the farm adopts a new technology, which allows it to use fewer resources to fatten pigs, explain how the farm’s production possibilities will change and the effect on the opportunity cost of producing a ton of wheat.
Figure 3.5 shows the new technology production possibilities frontier shifting outward from the PPF labeled “Initial PPF” to the production possibilities frontier labeled “New PPF.” The new technology has changed the opportunity cost of producing a ton of wheat. The opportunity cost of producing a ton of wheat has increased because now more pigs must be forgone to produce a ton of wheat. In the figure, along the initial PPF the first ton of wheat has an opportunity cost of 4 pigs (from 50 pigs to 46 pigs) while along the new PPF the first ton of wheat has an opportunity cost of 7 pigs (from 80 pigs to 73 pigs).
4. The table shows a farm’s production possibilities. If the farm uses its resources efficiently, what is the opportunity cost of an increase in beef production from 300 pounds to 500 pounds a year? Explain your answer.
If the farm expands beef production from 300 pounds to 500 pounds, corn production decreases from 200 to 100 bushels. The opportunity cost of the additional 200 pounds of beef is 100 bushels of corn, or ½ of a bushel of corn per pound of beef.
5. In Mexico, an average worker can produce 3 cars a year or 3 tons of steel a year. In Canada, an average worker can produce 10 cars a year or 6 tons of steel a year. Which country has an absolute advantage? Can Canada and Mexico gain from trading with each other? If they can gain, which good does Canada sell to Mexico?
Canada has an absolute advantage in producing cars and steel because each worker in Canada can produce more cars and more steel than each worker in Mexico. Canada and Mexico can gain from trade. The opportunity cost of producing a car is lower in Canada than in Mexico, so Canada exports cars to Mexico. In exchange, the opportunity cost of producing steel is lower in Mexico so Canada imports steel from Mexico.
6. In Africa, HIV-AIDS has decreased the number of healthy people of working age and it has brought a large increase in the health-care budgets of governments. Illustrate and explain the effects of HIV-AIDS on the PPFs of African economies. Has HIV-AIDS increased the opportunity costs of some goods and services in African economies?
In some African nations, upwards of 35 percent of the population is infected with either HIV or AIDS. In these nations the production possibilities frontier has shifted inward as their population—and so their labor force—has decreased because of deaths. Figure 3.6 illustrates such an inward shift of the PPF.
The spread of AIDS has increased the opportunity cost of health care because. Presuming that these countries are producing on their PPFs, as more health care services are produced, the opportunity cost of health care increases.
c. Could HIV-AIDS have decreased the opportunity costs of some goods and services in African economies?
Presuming these nations are operating on their PPFs, more health care services and fewer other goods and services are being produced. As fewer of the other goods and services are produced, the opportunity cost of additional units of these other items decreases.
Corn, Soybeans, …
Corn production is forecast at 13.1 billion bushels, up 24 percent from last year ... . Based on conditions as of August 1, yields are expected to average 152.8 bushels per acre, up 3.7 bushels from last year. …The expected shift from planting soybeans to corn this year is bigger than expected. On June 29, 2007, the USDA estimated that 64.1 million acres of soybeans will be planted this spring, down 15 percent from a year ago… . On August 10, 2007, the USDA said that there will be 220 million bushels of soybeans at the end of the 2007-2008 season, down from 575 million.
USDA Crop Production, August 10, 2007
Use this information to answer Exercises 7 and 8.
7. Calculate the opportunity cost of a bushel of corn in terms of soybeans.
The opportunity cost of growing more corn is equal to the loss of soybeans divided by the increase in corn. The loss of soybeans is 355 million bushels (575 million  220 million). Corn production, equal to 13.1 billion bushels, was up 24 percent from the previous year, so corn production the previous year was 10.6 billion bushels (10.6 billion bushels  1.24 = 13.1 billion bushels). So corn production increased 2.5 billion bushels (13.1 billion  10.6 billion). The opportunity cost of a bushel of corn in terms of soybeans = (355 million bushels of soybeans)  (2.5 billion bushels of corn), which is 0.14 bushels of soybean per bushel of corn.
8. As farmers have switched from soybean to corn, has the opportunity cost of a bushel of corn increased or decreased? Explain your answer.
As more corn has been produced, the law of increasing opportunity cost tells us that the opportunity cost of a additional bushels of corn has increased.
 
Answer to Chapter 4 Checkpoint (Exercises)
1. The following events occur:
• A new technology that reduces the time it takes to manufacture a pair of jeans becomes available.
• The price of the cloth (denim) used to make jeans falls.
• The wage rate paid to garment workers increases.
• The price of a denim skirt doubles.
• People’s incomes increase.
Explain how each event changes the demand for or supply of jeans.
• The new technology that cuts the time to manufacture a pair of jeans increases the supply of jeans.
• The fall in the price of the cloth, a resource used in the production of jeans, increases the supply of jeans.
• An increase in the wage rate paid garment workers is a rise in the price of a resource used to produce jeans, so the supply of jeans decreases.
• Denim skirts and denim jeans are substitutes in production, so a rise in the price of a denim skirt decreases the supply of jeans.
• Jeans are likely a normal good, so an increase in people’s incomes increases the demand for jeans.
2. What is the effect on the equilibrium price and equilibrium quantity of orange juice if the price of apple juice decreases and the wage rate paid to orange grove workers increases?
Apple juice and orange juice are substitutes for consumers, so the fall in the price of apple juice decreases the demand for orange juice. The demand curve for orange juice shifts leftward. The increase in the wage rate paid to orange grove workers raises the cost of producing orange juice. The supply of orange juice decreases and the supply curve of orange juice shifts leftward. The net effect of these events decreases the equilibrium quantity but has an undetermined effect on equilibrium price. If supply decreases by more than the demand, the shift in the supply curve is greater than the shift in the demand curve and the equilibrium price rises. If demand decreases more than the supply, the shift in the demand curve is greater than the shift in the supply curve and the equilibrium price falls.
3. What is the effect on the equilibrium in the orange juice market if orange juice becomes more popular and a cheaper robot is used to pick oranges?
Because orange juice becomes more popular, demand increases and the demand curve for orange juice shifts rightward. The cheaper picking robot lowers the production costs of orange juice, so the supply of orange juice increases and the supply curve of orange juice shifts rightward. The equilibrium quantity increases. But the effect on the equilibrium price is ambiguous. If the change in supply is greater than the change in demand, the shift in the supply curve is greater than the shift in the demand curve and the equilibrium price falls. If the change in demand is greater than the change in supply, the shift in the demand curve is greater than the shift in the supply curve and the equilibrium price rises.
The table shows the demand and supply schedules for greeting cards. Use the table to answer exercises 4 and 5.
4. If the price of a greeting card is $7.00, describe the situation in the market. Explain how market equilibrium is restored.
At the price of $5.00, the quantity supplied equals the quantity demanded. At a price of $7.00, the quantity demanded is 120 greeting cards and the quantity supplied is 160 greeting cards. There is a surplus of 40 greeting cards a week and the price falls. As the falls, the quantity demanded increases, the quantity supplied decreases, and the surplus decreases. The price falls until the surplus disappears. The market equilibrium occurs at a price of $5.00 and 140 cards a week so the price falls to $5.00 a greeting card.
5. If new audio greeting message (sent via cell phone) becomes popular and at the same time the cost of producing greeting cards falls, set out the three-step process of analysis and show on a graph the adjustment process. How does the price and quantity of greeting cards change?
The new audio greeting message affects the demand for greeting cards. The demand for greeting cards decreases because greeting cards and audio greeting cards are substitutes. The demand curve for greeting cards pads shifts leftward, from D0 to D1 in Figure 4.6. Simultaneously the fall in the cost of producing a greeting card affects the supply. The fall in the cost of producing greeting cards increases the supply and the supply curve shifts rightward, from S0 to S1 in Figure 4.6. At the initial price of a greeting card, $5.00 in Figure 4.6, there is a surplus of 60 greeting cards per week. The surplus forces the price lower, so the equilibrium price of a greeting card falls, to $2.00 in the figure. The effect on the quantity of greeting cards, however, is ambiguous. If the magnitude of the decrease in demand exceeds that of the increase in supply, the quantity of greeting cards decreases. If the magnitude of the increase in supply exceeds that of the decrease in demand, the quantity increases. And, if the magnitudes of the changes are the same, as in Figure 4.6, the quantity of greeting cards does not change.
6. During 1994, Brazil experienced severe frosts which wiped out many coffee plantations. New plantations in Brazil began to produce coffee beans in 1999. During the early 2000s, countries such as Vietnam started to produce coffee beans and coffee shops such as Starbucks started to spring up across Europe. Use these events to explain why the price of coffee beans rose during the late 1990s, fell during the early 2000s, and rose again after 2003.
The severe frosts that wiped out the plantations decreased the supply of coffee beans so the supply curve shifted leftward. The demand did not change, so the demand curve did not shift. As a result of the decrease in supply, the price of coffee beans rose in the late 1990s. Then when the new plantations started to produce coffee beans, the supply of coffee beans increased and the supply curve shifted (back) rightward. The demand still did not change, so the demand curve did not shift. As a result of the increase in supply, the price of coffee beans fell during the early 2000s.
In the early 2000s, the expansion of nations producing coffee beans increased the supply of coffee beans so the supply curve shifted rightward. The expansion of coffee shops such as Starbucks increased the demand for coffee beans so the demand curve shifted rightward. The price rose after the early 2000s because during these years the demand for coffee beans increased by more than the supply.
Italians Call for 1-Day Pasta Strike
Be it fettuccine, linguine or spaghetti, Italians will soon be paying up to 20 percent more for their pasta.
Consumer groups are calling for a one-day pasta strike Thursday--not against eating it, but against buying it--to protest the increase. But producers say the strike targeting Italy’s national dish is wrongheaded because the price is linked to a global rise in the cost of grain. …
[T]he cost of a pound of durum flour has risen in just the last two months from 16 cents to 28 cents … and durum flour constitutes 70 percent of the cost of producing pasta.
The Associated Press, The New York Times, September 12, 2007
Use this information to answer Exercises 7 and 8.
7. Show on a graph the effect of the rise in the price of durum flour on the market price of pasta.
The increase in the price of durum flour boosts the cost of making pasta. The higher cost decreases the supply of pasta. Figure 4.7, in which the supply curve of pasta shifts leftward, illustrates the decrease in supply. As a result, the equilibrium price of pasta rises, as shown in Figure 4.7 by the rise in price from $1.30 per pound to $1.50 per pound. Additionally, the equilibrium quantity of pasta decreases, in the figure from 140 tons per week to 120 tons per week.
8. Suppose that as a result of the one day strike supermarkets did not raise the price of pasta next month as predicted. Describe the situation in the market.
If supermarkets did not raise the price, there would be a shortage of pasta. Producers, whose costs have risen, will decrease the supply. At the lower, initial price of pasta, the quantity of pasta supplied would be less than the quantity demanded, so a shortage would result.
 
