Consider a corrupt provincial government in which each housing inspector examines two newly built structures each week. All the builders in the province are unethical and want to increase their profits by using substandard construction materials, but they can’t do that unless they can bribe a housing inspector into approving a substandard building. a. If bribes cost $1,000 each, how much will a housing inspector make each year in bribes? (Assume that each inspector works 52 weeks a year and gets bribed for every house he inspects.) b. There is a provincial construction supervisor who gets to hire all of the housing inspectors. He himself is corrupt and expects his housing inspectors to share their bribes with him. Suppose that 20 inspectors work for him and that each passes along half the bribes collected from builders. How much will the construction supervisor collect each year? c. Corrupt officials may have an incentive to reduce the provision of government services to help line their own pockets. Suppose that the provincial construction supervisor decides to cut the total number of housing inspectors from 20 to 10 in order to decrease the supply of new housing permits. This decrease in the supply of permits raises the equilibrium bribe from $1,000 to $2,500. How much per year will the construction supervisor now receive if he is still getting half of all the bribes collected by the 10 inspectors? How much more is the construction supervisor getting now than when he had 20 inspectors working in part (b)? Will he personally be happy with the reduction in government services? d. What if reducing the number of inspectors from 20 to 10 only increased the equilibrium bribe from $1,000 to $1,500? In this case, how much per year would the construction supervisor collect from his 10 inspectors? How much less is the construction supervisor getting than when he had 20 inspectors working in part (b)? In this case, will the construction supervisor be happy with the reduction in government services? Will he want to go back to using 20 inspectors?
> Suppose that an SML indicates that assets with a beta = 1.15 should have an average expected rate of return of 12 percent per year. If a particular stock with a beta = 1.15 currently has an average expected rate of return of 15 percent, what should we ex
> The interest rate on short-term U.S. government bonds is 4 percent. The risk premium for any asset with a beta = 1.0 is 6 percent. What is the average expected rate of return on the market portfolio? a. 0 percent. b. 4 percent. c. 6 percent. d. 10 perce
> If an investment has 35 percent more nondiversifiable risk than the market portfolio, its beta will be: a. 35. b. 1.35. c. 0.35.
> An investment has a 50 percent chance of generating a 10 percent return and a 50 percent chance of generating a 16 percent return. What is the investment’s average expected rate of return? a. 10 percent. b. 11 percent. c. 12 percent. d. 13 percent. e. 1
> Sammy buys stock in a suntan-lotion maker and also stock in an umbrella maker. One stock does well when the weather is good; the other does well when the weather is bad. Sammy’s portfolio indicates that “weather risk” is a _________ risk. a. Diversifiab
> Tammy can buy an asset this year for $1,000. She is expecting to sell it next year for $1,050. What is the asset’s anticipated percentage rate of return? a. 0 percent. b. 5 percent. c. 10 percent. d. 15 percent.
> Asset X is expected to deliver 3 future payments. They have present values of, respectively, $1,000, $2,000, and $7,000. Asset Y is expected to deliver 10 future payments, each having a present value of $1,000. Which of the following statements correctly
> Demand curves slope downward because, other things held equal, LO3 a. An increase in a product’s price lowers MU. b. A decrease in a product’s price lowers MU. c. A decrease in a product’s price raises MU per dollar and makes consumers wish to purchase
> It is a fact that (1 + 0.12)3 = 1.40. Knowing that to be true, what is the present value of $140 received in three years if the annual interest rate is 12 percent? a. $1.40. b. $12. c. $100. d. $112.
> Identify each of the following investments as either an economic investment or a financial investment. a. A company builds a new factory. b. A pension plan buys some Google stock. c. A mining company sets up a new gold mine. d. A woman buys a 100-year-o
> Why does a downshift of the consumption schedule typically involve an equal upshift of the saving schedule? What is the exception to this relationship?
> Precisely how do the MPC and the APC differ? How does the MPC differ from the MPS? Why must the sum of MPC and the MPS equal 1?
> Why is it difficult to distinguish between frictional, structural, and cyclical unemployment? Why is unemployment an economic problem? What are the consequences of a negative GDP gap? What are the noneconomic effects of unemployment?
> How, in general, do unemployment rates vary by race and ethnicity, gender, occupation, and education? Why does the average length of time people are unemployed rise during a recession?
> How is the labor force defined and who measures it? How is the unemployment rate calculated? Does an increase in the unemployment rate necessarily mean a decline in the size of the labor force? Why is a positive unemployment rate—one more than zero perce
> How, in general, can a financial crisis lead to a recession? How, in general, can a major new invention lead to an expansion?