Answer to Chapter 5 Checkpoint (Exercises)
1. When heavy rain ruined the banana crop in Central America, the price of bananas rose from $1 a pound to $2 a pound. Banana sellers sold fewer bananas but their total revenue remained unchanged. By how much did the quantity of bananas demanded change? Is the demand for bananas from Central America elastic or inelastic?
Because the total revenue did not change, the percentage change in bananas demanded equals the percentage increase in price. Using the midpoint method, the percentage increase in the price equals ($1.00  $1.50) = 66.67 percent. So the quantity of bananas demanded decreased by 66.67 percent. The demand for bananas is unit elastic because the percentage increase in the price equals the percentage decrease in the quantity of bananas demanded.
In Pioneer Ville, the price elasticity of demand for bus rides is 0.5, the income elasticity of demand for bus rides is 0.1, and the cross elasticity of demand for bus rides with respect to gasoline is 0.2. Use this information to answer Exercises 2, 3, and 4.
2. Is the demand for bus rides elastic or inelastic with respect to the price of a bus ride? Why? Would an increase in bus fares increase the bus company’s total revenue? Explain your answer.
The price elasticity of demand for bus rides is inelastic because the price elasticity of demand is less than 1.0. When the elasticity is less than 1.0, an increase in the price of a bus fare brings about a percentage decrease in the quantity of bus rides demanded that is smaller than the percentage increase in price.
An increase in the price of bus fares increases the bus company’s total revenue. Because the demand is inelastic, an increase in the price of the fare leads to a smaller percentage decrease in the quantity of bus rides demanded than the percentage increase in the fare. As a result, total revenue increases.
3. Describe the relationship between bus rides and gasoline. If the price of gasoline increases by 10 percent with no change in the price of a bus ride, how will the number of bus rides change?
Bus rides and gasoline are substitutes. As the price of gasoline increases, it becomes more expensive to drive your car and you might decide to take a bus to work. The cross elasticity of demand between bus rides and gasoline is positive, indicating that the two are substitutes.
The cross elasticity of demand for bus rides with respect to gasoline is 0.2, so bus rides increase by (10 percent)  (0.2), which is 2 percent.
4. If incomes increase by 5 percent with no change in prices, how will the number of bus rides change? Is a bus ride a normal good or an inferior good? Why? Are bus rides and gasoline substitutes or complements? Why?
The income elasticity of demand is 0.1, so bus rides decrease by (0.1)  (5 percent), which is 0.5 percent. In Pioneer Ville, a bus ride is an inferior good because the income elasticity of demand is negative. As income increases, fewer bus rides are demanded. In Pioneer Ville, bus rides and gasoline are substitutes because the cross elasticity of demand is positive. As the price of gas increases, the quantity of bus rides demanded increases.
5. The income elasticity of demand for haircuts is 1.5, and the income elasticity of demand for food is 1.4. You take a weekend job, and the income you have to spend on food and haircuts doubles. If the prices of food and haircuts remain the same, will you double your expenditure on haircuts and double your expenditure on food? Explain why or why not.
Your expenditure on haircuts and food will more than double because the income elasticity of demand for both exceeds 1.0. Only if the income elasticity of demand equals 1.0 will the expenditure on a good or service change proportionally with income.
6. Drought cuts the quantity of wheat grown by 2 percent. If the price elasticity of demand for wheat is 0.5, by how much will the price of wheat rise? If pasta makers estimate that this change in the price of wheat will increase the price of pasta by 25 percent and decrease the quantity demanded of pasta by 8 percent, what is the pasta makers’ estimate of the price elasticity of demand for pasta? If pasta sauce makers estimate that, with the change in the price of pasta, the quantity of pasta sauce demanded will decrease by 5 percent, what is the pasta sauce makers’ estimate of the cross elasticity of demand for pasta sauce with respect to the price of pasta?
Rearranging the price elasticity of demand formula shows that the percentage change in the price of wheat equals the percentage change in the quantity demanded divided by the price elasticity of demand. So the percentage change in the price of wheat is (2 percent)  (0.5), which is 4 percent.
The estimated price elasticity of demand for pasta is equal to the percentage change in the quantity demanded of pasta divided by the estimated change in the price of pasta. So the estimated price elasticity of demand for pasta is (8 percent)  (25 percent), which is 0.32.
The estimated cross elasticity of demand for pasta sauce with respect to the price of pasta is equal to the percentage change in the quantity demanded of pasta sauce divided by the estimated change in the price of pasta. So the estimated cross elasticity of demand for pasta sauce with respect to the price of pasta is (5 percent)  (25 percent), which is 0.2.
Why the Tepid Response to Higher Gasoline Prices?
Most studies find that … a 10 percent increase in gas prices … is associated with a 1 to 2 percent drop in the quantity of gasoline purchased ..
From September 2004 to September 2005, the average retail gasoline price jumped to $2.90 a gallon from $1.87 ... yet gasoline consumption dropped only 3.5 percent ...
The New York Times, October 13, 2005
Use this information to answer Exercises 7 and 8.
7. Calculate is the price elasticity of demand for gasoline implied by what most studies have found.
The price elasticity of demand equals the percentage change in the quantity demanded divided by the percentage change in price. So for most studies, the price elasticity of demand equals 0.1 or 0.2.
8. Compare the elasticity implied by the data for the year to September 2005 with that implied by most studies. What might explain the difference?
From September 2004 to September 2005, the price of gasoline increased by 43 percent (The percentage change equals ($2.90  $1.87)  $2.385, where 2.385 is the average of the September 2004 and September 2005 price). The quantity demanded decreased by 3.5 percent, so the price elasticity of demand over this year was 3.5 percent  43 percent, which is 0.08. So the price elasticity of demand of demand for gasoline calculated over this year is slightly smaller than the conventional range. The price elasticity of demand of demand over the year is probably smaller than normal because other factors also changed. In particular, income increased. Gasoline is a normal good, so the increase in income increased the demand for gasoline. In turn, the increase in demand for gasoline increased the equilibrium quantity of gasoline. So the “usual” decrease in the quantity demanded from the higher price was probably offset somewhat by the increase in demand from the higher income.
 
Answer to Chapter 6 Checkpoint (Exercises)
The table shows the demand schedule for haircuts and the supply schedule for haircuts. Use the table to answer Exercises 1 and 2.
1. What is the quantity of haircuts bought, the value of a haircut, and the total surplus from haircuts?
The equilibrium quantity of haircuts is 40 per day. The value of the 40th haircut is $30. The total surplus is equal to the sum of the consumer surplus plus the producer surplus. Figure 6.5 makes calculating the consumer surplus and producer surplus easier. In the figure, the consumer surplus is equal to the area of the dark grey triangle. The consumer surplus equals 1/2  40 haircuts  $20 per haircut), or $400. The producer surplus is equal to the lighter grey area which is also $400.
2. Suppose that all salons agree to charge $40 a haircut. What is the change in consumer surplus, the change in producer surplus and the deadweight loss created?
If the price is $40 a haircut, the quantity of haircuts is 20. The consumer surplus in this case is $100, so the consumer surplus has decreased by $300. The producer surplus is $600, so the producer surplus has increased by $100. The deadweight loss is $200. Note that the deadweight loss is equal to the gain in producer surplus minus the loss in consumer surplus.
3. The winner of the men’s or women’s tennis singles at the U.S. Open is paid twice as much as the runner-up, but it takes two to have a singles final. Is this compensation arrangement efficient? Is it fair? Explain why it might illustrate the big tradeoff.
The compensation arrangement is efficient because all the participants play their hardest in an attempt to win the prize. As a result, the quality of play is extremely high and the “amount” of tennis produced is large. The fair results approach to fairness asserts that the compensation scheme is unfair because income is not equally distributed. The fair rules approach asserts that the scheme is fair because the players voluntarily enter the tournament and the symmetry principle is not violated. This arrangement might illustrate the big tradeoff because if the winner was paid less and the loser was paid more, both the ultimate winner and the ultimate loser have incentives to play less hard, that is, they may decrease the amount of tennis they produce.
In California, farmers pay a lower price for water than do city residents. Use this information to answer Exercises 4, 5, and 6.
4. What is this method of allocation of water resources? Is this allocation of water efficient? Is this use of scarce water fair? Why or why not?
This method of allocation is based on personal characteristics. Two otherwise identical people pay different prices for water if one is a farmer and the other is not.
Water use is probably not efficient. Because farmers face a lower price, the quantity of water they consume is greater than the quantity of water consumed by otherwise identical non-farmers. As a result, the marginal benefit of farmers is less than the marginal benefit of otherwise identical non-farmers. Presumably, however, the marginal cost of supplying water to the two groups is the same. So there is overuse of water in farm uses and underuse of water in other uses.
By the “fair results” approach, the question of fairness depends on relative incomes of farmers and city dwellers. If farmers have lower incomes, the lower price for water is fair. If farmers have higher incomes, then the lower price of water is not fair. Under the “fair rules” approach, the different prices are fair because transactions are voluntary
5. If farmers were charged the same price as city residents pay, how would the price of agricultural produce, the quantity of produce grown, consumer surplus, and producer surplus change?
If farmers are charged the same price for water as city residents, farmers’ costs increase. The increase in costs decreases the supply of agricultural products, so the price of agricultural produce rises and the quantity decreases. Consumer surplus decreases and producer surplus also decreases.
6. If all water in California is sold for the market equilibrium price, would the allocation of water be more efficient then when farmers pay a lower price than city residents? Why or why not?
Market price is the allocation scheme and .Water use would be more efficient. Prior to the change, farmers were paying less than the marginal cost and so there was overuse of water in farm uses. After the change farmers pay the marginal cost and so the marginal benefit equals the marginal cost.
Scarce Water and Population Boom Leads California to ‘Perfect Drought’
Coachella Valley in California has more than 100 golf courses ... and 8cm rain a year. A typical summer’s day in Los Angeles: temperatures nudge the nineties, ... and sprinklers spray a fine mist of water into the scorching air. But if the predictions ... are correct, the sprinklers and many other of the comforts that have made southern California habitable may have to be turned off. ...
Melanie Winter, of the LA-based River Project, says land use and 20th century flood controls—LA’s storm drains to channel the rain into the sea—need to be changed to make the city more self-sufficient and less dependent on water travelling hundreds of miles [from the Colorado River]. “We spend $1bn to import water and $500,000 to throw local [rain] water into the ocean. In 30 years we may be able to provide 65% of our drinking water locally rather than 15%.”
The Guardian, June 25, 2007
Use this information to answer Exercises 7, 8, 9, and 10.
7. If sprinklers and other comforts are banned, explain how consumer surplus and total surplus would change if the price of water remains unchanged?
If the “sprinklers are turned off,” essentially consumers would face a quota—0—for the water they could use outdoors. A quota of zero would totally eliminate the consumer surplus from using water outdoors and would thereby drastically decrease the total surplus.
8. In 2007, is water allocated in the social interest or self-interest? What method of allocating water would be more efficient than banning sprinklers? Explain.
If the water is allowed to reach its equilibrium without any government intervention and without any of the other reasons (monopoly, transactions costs, and so on) that make a private market inefficient, then water is allocated in the social interest and the self-interest. However, if the government controls the price of water or water is a common resource, then water is allocated in the self-interest but not the social interest.
One method other than banning sprinklers (which is allocation using government command) would be market price—let the price rise until the quantity demanded equals the quantity supplied. First-come, first serve could be used—the water runs until a day’s quota is reached after which it is shut off. Of these methods, utilizing the market price is the only allocation method that would insure efficiency. By letting the market price ration water, people with a high marginal benefit can buy more water than people with a low marginal benefit. More generally, the equilibrium in a competitive market is such that the quantity produced and consumed is the efficient quantity because it is the quantity that sets the marginal benefit equal to the marginal use.
9. Would making the “the city more self-sufficient” enable land use and water to be used more efficiently?
Making the city more self-sufficient does not necessarily mean that water will be used more efficiently. Water use is efficient when marginal benefit equals marginal cost. If making the city more self-sufficient has a higher marginal cost than importing water from elsewhere, the self-sufficiency makes water use less efficient.
10. Would privatization of the urban water supply create an incentive to increase efficiency?
Privatization of the urban water supply will create incentives to use water more efficiently. Privatization means that water will be allocated using the market price. As long as there is no monopoly, high transactions costs, externalities, or public good or common resource elements in the water market, then privatizing the water market leads to an efficient use of water.
 
Answer to Chapter 7 Checkpoint (Exercises)
Concerned about the political fallout from rising gas prices, the U.S. government imposes a price ceiling on gasoline of $3.00 a gallon on gasoline sold in the United States. Use this information to answer Exercises 1 and 2.
1. Explain how the market for gasoline would react to this price ceiling if the oil-producing nations increased production and drove the equilibrium price of gasoline to $2.50 cents a gallon. Would the U.S. gasoline market be efficient?
If the equilibrium price of gasoline is $2.50 a gallon, then a price ceiling of $3.00 a gallon has no effect on the market because it does not change the equilibrium price. The market is efficient because at the equilibrium the marginal benefit equals the marginal cost.
2. Explain how the market for gasoline would react to this price ceiling if a global shortage of oil sent the equilibrium price of gasoline to $3.50 a gallon. Would the U.S. gasoline market be efficient?
If the equilibrium price of gasoline is $3.50 a gallon, then a price ceiling of $3.00 a gallon results in a shortage. The quantity of gasoline demanded at $3.00 a gallon exceeds the quantity supplied. A black market is likely to develop, in which consumers buy gasoline at prices higher than the price ceiling. In addition, a great deal of additional search activity arises as drivers look for gas stations that are open and willing to sell gasoline. The market is inefficient because the marginal benefit of a gallon of gasoline exceeds the marginal cost and so there is a deadweight loss.
The table shows the demand and supply schedules for mushrooms. Use the table to answer Exercises 3 and 4.
3. Suppose the government introduces a price support for mushrooms of $4 per pound. What are the quantity of mushrooms produced, the surplus of mushrooms, and the deadweight loss created?
The equilibrium price is $4.00 a pound and the equilibrium quantity is 3,500 pounds a week. With a price support of $4 per pound, 3,500 pounds per week are produced and the surplus is 0. Because the price support equals the equilibrium price, neither the (equilibrium) price nor the (equilibrium) quantity changes. There is no deadweight loss.
4. Suppose the government introduces a price support for mushrooms of $6 per pound. Who gains and who loses, what are the quantity of mushrooms produced, the surplus of mushrooms, and the deadweight loss created?
If the government introduces a price support of $6 per pound, production rises to 4,400 pounds per week. Mushroom producers gain from the price support. Mushroom consumers and taxpayers lose from the price support. There is a surplus of 2,000 pounds per week. Figure 7.4 can be used to calculate the deadweight loss. The deadweight loss is the area of the darkened triangle. The area of a triangle is equal to 1/2  base  height, so the deadweight loss is 1/2  (1,000 pounds)  ($4 a pound), which is $2,000.
Chinese City Stews over Rising Cost of Beef Noodles
Lanzhou, China - Mention this city’s name in China and people think beef noodles. Today, more than 1,000 beef noodle shops cater to this western industrial city of 3 million.... So when one shop after another bumped up the price of a bowl from 33 cents to 40 cents last month, it came as something of a jolt…. The outcry over the beef noodle price hike prompted the local government on June 26 to cap the price of a bowl at 33 cents. .. "'
latimes.com, July 28, 2007
Use this information to answer exercises 5 and 6.
5. Think about the Lanzhou market for beef noodles. In addition to the price rise, latimes.com also reported that the price of palm oil, a major ingredient in noodles, has risen 20 percent over the year. Explain how the consumer surplus, the producer surplus, and total surplus have changed as a result of the price hike to 40 cents for a bowl of noodles?
The price rose because the supply decreased as a result of the cost hike. The consumer surplus and the producer surplus both decreased. Therefore total surplus, the sum of consumer surplus plus producer surplus, also decreased.
6. When the government announced the price cap, latimes.com reported that many consumers “cheered.” Describe the situation in the noodle market if the price cap were enforced. Is the consumer surplus larger or smaller than before the price was capped?
If the price cap is effective, there will be a shortage in the noodle market. The quantity of noodles demanded by consumers will exceed the quantity of noodles supplied by noodle shops. Some consumers will be unable to find noodles as some shops likely close or reduce their hours. Search for an open shop will increase. If the time spent searching is neglected, then the consumer surplus will be larger with the price cap than without.
7. The latimes.com reported that with no penalty for violating the cap, shops “are defying the directive.” Is this black market efficient or inefficient? And is it fair or unfair?'
Presuming that with no penalty for defying the price cap, all shops will defy it, the price cap then has no effect. The noodle market remains in equilibrium, so that the quantity of noodles is the efficient amount. The black market is unfair under the “fair results” approach because some consumers will be unable to afford noodles. The black market is fair under the “fair rules” approach because it allows for voluntary exchange as long as the market participants are willing to transact in the black market.
 
Answer to Chapter 12 Checkpoint (Exercises)
1. Tim buys 2 pizzas and sees 1 movie a week when he has $16 to spend, a movie ticket is $8, and the price of a pizza is $4. What is the relative price of a movie ticket? If the price of a movie ticket falls to $4, how will Tim’s consumption possibilities change? Explain.
The relative price of a movie ticket is the number of pizzas that Tim must forgo to buy 1 movie ticket. The relative price of a movie ticket equals the price of a movie ticket divided by the price of a pizza, which is $8 a movie ticket  $4 a pizza = 2 pizzas per movie ticket. Tim’s consumption possibilities increase because his budget line rotates outward.
Cake Pasta
Quantity per week Total utility Dishes
per week Total utility
0 0 0 0
1 10 1 20
2 18 2 36
3 25 3 48
4 31 4 56
5 36 5 60
6 40 6 60
The table shows Martha’s total utility from cake and pasta. Use the table to answer Exercises 2, 3, and 4.
2. When Martha buys 3 cakes and 2 dishes of pasta a week, what is her total utility and her marginal utility from the third cake. If the price of a cake is $4, what is her marginal utility per dollar from cake.
The total utility from consuming 3 cakes and 2 dishes of pasta is 61 units. The marginal utility from the third cake is 7 units. The marginal utility per dollar from the third cake is (7  $4), which is 1 3/4 units per dollar.
3. When the price of a cake is $4, the price of pasta is $8 a dish, and Martha has $24 a week to spend, she buys 2 cakes and 2 dishes of pasta. Does she maximize her total utility? Explain your answer.
Martha is maximizing her utility because she is allocating her entire budget and the marginal utility per dollar from cake (2 units per dollar) equals the marginal utility per dollar from pasta (2 units per dollar).
4. When the price of a cake is $4, Martha has $24 to spend, and the price of pasta falls from $8 to $4 a dish, what quantities of cake and pasta does Martha buy? What are two points on Martha’s demand curve for pasta?
If the price of a dish of pasta falls to $4, Martha buys 2 cakes and 4 dishes of pasta. This combination maximizes Martha’s utility because it allocates her entire income and equates her marginal utility per dollar from both goods. When the price of a dish of pasta is $8 (and the price of a cake is $4), Martha buys 2 dishes of pasta. So, one point on Martha’s demand curve for pasta is a price of $8 for a dish of pasta and a quantity of 2 dishes. When the price of a dish of pasta is $4 (and the price of a cake is $4), Martha buys 4 dishes of pasta. So, another point on her demand curve is a price of $4 for a dish of pasta and a quantity of 4 dishes.

Quantity
(per day) Marginal utility from
smoothies movies
1 7 30
2 6 24
3 5 18
4 4 12
5 3 6
6 2 0
The table shows the marginal utility that Ali gets from smoothies and movies. Ali has $30 a week to spend, the price of a movie ticket is $6, and the price of a smoothie is $3. Use the table to answer Exercises 5 and 6.
5. If Ali buys 4 smoothies a week and sees 3 movies, does he spend all $30? What are his utility from smoothies and his utility from movies? Does he maximize his utility? If he is not, which good must he buy more of?
If Ali buys 4 smoothies and sees 3 movies, he spends $12 on smoothies and $18 on movies, so Ali spends all of his income. Ali’s marginal utility from smoothies is 4 and his marginal utility from movies is 18. Ali is not maximizing his utility. His marginal utility per dollar from movies is 3 units per dollar and his marginal utility per dollar from smoothies is 1.33. To maximize his utility, Ali should see more movies.
6. When Ali allocates his budget so as to maximize his utility, what does he buy and what is the marginal utility per dollar?
Ali buys 4 movies and 2 smoothies. His marginal utility per dollar from both movies and smoothies is 2 units per dollar.
Adrienne loves riding and she pays $500 a month to the stable to care for her horse. She thinks she’s getting a real bargain and would willingly pay twice the price for the great service she gets. Adrienne rents an apartment for $1,000 a month. Unlike the stable, she doesn’t think the deal she gets from her landlord is all that good, and she is on the verge of looking for something better for the same price. Use this information to answer Exercises 7 and 8.
7. Does Adrienne get greater total utility from her horse or her apartment?
Adrienne may well receive greater total utility from her horse because she loves riding.
8. Use Adrienne’s horse-riding and apartment to explain the paradox of value.
Adrienne gets greater marginal utility from her apartment. The price of her apartment is 2 times greater than the price of the horse stable, so for Adrienne to maximize her utility, her marginal utility from her apartment must be 2 times her marginal utility from the horse. Adrienne thinks so highly of her horse stable, she receives greater total utility from her horse. So, as is the case for the water and diamond paradox of value, Adrienne receives greater total utility from the less expensive good.
In the Land of Free Flight
… As traveling takes longer because of the extra time spent getting through airports, alternative forms of transport begin to look more attractive. Amtrak now competes comfortably with the airlines on its Boston-New York-Washington express rail service.
The Economist, June 14, 2007
Use this information to answer Exercises 9 and 10.
9. For a trip from Boston to Washington, compare the opportunity costs of taking Amtrak and United Airlines.
The opportunity cost includes all the opportunity costs of traveling via Amtrak or traveling via United Airlines. The fare spent on the ticket, either Amtrak or United Airlines, is part of the opportunity cost. So, too, is the time spent on the trip itself and the time spent buying the good, which in this case includes the opportunity cost of the time spent in the airport.
10. Compare the marginal utility per dollar from train travel and from air travel.
The marginal utility per dollar equals the marginal utility of train or air travel divided by the price. The price includes all the opportunity costs of buying the good, which includes the dollar price of the product and any other costs such as the time it takes. The increased time spent in airports increased the price of all the opportunity costs of flying. In addition, after 9-11 with the increased possibility of terrorist attacks on planes, the marginal utility from flying has fallen. Both these changes lower the marginal utility per dollar from air travel, which leads more people to take trains.
 
Answer to Chapter 12 Appendix Checkpoint (Exercises)
Marc has a budget of $20 a month to spend on root beer and CDs. The price of root beer is $5 a bottle, and the price of a CD is $10. The figure illustrates his preferences. Use the figure to answer Exercises 1, 2, and 3.
1. What is the relative price of root beer in terms of CDs and what is the opportunity cost of a bottle of root beer? Draw a graph of Marc’s budget line with CDs on the x-axis.
The relative price of a bottle of root beer is ($5 a bottle of root beer)  ($10 a CD), which is 1/2 of a CD per bottle of root beer. The opportunity cost of a bottle of root beer is the same as its relative price, 1/2 of a CD per bottle of root beer. The budget line is in Figure A12.5, below.
2. What quantities of root beer and CDs does Marc buy? What is his marginal rate of substitution of CDs for root beer at the point at which he consumes?
Marc buys 2 bottles of root beer and 1 CD because that is the combination that is on his budget line and on the highest indifference curve. The marginal rate of substitution is equal to the slope of the budget line, 2 bottles of root beer per CD.
3. Suppose that the price of a CD falls to $5 and the price of root beer and Marc’s budget remain unchanged. What quantities of root beer and CDs does Marc now buy. What are two points on Marc’s demand curve for CDs?
Marc now buys 3 CDs and 1 bottle of root beer. One point on Marc’s demand curve for CDs comes from the answer to exercise 5, that when the price of a CD is $10, the quantity Marc demands is 1 CD. Another point comes from this answer, that when the price of a CD is $5, the quantity Marc demands is 3 CDs.
4. Jim spends all his income on apartment rent, food, clothing, and vacations. He gets a pay raise from $3,000 a month to $4,000 a month. At the same time, airfares and other vacation-related expenses increase by 50 percent. How has Jim’s real income in terms of airfares and other vacation-related expenses changed? Is Jim better off or worse off in his new situation?
Jim’s real income in terms of airfares and vacation-related expenses is lower than before. His income increased by 33 percent but the airfares and vacation-related expenses rose by 50 percent. Depending on his preferences, Jim might be better off, but we cannot say for sure. For instance, if prior to the changes Jim spent, say, $1 on vacation travel and the rest of his income on the other goods, almost certainly Jim is better off. But, if prior to the changes Jim spent $2,999 on vacation travel and the rest of his income on the other goods, than almost surely Jim is worse off.
 
Answer to Chapter 13 Checkpoint (Exercises)
Sonya used to sell real estate and earn $25,000 a year, but she now sells greeting cards. Normal profit for the retailers of greeting cards is $14,000. Over the past year, Sonya bought $10,000 worth of cards from manufacturers of cards. She sold these cards for $58,000. Sonya rents a shop for $5,000 a year and spends $1,000 on utilities and office expenses. Sonya owns a cash register, which she bought for $2,000 with her savings account. Her bank pays 3 percent a year on savings accounts. At the end of the year, Sonya was offered $1,600 for her cash register. Calculate Sonya’s explicit costs, implicit costs, and economic profit.
Sonya’s explicit costs are $10,000 for cards, $5,000 for rent, and $1,000 for utilities. So Sonya’s explicit costs are $16,000.
Sonya’s implicit costs are $25,000 in forgone income as a real estate agent, $14,000 normal profit, $60 in forgone interest, and $400 in economic depreciation on the cash register, for a total of $39,460.
Sonya’s economic profit equals her total revenue, $58,000, minus her total opportunity costs or $55,640, which is the sum of her explicit and implicit costs. Sonya’s economic profit is $58,000  $55,640, which equals $2,360.
Yolanda runs a bullfrog farm in Arizona. When Yolanda employed one person, she produced 1,000 bullfrogs a week. When she hired a second worker, her total product doubled. Her total product doubled again when she hired a third worker. When she hired a fourth worker, her total product increased but by only 1,000 bullfrogs. Yolanda pays $1,000 a week for equipment and $500 a week to each worker she hires. Use this information to answer exercises 2, 3, and 4.
2. Construct Yolanda’s marginal product and average product schedules. Over what range of workers do marginal returns increase?

Labor Total
product Average
product Marginal
product
0 0 xx 1,000
1 1,000 1,000 1,000
2 2,000 1,000 2,000
3 4,000 1,333 1,000
4 5,000 1,250
The marginal product and average product schedules are in the table to the right. Marginal returns increase for the first 2 workers.

3. Construct Yolanda’s total variable cost and total cost schedules. What is Yolanda’s total fixed cost?
The variable costs are the costs of labor; the fixed costs are the costs of the equipment. The total cost schedules are in the table to right. Total fixed cost always equals $1,000.
4. At what output is Yolanda’s average total cost at a minimum?

Labor
Output Average
fixed cost Average
variable cost Average
total cost
0 0 xx xx xx
1 1,000 1.00 .50 1.50
2 2,000 .50 .50 1.00
3 4,000 .25 .38 .63
4 5,000 .20 .40 .60
Though not necessary to answer the question, the table to the right has the average cost schedules. From the numbers in the average cost table, Yolanda’s average total cost is at a minimum when she produces 5,000 bullfrogs a week.
L TP TVC TC AFC AVC ATC MC
1 100 350 850 C 3.50 D
2.50
2 240 700 B 2.08 2.92 5.00
E
3 380 A 1,550 1.32 2.76 4.08
5.83
4 440 1,400 1,900 1.14 3.18 4.32
11.67
5 470 1,750 2,250 1.06 3.72 4.79
5. The table shows some of the costs incurred at Bill’s Bakery. Calculate the values of A, B, C, D, and E. Show your work.
A = $1,050. Calculate A using TVC = TC  TFC. Total cost is given in the row. For total fixed cost, TFC, note that TFC = TC  TVC. Use the information in the top row to get TFC = $500. So A = $1,550  $500, which equals $1,050.
B = $1,200. Calculate B by adding TVC + TFC, with TFC from the previous answer as $500. Then B = $700 + $500, which equals $1,200.
C = $5. Calculate C by calculating TFC  TP, which is $500  100 = $5.
D = $8.50. Calculate D by calculating TC  TP, which is $850  100= $8.50.
E = $2.50. Calculate E as the change in TC divided by the change in TP, which is ($1,550  $1,200)  (380  240) = $2.50.
6. Dairies Move to Stop Milk Crate Thefts
For decades, college kids have used stolen milk crates as the basic building blocks of coffee tables and dorm room shelves.
Now, a new breed of crate rustler is cashing in by swiping thousands of the containers from loading docks and selling them to recyclers. The containers are chopped into bits and shipped to booming factories in China to be made into a variety of products, including pipes and flower pots.
... dairies across the country are moving to stop the plastic pilfering. In California, [dairies] are even hiring private detectives...
Associated Press, July 24, 2007
How does hiring private detectives influence a dairy’s short-run costs of producing a carton of milk and how do China’s imported “plastic bits” influence the short-run costs of producing “pipes and flowerpots.”
Hiring private detectives increases the short-run costs of producing a cartoon of milk. Presumably a dairy will hire a certain number of detectives. In this case the cost of the detectives is a fixed cost because it does not vary with the number of cartons of milk produced. So the firms’ fixed costs, total costs, average fixed cost, and average total cost all increase.
In China, the cost of the imported “plastic bits” is a variable cost to the producers of “pipes and flowerpots.” Presumably these manufacturers buy the imported plastic bits because they are less expensive than other (more legitimate) sources of plastic. Hence the ability to buy low-cost imported “plastic bits” lowers these firms’ variable cost, total cost, average variable cost, average total cost, and marginal cost.
 
Answer to Chapter 14 Checkpoint (Exercises)
1. In what type of market is each of the following goods and services sold? Explain your answers.
• Breakfast cereals
The breakfast cereal market is an oligopoly because it is dominated by 4 large firms: Kellogg’s, General Mills, The Quaker Oats Company, and Post Cereals.
• Cell phones
The cell phone market is monopolistically competitive. There are many firms (LF, Apple, Nokia, Motorola, Panasonic, Sony Ericsson, Sanyo, Research in Motion, and others) each making a differentiated cell phone. There are no barriers to entry into the market.
• The only restaurant in a small town
The only restaurant in a small town is a monopoly because it is the only one firm in the market.
• Oranges
Oranges are a perfectly competitive market. There are many orange growers, with no barriers to entry into the market, and each orange grower produces an identical product—oranges.
• Cable TV in a town with one cable company
The cable company is a monopoly because it is the only one firm in the market.
 
The figure shows the short-run cost curves of a firm that produces toys. Suppose there are 1,000 identical toy producers. The table shows the market demand schedule for toys. Use this information to answer Exercises 2, 3, and 4.
2. At a market price of $21 a toy, what quantity does the firm produce in the short run and does the firm make a positive economic profit, a zero economic profit, or an economic loss? Will firms enter or exit the market?

Price
(dollars per toy) Quantity
demanded
(thousands of toys per week
24 1,000
21 1,500
18 2,000
15 2,500
12 3,000
At a market price of $21 the firm will produce 2,000 toys per week because this is the quantity of toys for which the marginal revenue, $21, equals the marginal cost. At this price the firm makes an economic profit because the price exceeds the average total cost. Other firms will enter the industry because there is an economic profit from producing toys.
3. At a market price of $12 a toy, how many toys does the firm produce and what is its economic profit in the short run? How will the number of firms in the industry change in the long run?
At a market price of $12 the firm will produce either 1,000 toys or 0 toys per week because this price equals the firm’s shut down point, the minimum of its average variable cost. At this price the firm makes an economic loss because the price is less than the average total cost. Firms will exit the industry so in the long run the number of firms decreases.
4. At what market prices would the firm shut down temporarily? What is the market price of a toy in the long-run equilibrium? How many firms will be in the toy market in the long run? Explain you answer.
At any market prices less than $12 per toy, the firm would shut down. The long-run price of a toy is $15. This price equals the firms’ average total cost, so at this price there is no longer any incentive to enter or exit the industry. When the price is $15 per toy, each firm produces 1,500 toys and the market quantity demanded is 2,500, 000 toys. To meet the market demand, there must be 2,500,000 toys  1,500 toys per firm, or 1,667 firms.
5. Suppose that the restaurant industry is perfectly competitive. Joe’s Diner is always packed in the evening but rarely has a customer at lunch time. Why doesn’t Joe’s Diner close—temporarily shut down—at lunchtime?
Joe’s Diner doesn’t shut down because the price of a meal is greater than average variable cost. By staying open, even though Joe does not have many customers, he can pay all of the variable costs of remaining open and some of his fixed cost.
6. In 1969, when Rod Laver completed his tennis grand slam, all tennis rackets were made of wood. Today, tennis players use graphite rackets. Draw two graphs of the market for wooden tennis rackets in 1969: one that shows the market as a whole and one that shows an individual producer of rackets. Now show in the graphs the effect of a permanent decrease in the demand for wooden rackets.



Figure 14.8 shows the market for wooden tennis rackets. The initial demand curve is D0 and the supply curve is S. The initial market equilibrium price is $80 a racket and the initial market equilibrium quantity is 600 rackets an hour. Figure 14.9 shows an individual producer of rackets. The firm initially produces 5 rackets an hour and has a normal profit because the price, $80 a racket, equals average total cost.
The demand for wooden tennis rackets decreases and the demand curve shifts leftward to D1. In the short run, illustrated in Figure 14.8, the market equilibrium price of a tennis racket falls to $40 a racket and the equilibrium quantity decreases to 400 rackets an hour. The marginal revenue of the individual producer falls from $80 a racket, MR0, to $40 per racket, MR1. This firm responds by decreasing the quantity of rackets it produces to 3 1/2 rackets an hour.
In the short run, illustrated in Figure 14.8, firms incur an economic loss because price is less than average total cost. As time passes, firms exit the market and the supply decreases. In the case of wooden tennis rackets, the demand decreased sufficiently so that eventually all the firms exited the wooden tennis racket market because today no tennis rackets are made of wood.
Grain Prices Go the Way of the Oil Price
Every morning millions of Americans confront the latest trend in commodities markets at their kitchen table. ... Rising prices for crops ... have begun to drive up the cost of breakfast.
The culprit is the growing use of grains to make biofuels, such as ethanol. ... The amount of com used to make ethanol in America has tripled since 2000. ... Farmers are struggling to keep up.... [and) are growing less soya and wheat,...
The Economist, July, 21, 2007
7. Why did the price of corn surge, as the figure shows? How did farmers respond to the increase in the price of com? Why did farmers grow less soya and wheat? Explain your answers.
The price of corn surged upward because of the increase in the demand for corn for use to make ethanol. Farmers responded to the increase in the price of corn by planting more acreage as corn. When they planted more acreage in corn, they planted less in soya and wheat.
8. Explain why the “cost of breakfast" has increased.
The cost of breakfast has increased because the price of corn—one of the ingredients in many breakfast cereals—rose. In addition, because farmers cut back on their production of wheat, the supply of wheat decreased, thereby raising the price of wheat. The higher prices for corn and wheat increased the cost of producing cereal, which decreased the supply, thereby raising the price of cereal.
 
Answer to Chapter 15 Checkpoint (Exercises)
Bobbie’s Hair Care is a natural monopoly. The table shows the demand schedule (the first two columns) and Bobbie’s marginal cost schedule (the middle and third columns). Bobbie has done a survey and discovered that she has four types of customer each hour: one woman who is willing to pay $18, one senior who is willing to pay $16, one student who is willing to pay $14, and one boy who is willing to pay $12. Suppose that Bobbie’s fixed costs are $20 an hour and Bobbie’s price discriminates. Use this information to answer Exercises 1 and 2.
1. What is the price each type of customer is charged and how many haircuts an hour does Bobbie’s sell? What is the increase in Bobbie’s economic profit that results from price discrimination?
If Bobbie price discriminates, she charges the woman $18, the senior citizen $16, the student $14, and the boy $12. If Bobbie price discriminates, she sells 4 haircuts an hour. Bobbie’s economic profit is her total revenue minus her total cost. If she does not price discriminate, she produces the quantity such that marginal revenue equals marginal cost. Bobbie’s marginal revenue when she produces 3 haircuts is equal to her marginal cost when she produces 3 haircuts. (Both are equal to $8.) So without price discrimination, Bobbie’s produces 3 haircuts an hour at a price of $14. In this case, her economic profit is her total revenue, $42, minus her total cost, $33 (the sum of the fixed cost plus the marginal costs), which is $9. If she price discriminates, her total revenue is $18 + $16 +$14 + $12, which is $60. Her total cost to produce 4 haircuts is $45, so her economic profit is $60  $45, which is $15. So her economic profit increases by $6.
2. Who benefits from Bobbie’s price discrimination? Is the quantity of haircuts efficient?
When Bobbie price discriminates, Bobbie benefits because her economic profit is higher. Because Bobbie is perfectly price discriminating, Bobbie is producing the efficient quantity of haircuts. With price discrimination, the boy willing to pay $12 benefits because he now gets a haircut. Society benefits because the deadweight loss is eliminated.
Big Top is the only circus in the nation. The table sets out the demand schedule for circus tickets and the cost schedule for producing the circus. Use this information to answer Exercises 3 through 8.
3. Calculate Big Top’s profit-maximizing price, output, and economic profit if it charges a single price for all tickets.

Price
(dollars per ticket)
Quantity
(tickets per show) Total
revenue
(dollars per show) Marginal
revenue
(dollars per show)
20 0 0
18 100 1800 18
16 200 3200 14
14 300 4200 10
12 400 4800 6
10 500 5000 2
8 600 4800 2
6 700 4200 6
4 800 3200 10
Big Top’s total revenue and marginal revenue schedules are in the second table to the right, which is useful to answer this question. Big Top’s marginal cost is constant and equal to $6 per ticket. So Big Top’s marginal revenue equals its marginal cost when the quantity of tickets is 350 tickets per show and the price is $13 per ticket. The total revenue is 350 tickets  $13, which is $4,550. The total cost of 350 tickets is $3,100. So the economic profit equals $4,550  $3,100, which is $1, 450.
4 When Big Top maximizes profit, what is the consumer surplus and producer surplus and is the circus efficient? Explain why or why not.
The consumer surplus equals 1/2  ($20  $13)  350, which is $1,225. The producer surplus is the area above the marginal cost curve and below the price. Because the marginal cost curve is horizontal, this area is a rectangle equal to ($13  $6)  350, which is $2,450. When Big Top maximizes its profit, the circus is not efficient. At 350 tickets, the marginal cost of another ticket is $6 and the marginal benefit from another ticket (which is equal to the maximum a consumer is willing to pay) is $13. Marginal benefit is greater than marginal cost, so a deadweight loss exists.
5. Big Top offers children a discount of 50 percent. How will this discount change the consumer surplus and producer surplus? Will Big Top be more efficient?
If Big Top offers a child discount, the consumer surplus increases because more children attend and each pays a lower price. Presumably the producer surplus increases (as Big Top’s production increases) because Big Top would be unwilling to offer a discount otherwise. Big Top sells more tickets and so it operates closer to the efficient level of output.
 
6. If Big Top is regulated to produce efficiently, what is the quantity of tickets sold and what is the price of a ticket, and what would be the consumer surplus?
Big Top’s marginal cost is constant at $6 per ticket. To operate efficiently Big Top’s marginal cost must equal the price, so the price of a ticket is $6. At this price, the quantity of tickets sold will be 700 tickets per show. The consumer surplus equals 1/2  ($20  $6)  700, which is $4,900.
7. If Big Top is regulated to charge a price equal to average total cost, what is the quantity of tickets sold, the price of a ticket, and economic profit?
The quantity will be a bit more than 600 and the price will somewhat less than $8. Because the price equals the average total cost, the economic profit is zero. (Interpolation of the total cost and demand schedules shows that the “precise” quantity is 619 tickets and the “precise” price is $7.62. At this quantity, interpolation of the total cost schedule is $4,716 and so the average total cost is $7.62, equal to the price.)
8. Draw a graph to illustrate Big Top if regulators set a price cap that enables the firm to break even. Show the deadweight loss in the graph.
Figure 15.11 shows the situation of regulators set a price cap that allows Big Cap to break even. The price cap is a touch under $8 because this is the price at which the average total cost curve intersects the demand curve. The quantity of tickets sold is a bit more than 600. The deadweight loss is equal to the area of the grey triangle.
 
Qatar Gets Seven Bids For Mobile Phone License
Qatar received bids from seven of 12 qualified companies ... for the Gulf Arab state’s second mobile phone license, the telecom regulator said on Tuesday.
The regulator ... had short-listed 12 companies ... to bid for the license that will end the monopoly of Qatar Telecommunications Co. ...
The regulator said it would review technical bids before inviting companies to submit financial bids in an auction ... in early November. Mobile penetration in Qatar … exceeds 100 percent.
Reuters, September 18, 2007
Use this information to answer Exercises 9 and 10.
9. Draw a graph to illustrate the mobile phone market in Qatar. On the graph, shade in the consumer surplus, economic profit, and deadweight loss.
Supposing that currently the mobile phone market in Qatar has one company that is regulated to set its price equal to its average total cost, Figure 15.12 shows the market. In the figure, 3 million households have service and the price is $60 per month. In Figure 15.12, the consumer surplus is equal to the area of the light gray triangle and the deadweight loss is equal to the area of the dark gray triangle. There is no economic profit because the firm is regulated to set its price equal to its average total cost.
10. After the auction, if the two mobile phone companies are regulated to charge the break-even price, will the mobile phone service be efficient?
If the mobile phone market is a natural monopoly and the two companies are regulated to break even, then the market will not be efficient. They will be regulated to set their price equal to their average total cost.
 
Answer to Chapter 21 Checkpoint (Exercises)
1. Classify each of the following items as a final good or service or an intermediate good or service and identify which is a component of consumption expenditure, investment, or government expenditure on goods and services:
• Banking services bought by Wal-Mart.
Banking services purchased by Wal-Mart is an intermediate service.
• Security system bought by the White House.
The security system purchased by the White House is a final good. It is part of government expenditure on goods and services.
• Coffee beans bought by Starbucks.
Coffee beans purchased by Starbucks are an intermediate good.
• New coffee grinders bought by Starbucks.
New coffee grinders purchased by Starbucks are final goods. They are part of investment.
• Starbuck’s grande mocha frappuccino bought by a student.
The student’s purchase is a final good. It is part of consumption expenditure on goods and services.
• New battle ship bought by the U.S. navy.
The new battle ship purchased by the U.S. navy is a final good. It is part of government expenditure on goods and services.
2. You are provided with the following data on the economy of Iberia:
• GDP $100 billion
• Net taxes $18 billion
• Government expenditure on goods and services $20 billion
• Household saving $15 billion
• Consumption expenditure $67 billion
• Investment $21 billion
• Exports of goods and services $30 billion
Calculate Iberia’s imports of goods and services.
GDP equals C +I +G +NX. Rearranging, NX = GDP  C  I  G. So Iberia’s net exports equal $100 billion  $67 billion  $21 billion  $20 billion, which is $8 billion. Net exports equal exports  imports, so imports equal exports minus net exports. Iberia’s imports equal $30 billion  ($8 billion), which is $38 billion.
 

3. Figure 21.3 shows the flows of income and expenditure in an economy. In 2007, Q was $1,000 billion, U was $250 billion, W was $650 billion, and Z was $50 billion. Calculate investment and total income.
Flow Q is total income, so total income is $1,000 billion. Total expenditure equals the sum of consumption expenditure (flow W or $650 billion), investment, government expenditure on goods and services (flow U or $250 billion), and net exports of goods and services (flow Z or $50 billion). Total expenditure also equals total income. So using the data in the exercise, $1,000 billion = $650 billion + investment + $250 billion + $50 billion. This equation shows that investment equals $50 billion.
4. Figure 21.3 shows the flows of income and expenditure in an economy. In 2008, X was $2 trillion, R was $3 trillion, Z was –$1trillion, Q was $10 trillion, and U was $4 trillion. Calculate saving and consumption expenditure.
Flow Q is total income, so total income is $10 trillion. Total expenditure equals the sum of consumption expenditure, investment (flow X or $2 trillion), government expenditure on goods and services (flow U or $4 trillion), and net exports of goods and services (flow Z or $1 trillion). Total expenditure also equals total income. So using the data in the exercise, $10 trillion = consumption expenditure + $2 trillion + $4 trillion  $1 trillion. This equation shows that consumption expenditure equals $5 trillion.
Households divide their income into consumption expenditure, net taxes, and saving. As a result, total income equals the sum of consumption expenditure, net taxes, and saving. Total income is $10 trillion, consumption expenditure is $5 trillion, and net taxes (flow R) is $3 trillion. Hence saving (flow V) is $2 trillion.
 

GDP data for 2009
Item Quantity Price
Fish 50 $3
Berries 72 $3

GDP data for 2010
Item Quantity Price
Fish 51 $4
Berries 80 $6
An economy produces only fish and berries. The tables show the quantities produced and their prices in 2009 and 2010. The base year is 2009. Use this information to answer Exercises 5 and 6.
5. Calculate nominal GDP in 2009 and 2010 and real GDP in 2009 and 2010.
Nominal GDP in 2009 is equal to (50 fish  $3) + (72 berries  $3) = $366. Nominal GDP in 2010 is equal to (51 fish  $4) + (80 berries  $6) = $684. In the base year, real GDP equals nominal GDP, so real GDP in 2009 is $366. Real GDP in 2010 uses 2010 quantities and 2009 prices and so equals (51 fish  $3) + (80 berries  $3) = $393.
6. Calculate the percentage increase in production in 2010.
The percentage increase in production equals the percentage increase in real GDP. Real GDP grew [($393  $366)/$366] x 100, or 7.4 percent.
New-Home Sales Hit 7-Year Low
Despite huge discounts, sales of new homes last month slowed to their slowest pace in seven years, setting the stage for further price declines well into next year. … In addition, the government reported that the nation’s gross domestic product expanded at an annual rate of 3.8% in the April-to-June quarter, slightly less than the 4% estimated earlier. After-tax corporate profits rose 5.2% to $1.15 trillion. …
Wall Street Journal, September 28, 2007
Use this information to answer Exercises 7 and 8.
7. Where in the U.S. National Income and Product Accounts and the circular flow of expenditure and income do new home sales appear? How does a fall in new home sales affect real GDP? Explain your answer.
New home sales are part of the investment component of expenditure. In the circular flow, they are part of the expenditures coming from the financial markets to the goods markets. A fall in new home sales decreases investment and thereby directly decreases real GDP.
8. If corporate profits rose by 5.2 percent and real GDP increased by 3.8 percent, what do you think happened to the compensation of employees? Explain your answer.
Corporate profits are part of the “interest, rent, and profit” component of income in the U.S. National Income and Product Accounts. If corporate profits rose by 5.2 percent while real GDP increased by only 3.8 percent, compensation of employees probably grew at less than 3.8 percent, unless “interest and rent” grew so slowly to allow compensation of employees to grow more rapidly.
 
Answer to Chapter 21 Appendix Checkpoint

Item 2008 2009
Quantity Price Quantity Price
Fish 90 $15 each 100 $20 each
Crabs 20 $20 each 25 $20 each
An island economy produces only fish and crabs. The table gives the quantities produced and the prices in 2008 and in 2009. The base year is 2008.
1. Calculate nominal GDP in 2008 and nominal GDP in 2009.
Nominal GDP in 2008 = ($15  90) + ($20  20) = $1,350 + $400 = $1,750.
Nominal GDP in 2009 = ($20  100) + ($25  20) = $2,000 + $500 = $2,500.
2. Calculate the value of 2009 production in 2008 prices and the percentage increase in production when valued at 2008 prices.
Using 2008 prices, the value of 2009 production is ($15  100) + ($20  25) = $1,500 + $500 = $2,000. In 2008 prices, the value of production increased from $1,750 to $2,000, an increase of $250. The percentage increase is equal to ($250  $1,750)  100, which is 14.3 percent.
3. Calculate the value of 2008 production in 2009 prices and the percentage increase in production when valued at 2009 prices.
Using 2009 prices, the value of 2008 production is ($20  90) + ($20  20) = $1,800 + $400 = $2,200. In 2009 prices, the value of production increased from $2,200 to $2,500, an increase of $300. The percentage increase is equal to ($300  $2,200)  100, which is 13.6 percent.
4. Calculate real GDP in 2008 and 2009 (use the chained-dollar method).
Real GDP in 2008 = $1,750. It is equal to nominal GDP because 2008 is the base year.
To calculate real GDP in 2009 compute the growth rate of real GDP between 2008 and 2009. That growth rate is the average of the growth rates between 2008 and 2009 using prices from 2008 and using prices from 2009. Taking the average of the answers to Exercises 3 and 4 gives an average percentage increase of 13.95 percent. This result means that real GDP in 2009 is 13.95 percent greater than real GDP in 2008. Real GDP in 2008 was $1,750, so real GDP in 2009 equals ($1,750)  (1.1395), which is $1,994.13.
 
Answer to Chapter 22 Checkpoint (Exercises)
1. The people on Coral Island buy only juice and cloth. In 2007, the reference base year, the average household spent $60 on juice and $30 on cloth. The price of juice in 2007 was $2 a bottle, and the price of cloth was $5 a yard. In the current year, 2008, juice is $4 a bottle and cloth is $6 a yard. Calculate the CPI market basket, the CPI in 2008, and the inflation rate in 2008.
In the reference base year, 2007, the average household on Coral Island spent $60 on juice and $30 on cloth. The price of juice was $2 a bottle, so the average household purchased 30 bottles of juice. The price of cloth was $5 a yard, so the average household purchased 6 yards. Hence the CPI market basket is 30 bottles of juice and 5 yards of cloth.
In 2007, the CPI market basket cost $90 ($60 on juice and $30 on cloth). In 2008, the CPI market basket cost (30 bottles of juice  $4 a bottle) + (6 yards of cloth  $6 a yard) = $120 + $36 = $156. So the CPI in 2008 equals ($156  $90)  100, which is 173.3.
The inflation rate on Coral Island between 2008 and 2007 is equal to [(173.3  100)  100]  100, which is 73.3 percent.
2. Two countries, Sahara and Arctica, conduct consumer surveys. In Sahara, consumers buy 70 units of bottled water, 20 units of food, and 10 units of housing. In Arctica, consumers buy no bottled water (they suck free icicles), 80 units of housing, and 20 units of food. The prices in these two countries are the same. In the reference base year, water is $1 a unit, food is $5 a unit, and housing is $10 a unit. In the current year, water is $2 a unit, food is $6 a unit, and housing is $11 a unit. In the current year, what is the CPI and the inflation rate in each country? Which country’s CPI is rising faster?
In the reference base period, the market basket in Sahara cost (70 units  $1) + (20 units  $5) + (10 units  $10), which is $270. In the current period, the market basket costs (70 units  $2) +(20 units  $6) + (10 units  $11), which is $370. So the CPI in Sahara is ($370  $270)  100, which is 137. In the reference base year, the CPI is 100, so the inflation rate between that and the current year is equal to [(137  100)  100]  100, or 37 percent.
In the reference base period, the market basket in Arctica cost (20 units  $5) + (80 units  $10), which is $900. In the current period, the market basket costs (20 units  $6) + (80 units  $11), which is $1,000. So the CPI in Arctica is ($1,000  $900)  100, which is 111. In the reference base year, the CPI is 100, so the inflation rate between that and the current year is equal to [(111  100)  100]  100, or 11 percent
The CPI rose faster in Sahara because they consume much more water than in Arctica and the price of water doubled over this period of time.
3. In 1932, the average wage rate was 55¢ an hour and in 2002 the average wage rate was $14.76 an hour. The CPI in 1932 was 13.7 and in 2002 it was 183.3. Which wage rate is higher?
The 2002 wage rate that is equivalent to 55¢ in 1932 equals the CPI in 2002 divided by the CPI in 1932 and then multiplied by 55¢. So the 2002 wage rate is (180.3  13.7)  55¢, which is $7.24. The wage rate of $14.76 in 2002 is the higher wage rate.



Item Week 1 Week 2
Quantity Price Quantity Price
Coffee 5 cups $3.00 a cup 4 cups $3.25 a cup
iTune songs 5 $1.00 each 10 $1.00 each
Gasoline 10 gallons $2.00 a gallon 10 gallons $3.00 a gallon
4. The table shows the quantities of the goods that Harry bought and the prices he paid during two consecutive weeks. Harry’s CPI market basket contains the goods he bought in Week 1. Calculate the cost of Harry’s CPI basket in Week 1 and in Week 2. What was the value of Harry’s CPI in Week 2 and his inflation rate in Week 2.
Harry’s CPI market basket contains 5 cups of coffee, 5 iTunes songs, and 10 gallons of gasoline. The cost of his market basket in week 1 is (5 cups  $3.00 a cup) + (5 songs  $1.00 each) + (10 gallons of gasoline  $2.00 a gallon), which is $15.00 + $5.00 + $20.00, or $40.00. The cost of his market basket in week 2 is (5 cups  $3.25 a cup) + (5 songs  $1.00 each) + (10 gallons of gasoline  $3.00 a gallon), which is $16.25 + $5.00 + $30.00, or $51.25. His CPI in week 2 is equal to [($51.25)  ($40.00)]  100, which is 128.1. The CPI in the base week is 100, so the inflation rate equals {[(128.1)  (100.0)]  100}  100, which is 28.1 percent.
The reference base year is 2000. Real GDP in 2000 was $10 trillion (2000 dollars). The GDP deflator in 2006 was 112, and real GDP in 2006 was $11 trillion (2000 dollars). Use this information to answer Exercises 5 and 6.
5. Calculate nominal GDP in 2000 and in 2006 and the percentage increase in nominal GDP between 2000 and 2006.
In the base year, nominal GDP equals real GDP. So in the base year of 2000, nominal GDP = $10 trillion. In general, nominal GDP = real GDP  price level  100. So in 2006, nominal GDP = $11 trillion  112  100, which is $12.32 trillion. The percentage increase in nominal GDP is equal to [($12.32 trillion  $10 trillion)  $10 trillion]  100, which is 23.2 percent.
6. What was the percentage increase in production between 2000 and 2006, and by what percentage did the cost of living rise between 2000 and 2006?
The percentage increase in production equals the percentage increase in real GDP, [($11 trillion  $10 trillion)  $10 trillion]  100, which is 10 percent.
The percentage increase in the cost of living equals the percentage increase in the GDP deflator. In the base year, the GDP deflator equals 100. So the percentage increase in the GDP deflator equals [(112  100)  100]  100, which is 12 percent.
7. If the interest rate is 19 percent a year in Argentina and 0.01 percent a year in Japan, and the inflation rate is 39 percent a year in Argentina and 0.9 percent a year in Japan, which country has the higher real interest rate?
The real interest rate equals the nominal interest rate minus the inflation rate. So the real interest rate in Argentina in 2002 is (19 percent)  (39 percent), which is 20 percent. The real interest rate in Japan in 2002 is (0.01 percent)  (0.9 percent), which is 0.91 percent. The real interest rate is higher in Japan.
Lawmakers Plan to Tie Tuition Hikes to Consumer Price Index
This week lawmakers are expected to raise college tuition 5 percent for next spring’s classes. But they also plan to tie increases in the cost of attending college in future years to the Consumer Price Index.
Daytona Beach News—Journalonline.com, October 8, 2007
Use this information to answer Exercises 8 and 9.
8. If Daytona Beach Community College tuition had been tied to the CPI last year, by how much would tuition have increased? Would the College be short of funds or flush with an abundance of funds?
The answer to this question depends on when you assign it. The answer should be equal to the rate of increase in the CPI over the past year. If Daytona Beach Community College’s tuition was tied to the CPI, it’s current-year shortage or abundance of funds would likely persist for a number of years. Eventually, however, because the CPI is biased upward, the college’s funds would gradually increase over what would be needed to keep the funds equal to increases in the cost of living.
9. In what direction would future tuition increases be biased if they were tied to the CPI?
If tuition was tied to the CPI, future increases would be larger than warranted because the CPI biased upward.
 
Answer to Chapter 23 Checkpoint (Exercises)
1. The BLS survey found the following numbers in a small community:
Total number of persons—100.
Worked at least 1 hour as paid employees or worked 15 hours or more as unpaid workers in their family business—50.
Were not working but had jobs or businesses from which they were temporarily absent—20.
Had no employment—10.
Were available for work and had made specific efforts to find employment some time during the previous 4 weeks—15.
Were available for work and were waiting to be recalled to a job from which they had been laid off—5.
Calculate the unemployment rate and the labor force participation rate.
The number of employed people is 50 + 20, which is 70. The number of unemployed people is 15 + 5, which is 20. The labor force is 50 + 20, which is 70. So the unemployment rate is (20  70)  100, which is 28.6 percent.
The total working age population is 50 + 20 + 10 + 15 + 5, which is 100. The labor force is 70. So the labor force participation rate is (70  100)  100, which is 70.0 percent.
2. The BLS survey reported the following data in a community of 320 people:
200 worked at least 1 hour as paid employees or 15 hours or more as unpaid workers in their family business; 20 were not working but were temporarily absent from their jobs; 40 had no employment; 10 were available for work and had looked for employment last week; and 6 were available for work and were waiting to be recalled to a job from which they had been laid off.
Calculate the unemployment rate and the labor force participation rate.
The number of employed people is 200 + 20, which is 220. The number of unemployed people is 10 + 6, which is 16. The labor force is 220 + 16, which is 236. So the unemployment rate is (16  236)  100, which is 6.8 percent.
The total working age population is 200 + 20 + 40 + 10 + 6, which is 276. The labor force is 236. So the labor force participation rate is (236  276)  100, which is 85.5 percent.
3. Describe the trends and fluctuations in the unemployment rate in the United States from 1967 through 2007. In which periods was the unemployment rate above average and in which periods was it below average?
Between 1967 and 2007, the unemployment rate averaged 5.9 percent. Over this period, the unemployment rate has fluctuated, falling in expansions and rising in recessions. It hit its peak, near 10 percent, in the 1982 recession. It also rose in the mid-1970s recession, the 1990-1991 recession, and the 2001 recession. The unemployment rate hit its trough of under 4 percent during the 1960s expansion and came close to that during the 1990s expansion.
4. Describe the trends and fluctuations in the labor force participation rate in the United States from 1967 through 2007, and contrast and explain the different trends for women and men.
Between 1967 through 2007, the labor force participation rate for men trended downward, from 80 percent to 73 percent. The labor force participation rate for women trended upward, from 40 percent to 60 percent. The overall labor force participation rate trended slowly upward, from 59 percent to 67 percent. The labor force participation rate for women trended most rapidly upward between 1967 and 1992, after which the upward trend has slowed and maybe even turned down a bit in the past few years. Women have joined the labor force for four reasons: more women pursued a college education and so increased their potential wages in the job market; technological change in the work place created a large number of white-collar jobs with flexible hours that women found attractive; technological change in the home increased the time available for paid employment; and, families wanted two incomes to balance tight budgets. The male labor force participation rate decreased for three reasons: some men retired early because of an increase in wealth; some men left the labor force because they lost jobs when they were older and finding a new job was difficult; and, more men remained in full-time education. Cyclical fluctuations in the labor force participation rate are mild and result from unsuccessful job seekers becoming discouraged workers.
Warning Signs and Defining Economic Moments
… what was so ominous about the government’s report last week [was] that businesses reduced total employment by 4,000 jobs in August. … Another ... labor market indicator—the share of the working-age population that reports holding a job—has fallen to its lowest level in nearly two years. … “Large numbers of people are leaving the job market,” said Jan Hatzius, ... “That is not just a sudden bout of laziness, but it’s a response to reduced labor market activity.” ...
Vikas Bajaj and Jeremy W. Peters, The New York Times, September 14, 2007
Use this information to answer Exercises 5, 6, and 7.
5. Explain how the reduction in employment changes the labor force and the unemployment rate.
The effect of the reduction in employment on the labor force depends on what the workers who lose their jobs do. If they start looking for work, and thereby are counted as unemployed, the labor force does not change. If they withdraw from the labor force, say by retiring or returning full-time to school, the labor force decreases. In both cases the unemployment rate rises. In the first case, the number of unemployed workers rises and the labor force does not change, which raises the unemployment rate. In the second case the number of unemployed workers does not change and the labor force decreases, which also raises the unemployment rate.
 
6. Explain how the fall in the share of the working-age population with a job changes the labor force and the unemployment rate.
The fall in the share of the working-age population that has a job has two potential effects on the labor force. If these workers continue to look for work, that is, they are unemployed, then the labor force does not change. However if these workers withdraw from the labor force, say by becoming discouraged workers or returning full-time to school, the labor force decreases. In both cases the unemployment rate rises. In the first case, the number of unemployed workers rises and the labor force does not change, which raises the unemployment rate. In the second case the number of unemployed workers does not change and the labor force decreases, which also raises the unemployment rate.
7. What are the labor market flows reported in the news? Explain how these flows change the labor force participation rate.
There were two flows mentioned in the story. First, the reduction in employment, is comprised of the flow of workers who lost their jobs and the flow of workers who left their jobs. Second, the article reported that large numbers of people are leaving the labor market. This flow is the flow of withdrawals from the labor market. The flow of withdrawals from the labor market decreases the labor force and thereby decreases the labor force participation rate.
 
Answer to Chapter 24 Checkpoint (Exercises)
The following events occur in the United States one at a time:
• An oil embargo in the Middle East cuts supplies of oil to the United States.
• The Anaheim Angels win the World Series.
• U.S. labor unions negotiate wage hikes that affect all workers.
• A huge scientific breakthrough doubles U.S. labor productivity.
• Migration to the United States increases the working-age population.
Use this information to answer Exercises 1, 2, 3, and 4.
1. Sort the items into four groups: those that change the production function, those that change the demand for labor, those that change the supply of labor, and those that do not change the production function, the demand for labor, or the supply of labor. Say in which direction any changes occur.
• The oil embargo changes the production function by shifting it downward. The scientific breakthrough changes the production function by shifting it upward.
• The scientific breakthrough increase workers’ productivity so the demand for labor increases.
• The increased migration increases the supply of labor.
• The Anaheim Angels winning the world series has no effect on the production function, the supply of labor, or the demand for labor. The union negotiation has no effect on the production function, the supply of labor, or the demand for labor. However it does increase the quantity of labor supplied and decrease the quantity of labor demanded. But these are movements along the curves and not shifts in the curves.
2. Which of the events increase the equilibrium quantity of labor and which decrease the equilibrium quantity of labor?
The scientific breakthrough and the increased migration increase the equilibrium quantity of labor. The union negotiated higher wage rate decreases the equilibrium quantity of labor.
3. Which of the events raise the real wage rate and which of the events lower the real wage rate?
The scientific breakthrough and the union negotiated wage hike increase the equilibrium real wage rate. The increased migration decreases the equilibrium real wage rate.
 
4. Which of the events increase potential GDP and which decrease potential GDP?
The scientific breakthrough and the increased migration increase potential GDP. The oil embargo and the union negotiated wage hike decrease the equilibrium real wage rate.
Labor
hours
(per day) Real GDP
(dollars
per year)
0 0
10 100
20 180
30 240
40 280
Real
wage rate
(dollars
per hour)
Quantity of labor demanded
Quantity of labor supplied
(hours per day)
1.00 10 50
0.80 20 40
0.60 30 30
0.40 40 20








The two tables set out information about the economy of Nautica. Use this information to answer Exercises 5 and 6.
5. What is the quantity of labor employed, potential GDP, the real wage rate, and total labor income?
The real wage rate is $0.60 per hour, because that is the real wage that sets the quantity of labor demanded equal to the quantity of labor supplied. The equilibrium quantity of labor is 30 hours per day. The production function shows that the potential GDP with this amount of employment is $240 per year.
6. Suppose that the government introduces a minimum wage of $0.80 an hour. What is the real wage rate, the quantity of labor employed, potential GDP, and unemployment? Does the unemployment arise from job search or job rationing? Is the unemployment cyclical? Explain.
The minimum wage of $0.80 an hour is greater than the equilibrium real wage rate, so the real wage rate equals the minimum wage, $0.80 an hour. At this wage rate the quantity of labor supplied is 40 hours per day but the quantity of labor demanded is 20 hours per day. Hence is employment is 20 hours per day. At this level of employment, potential GDP is $180 per year. Unemployment equals the difference between the quantity of hours supplied, 40 per day, and the quantity of hours demanded, 20 per day, or 20 hours per day of unemployment. This unemployment reflects job rationing from the minimum wage. It is not cyclical.
 
Tsunami Social Cost Yet to Come
Relief experts estimate it could take up to a decade for some places to fully recover, and reconstruction will cost about $9 billion. ... An assessment by the Indonesian government estimated total damage from the tsunami at $4.5 billion to $5 billion. ... Housing, commerce, agriculture, fisheries, and transport vehicles and services suffered losses of $2.8 billion, or 63 percent of the total.
CNN, 19 December 2005
Use this information to answer Exercises 7 and 8.
7. Explain the effect of the tsunami on employment in Indonesia. Did Indonesia move along its production function or did its production function shift? How did Indonesia’s potential GDP change?
The demand for labor in Indonesia immediately decreased as a result of the tsunami because much of the region’s capital was destroyed, thereby lowering workers’ productivity. The supply of labor also decreased due to the huge number of deaths. As a result, employment decreased. Eventually, however, the demand for labor increases as firms hire workers to help rebuild the area.
Indonesia’s production function shifted downward because of the destruction of the nation’s capital. The fall in employment also created a movement down along the production function. On both counts, Indonesia’s potential GDP decreased.
8. According to the CNN news article, “people hardest-hit by the tsunami were those who fell outside the ‘formal’ economy—mainly fishermen, farmers, women and people running small businesses.” Explain how this information changes Indonesia’s employment and potential GDP.
Because these workers were outside the “formal” economy, their employment and production was less well measured than those of workers in the formal economy. As a result, the measured fall in employment and production is likely to be less than the actual fall since much of the decrease will not be measured.
 
Answer to Chapter 29 Checkpoint (Exercises)
1. During the most recent U.S. business cycles, real GDP and the unemployment rate fluctuated in opposite directions (see page 748). Did real GDP reach a peak at the same time that the unemployment rate reached its lowest level? Which of these two indicators signals recession first and which signals expansion first?
In both of the last two business cycles, when GDP reached its peak, the unemployment rate was close to its lowest level. In the 2000 recession, unemployment continued to fall slightly after real GDP had started to decrease. In both the recessions of 1991 and 2000, real GDP reached its trough before unemployment reached its peak. In both instances, unemployment continued to rise after GDP had reached its trough and was starting to increase.
While it was close in 1991, it was not so close in 2000 and in both, real GDP signaled a recession first. Unambiguously, real GDP signals an expansion first.
2. Suppose that the United States is at full employment. Explain the effect of each of the following events on aggregate supply:
• Union wage settlements push the money wage rate up by 10 percent.
The higher money wage rate decreases U.S. aggregate supply and the U.S. AS curve shifts leftward.
• The price level increases.
The higher price level increases the quantity of real GDP supplied and there is a movement upward along the U.S. AS curve.
• Potential GDP increases.
The increase in potential GDP increases U.S. aggregate supply and the U.S. AS curve shifts rightward.
3. Suppose that the United States is at full employment. Then the federal government cuts taxes, and all other influences on aggregate demand remain the same. Explain the effect of the tax cut on aggregate demand in the short run.
The tax cut increases aggregate demand and shifts the AD curve rightward. Aggregate supply does not change. In the short run, the price level rises, real GDP increases, and unemployment decreases.
In 2003, the Japanese economy was at a below full-employment equilibrium. Use this information to answer Exercises 4 and 5.
4. Compare the amount of unemployment in Japan with Japan’s natural unemployment and compare Japan’s real GDP with its potential GDP.
The unemployment rate is higher than Japan’s natural unemployment and Japan’s real GDP is less than its potential GDP.
 
5. What policies could Japan adopt to restore full employment? Would any of these policies create inflation? Explain.
Japan could adopt several strategies to restore full employment. Japan could lower taxes, increase government spending, increase the quantity of money and lower the interest rate. All of these increase aggregate demand. All of the policies suggested in part (c) raise the price level so all of them create inflation for a period of time. Only a sustained increase in the quantity of money will create an ongoing inflation.
6. Suppose that the world price of oil rises. On an AS-AD graph, show the effect of the world oil price rise on the macroeconomic equilibrium in the short run. Explain the adjustment process that restores the economy to full employment.
A rise in the world price of oil decreases aggregate supply. As shown in Figure 29.3, the AS curve shifts leftward from AS0 to AS1.
The new short-run equilibrium occurs where the AS1 curve intersects the AD curve. In Figure 29.3, the new short-run equilibrium occurs at the price level of 120 and real GDP of $9.75 trillion.
Full employment is restored as the money wage rate falls. Aggregate supply increases and the AS curve shifts rightward. This adjustment likely would be slow because workers resist falls in their money wage rate.



7. Explain the effects of a global recession on the U.S. macroeconomic equilibrium in the short run. Explain the adjustment process that restores the economy to full employment.
As the world economy goes into recession, U.S. exports decrease so the U.S. aggregate demand decreases and the U.S. AD curve shifts leftward. Figure 29.4 illustrates this change, with the AD curve shifting leftward from AD0 to AD1.
The new short-run equilibrium occurs where the AS curve intersects the AD1 curve. The price level falls and real GDP decreases. In Figure 29.4, the new short-run equilibrium occurs at the price level of 100 and real GDP of $9.5 trillion.
In the long run, full employment is restored as the money wage rate falls. Aggregate supply increases and the AS curve shifts rightward. This adjustment likely would be slow because workers resist falls in their money wage rate.
As Fires Rage for Fourth Day, Hopes Rest on Winds Easing
A slew of wildfires … continued to rage. … President Bush, declared southern California a federal disaster area. … [M]ore than 645 square miles in seven counties had been consumed by some 16 fires, … the fires had consumed well over 1,400 homes and commercial structures. … The governor estimated that $75 million in federal aid would be needed. … The typically bustling Lake Arrowhead resembled a ghost town, with abandoned shops and homes. … A survey … found that avocado and citrus groves, nurseries, vineyards, rangeland, and other farm and ranch operations were possibly damaged, …
The New York Times, October 24, 2007
Use this information to answer Exercises 8 and 9.
8. Suppose that on the eve of the wild fires, the southern Californian economy was at full employment. What is the immediate effect of the fires on aggregate demand and aggregate supply?
The fire, by destroying commercial structures and agricultural farms, nurseries, and so on decreased this area’s potential GDP and thereby decreased aggregate supply. Additionally if people permanently leave the area, the labor force decreases, which also reduces potential GDP and aggregate supply. The effect on aggregate demand is somewhat mixed. On the one hand, people whose jobs were destroyed have lower income which will lead to lower consumption expenditure. On the other hand, there will be increased demand for rebuilding, so investment demand in the area will increase. Likely, on net, aggregate demand increases.
9. Explain the macroeconomic effect of the fires in the short run (the next six months) and in the long run (after two years).
In the short run, the area’s real GDP will fall. The area’s unemployment rate probably will be fall as rebuilding will be underway. In the long run, the area’s real GDP will return to its normal, potential level and the area’s unemployment rate will return to its normal, natural rate.
 
Answer to Chapter 30 Checkpoint (Exercises)
The table shows disposable income and consumption expenditure in an economy. Use the table to answer Exercises 1 and 2.
1. Calculate saving at each level of disposable income. Over what range of disposable income does consumption expenditure exceed disposable income? Calculate autonomous consumption expenditure.
When disposable income is $200 billion, saving is $150 billion; when disposable income is $400 billion, saving is $100 billion; when disposable income is $600 billion, saving is $50 billion; when disposable income is $800 billion, saving is $0; and, when disposable income is $1,000 billion, saving is $50 billion.
Autonomous consumption expenditure is consumption expenditure when disposable income is $0. In the table above, autonomous consumption expenditure is $200 billion.
2. Calculate the marginal propensity to consume. At what level of disposable income will saving be zero? If expected future income increases, in which direction will the consumption function change?
The marginal propensity to save equals the change in consumption expenditure divided by the change in disposable income. Because the consumption function is linear, the MPC is the same at all levels of disposable income. So the MPC = ($500 billion  $350 billion)  ($400 billion  $200 billion) = ($150 billion)  ($200 billion), which is 0.75. Saving is equal to zero when disposable income equals $800 billion. If expected future income increases, consumption increases and the consumption function shifts upward.
In an economy with no exports or imports, autonomous consumption is $1 trillion, the marginal propensity to consume is 0.8, investment is $5 trillion, and government expenditure on goods and services is $4 trillion. Taxes are $4 trillion and do not vary with real GDP.
3. If real GDP is $30 trillion, calculate disposable income, consumption expenditure, aggregate planned expenditure, and equilibrium expenditure.
Disposable income equals GDP minus net taxes. GDP is $30 trillion, taxes are $4 trillion, so disposable income is $30 trillion  $4 trillion, which is $26 trillion. Consumption expenditure equals the sum of autonomous consumption expenditure plus induced consumption expenditure. Induced consumption expenditure equals MPC times disposable income, so induced consumption expenditure equals (0.8)  ($26 trillion), which is $20.8 trillion. Autonomous consumption is given as $1 trillion, so total consumption expenditure equals $1 trillion + $20.8 trillion, which is $21.8 trillion. Aggregate planned expenditure equals the sum of consumption expenditure plus investment plus government expenditures (plus exports and minus imports if there is international trade). Aggregate planned expenditure equals $21.8 trillion + $5 trillion + $4 trillion, which is $30.8 trillion.
Equilibrium expenditure equals $34 trillion. To check this answer, note that when expenditure is $34 trillion, real GDP equals $34 trillion so disposable income equals $30 trillion. Therefore consumption expenditure is $25 trillion. So aggregate planned expenditure equals consumption expenditure, $25 trillion, plus investment, $5 trillion, plus government expenditures on goods and services, $4 trillion, which is $34 trillion, which equals real GDP.
4. If real GDP is $30 trillion, explain the process that takes the economy to equilibrium expenditure. If real GDP is $40 trillion, explain the process that takes the economy to equilibrium expenditure.
If real GDP is $30 trillion, aggregate expenditure exceeds real GDP. Firms find their inventories falling below their target levels, and in response, they increase production to restore inventories to their target levels. As firms increase production, real GDP increases and the economy moves toward its equilibrium expenditure of $34 trillion.
If real GDP is $40 trillion, real GDP exceeds aggregate planned expenditure. Inventories rise above their target levels. Firms slash production to drive inventories back to their target levels and so real GDP decreases. The economy moves toward its equilibrium expenditure of $34 trillion.
5. If investment increases by $0.5 trillion, calculate the change in equilibrium expenditure and the multiplier.
If investment increases by $0.5 trillion, the AE curve shifts upward by $0.5 trillion. Since there are no income taxes (taxes are fixed at $4 trillion) and because there are no imports or exports, the multiplier equals With the MPC equal to 0.8, the multiplier equals 5.0.
The change in equilibrium expenditure equals the change in autonomous expenditure times the multiplier. The change in autonomous expenditure is the change in investment, which is $0.5 trillion. The multiplier is 5.0. So the change in equilibrium expenditure is equal to ($0.5 trillion )  (5.0), which is $2.5 trillion.
 
The figure shows the aggregate demand curve in the global economy. Suppose that aggregate planned expenditure increases by $0.75 trillion for each $1 trillion increase in real GDP. Use this information to answer Exercises 6 and 7.
6. If investment increases by $1 trillion, calculate the change in the quantity of real GDP demanded if the price level is 100.
Because aggregate planned expenditure increases by 0.75 of any change in real GDP, the multiplier for the change in real GDP is equal to 1/(1  0.75), which is 4.0. Hence a $1 trillion increase in investment increases the quantity of real GDP demanded by $4 trillion when the price level is fixed at 100.
7. Compare the shift of the AD curve with the $1 trillion increase in investment. Explain the magnitude of the shift of the AD curve.
The AD curve shifts rightward by $4 trillion dollars. The overall increase in aggregate demand exceeds the initial increase in investment because of the multiplier: The increase in investment increases people’s disposable income, which in turn leads to further increases in consumption expenditure.
Economy Shows Some Resilience in Quarter
… According to the Commerce Department, the gross domestic product rose to $11.2 trillion when annualized and adjusted for inflation. … Business inventories fell at a $13.4 billion annual rate, compared with the $16.6 billion downward pace previously reported. Consumer spending, which accounts for about 70 percent of the economy, expanded.
The New York Times, December 1, 2005
Use this information to answer Exercises 8 and 9.
8. Explain the links between an expansion in consumer expenditure and growth in gross domestic product.
When consumption expenditure grows, aggregate expenditure grows. Growth in aggregate expenditure means that the equilibrium quantity of real GDP grows. So (at least in the short run) growth in consumption expenditure leads to growth in real GDP.
9. Describe the process that is going on in the economy when GDP grows and inventories continue to fall but at a slower pace.
When consumption expenditure grows, aggregate expenditure grows and increases real GDP. When inventories fall, firms boost their investment to build them back up. The increase in investment then increases aggregate expenditure which then leads to increases in equilibrium real GDP. The slower pace of inventory shortfalls means that firms will increase their inventory investment at a slower pace, which can offset, in whole or in part, the effect of the increase in consumption expenditure. 
Answer to Chapter 31 Checkpoint (Exercises)
1. In an economy, the natural unemployment rate is 4 percent and the expected inflation rate is 3 percent a year. Draw a graph of the short-run and long-run Phillips curves that display this information. Label each curve.
Figure 31.11 shows the short-run and long-run Phillips curves. The long-run Phillips curve, LRPC, is vertical at the natural unemployment rate of 4 percent. The short-run Phillips curve, SRPC, intersects the long-run Phillips curve at the expected inflation rate, 3 percent.






Data 2008 Data 2009
Price
level
(2007 = 100) Real GDP
(trillions of dollars) Unemployment rate
(percent) Price
level
(2007 = 100) Real GDP
(trillions of dollars) Unemployment rate
(Percent)
A 102 10.0 8 A 108 10.3 8
B 104 10.1 6 B 110 10.4 6
C 106 10.2 4 C 112 10.5 4
D 110 10.4 2 D 116 10.7 2

The first part of the table describes four possible situations that might arise in 2008, depending on the level of aggregate demand in that year. The second part of the table describes four possible situations that might arise in 2009. Use this information to answer Exercises 2 and 3.
2. Plot the Phillips curve and aggregate supply curve for 2008 and mark the points A, B, C, and D on each curve that correspond to the data in the first table.
The figures are on the next page. Also on the next page is a table with the data necessary to plot the Phillips curve and the aggregate supply curve. In the table the inflation rates are calculated as the change in the price
Inflation rate
(percent per year) Unemployment rate
(percentage)
Price level
(2007 = 100) Real GDP
(trillions of
dollars)
A 2 8 102 10.0
B 4 6 104 10.1
C 6 4 106 10.2
D 10 2 110 10.4




level divided by the initial price, all multiplied by 100. Then the inflation rates and unemployment rates are plotted as the Phillips curve in Figure 31.12. The aggregate supply curve is plotted in Figure 31.13 using the data in the problem, which is reproduced in the table above.
3. In 2008, the outcome turned out to be row D of the table. Plot the Phillips curve for 2009 and mark the points A, B, C, and D on each curve that correspond to the data provided in the second part of the table in the problem.

Inflation rate
(percent per year) Unemployment rate
(percentage)
Price level
(2007 = 100) Real GDP
(trillions of
dollars)
A 1.8 8 108 10.3
B 0 6 110 10.4
C 1.8 4 112 10.5
D 5.5 2 116 10.7
Use the table above the figures to plot the Phillips curve and the aggregate supply curve. The table is constructed the similarly to that in Exercise
2. The inflation rates and unemployment rates are plotted as the Phillips curve in Figure 31.14.










4. Explain the relationship between the long-run Phillips curve and potential GDP and the short-run Phillips curve and the aggregate supply curve.
The long-run Phillips curve and potential GDP are closely related. When the economy is producing at potential GDP, the unemployment rate is the natural unemployment rate and the economy is on its long-run Phillips curve. Potential GDP does not change when the price level changes, so the natural unemployment rate does not change when the price level or the inflation rate changes.
The short-run Phillips curve and the aggregate supply curve also are related. The inflation rate is defined as the percentage change in the price level. So, starting from any given price level last period, the higher the inflation rate, the higher is the current period’s price level. With this in mind, moving upward along the AS curve, the price level rises and real GDP increases. So, moving upward along the AS curve, as the price level rises, the inflation rate also increases. And as real GDP increases, unemployment decreases. So, a movement up along the AS curve corresponds to a movement up along the short-run Phillips curve, in which the inflation rate rises and the unemployment rate decreases.
5. The inflation rate is 3 percent a year, and the quantity of money is growing at a pace that will maintain the inflation rate at 3 percent a year. The natural unemployment rate is 4 percent, and the current unemployment rate is 3 percent. In what direction will the unemployment rate change? How will the short-run Phillips curve and the long-run Phillips curve shift?
The current unemployment rate is less than the natural unemployment rate. So, over time, the unemployment rate increases until it equals the natural unemployment rate.
Because the current unemployment rate is less than the natural unemployment rate, the economy has moved along its SRPC to a point to the left of the LRPC. At this point, the current inflation rate is greater than the expected inflation rate. So, over time, people revise upward their expected inflation rate and the short-run Phillips curve shifts upward. The long-run Phillips curve does not shift.
6. The inflation rate is 6 percent a year, the unemployment rate is 4 percent, and the economy is at full employment. The Fed announces that it intends to slow the money growth rate to keep the inflation rate at 3 percent a year for the foreseeable future. People believe the Fed. Explain how unemployment and inflation change in the short run and in the long run.
Because people believe the Fed, they immediately adjust their expected inflation rate downward to 3 percent, which shifts the short-run Phillips curve downward. Then, in both the short run and the long run, when the inflation rate falls to 3 percent, the unemployment rate remains at 4 percent.
7. The inflation rate is 6 percent a year, the unemployment rate is 4 percent, and the economy is at full employment. Unexpectedly, the Fed slows the money growth rate to lower inflation to 3 percent a year. Explain how unemployment and inflation change in the short run.
Because people are taken by surprise by the Fed’s action, they do not adjust their expected inflation rate. So the short-run Phillips curve remains stationary. Then, in the short run when the inflation rate falls to 3 percent, the economy moves along the short-run Phillips curve and the unemployment rate increases.
 
Personal Income and Spending Up in September
Personal income and spending continued to grow in September, a government report showed today, suggesting strength in the economy. … Inflation ... is up 2.4 percent for the year, above the Fed’s so-called comfort zone of 1 percent to 2 percent. … On the job front, new unemployment claims dipped 1.8 percent last week. ... The numbers are highly volatile … but taken together the reports suggest that a downturn in the labor market has yet to materialize.
The New York Times, November 1, 2007
Use this information to answer Exercises 8 and 9.
8. Sketch the Phillips curves if expected inflation is in the middle of the “Fed’s comfort zone” and the natural unemployment rate is 6 percent.
The long-run Phillips curve is vertical at the natural unemployment rate
of 6 percent. Figure 31.15 shows this long-run Phillips curve as LRPC. The middle of the Fed’s “comfort zone” has an inflation rate of 1.5 percent, so that is both the inflation rate the Fed prefers and the Fed’s preferred expected inflation rate. So the short-run Phillips curve intersects the long-run Phillips curve at the expected inflation rate of 1.5 percent, as illustrated in the figure by the short-run Phillips curve SRPC.
9. If the Fed is concerned about inflation and unexpectedly slows money growth, explain how unemployment will change in the short run and in the long run.
Because the change is unexpected, people are taken by surprise by the Fed’s action. As a result, they do not adjust their expected inflation rate so the short-run Phillips curve remains stationary. Then, in the short run when the inflation rate falls, the economy moves downward along the short-run Phillips curve and the unemployment rate increases. In the long run, people revise their expected inflation rate so that it equals the actual inflation rate. When this occurs, the short-run Phillips curve shifts downward and unemployment returns to its natural rate of 6 percent.

更新日期：2013/11/20 下午 06:30:39