> What are the four phases of the business cycle? How long do business cycles last? Why does the business cycle affect output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing consum
> How do the Minsky and Austrian explanations for the causes of the Great Recession differ? Explain how the proponents of government stimulus believe that it will affect aggregate demand and employment (be specific!). How might government stimulus possibl
> Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his MU from the final magazine is 10 utils while his MU from the final newspaper is also 10 utils. According to the utility
> Do prices tend to become more or less flexible as time passes? If there is a trend, how does it affect macroeconomists’ choice of models?
> Why do many firms strive to maintain stable prices?
> Are all prices in the economy equally inflexible? Which ones show large amounts of short-run flexibility? Which ones show a great deal of inflexibility even over months and years?
> Catalogue companies are committed to selling at the prices printed in their catalogues. If a catalogue company finds its inventory of sweaters rising, what does that tell you about the demand for sweaters? Was it unexpectedly high, unexpectedly low, or a
> Why, in general, do shocks force people to make changes? Give at least two examples from your own experience.
> How does investment as defined by economists differ from investment as defined by the general public? What would happen to the amount of economic investment made today if firms expected the future returns to such investment to be very low? What if firms
> Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can’t people enjoy more of both? How does saving relate to investment and thus to economic growth?
> Did economic output start growing faster than population from the beginning of the human inhabitation of the earth? When did modern economic growth begin? Have all of the world’s nations experienced the same extent of modern economic growth?
> Consider a nation in which the volume of goods and services is growing by 5 percent per year. What is the likely impact of this high rate of growth on the power and influence of its government relative to other countries experiencing slower rates of grow
> Why do you think macroeconomists focus on just a few key statistics when trying to understand the health and trajectory of an economy? Would it be better to try to make examine all possible data?
> Identify following arguments about economic growth as being either anti-growth or pro-growth. a. Growth means worker burnout and frantic schedules. b. Rising incomes allow people to buy more education, medical care, and recreation. c. The Earth has only
> Assume that the total value of the following items is $600 billion in a specific year for Upper Mongoose: net exports = $50 billion; value of new goods and services produced in the underground economy = $75 billion; personal consumption expenditures = $3
> The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data. Nominal GDP, Price Index Real GDP, Year B
> Suppose that in 1984 the total output in a single-good economy was 7,000 buckets of chicken. Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 2005 the price per bucket of chicken was $16 and that 22,000 buckets
> Using the following national income accounting data, compute (a) GDP, (b) NDP, and (c) NI. All figures are in billions. Compensation of employees U.S. exports of goods and services $194.2 17.8 Consumption of fixed capital 11.8 Government purchases 5
> Below is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income measures by both the expenditures and the income approaches. The resu
> Why might citizens interested in maximizing economic efficiency be happy to invest their government with the right to coerce them in at least some situations?
> Cite three examples of recent decisions that you made in which you, at least implicitly, weighed marginal cost and marginal benefit.
> What is the purpose of charging different groups of customers different prices? Supplement the three broad examples in the Last Word with two additional examples of your own. Hint: Think of price discounts based on group characteristics or time of purcha
> Research has found that an increase in the price of beer would reduce the amount of marijuana consumed. Is cross elasticity of demand between the two products positive or negative? Are these products substitutes or complements? What might be the logic be
> The income elasticities of demand for movies, dental services, and clothing have been estimated to be +3.4, +1, and +.5, respectively. Interpret these coefficients. What does it mean if an income elasticity coefficient is negative?
> What effect would a rule stating that university students must live in university dormitories have on the price elasticity of demand for dormitory space? What impact might this in turn have on room rates?
> If in some country personal consumption expenditures in a specific year are $50 billion, purchases of stocks and bonds are $30 billion, net exports are -$10 billion, government purchases are $20 billion, sales of second-hand items are $8 billion, and gro
> Explain why the choice between 1, 2, 3, 4, 5, 6, 7, and 8 “units,” or 1,000, 2,000, 3,000, 4,000, 5,000, 6,000, 7,000 and 8,000 movie tickets, makes no difference in determining elasticity in Table 6.1.
> Erin grows pecans. The number of bushels (B) that she can produce depends on the number of inches of rainfall (R) that her orchards get. The relationship is given algebraically as follows: B = 3,000 + 800R. Match each part of this equation with the corr
> True or False. The median voter model explains why politicians so often stake out fringe positions that appeal only to a small segment of the electorate. Why?
> Suppose there are only five people in a society and each favors one of the five highway construction options listed in Table 4.4 (“No new construction” is one of the five options). Explain which of these highway option
> Explain the paradox of voting through reference to the accompanying table, which shows the ranking of three public goods by voters Jay, Dave, and Conan: Rankings Public Good Jay Dave Conan Courthouse 2nd choice 1st choice 3d choice School 3d choice 2
> Political advertising is often directed at winning over so-called swing voters, whose votes might go either way. Suppose that two political parties-the Freedom Party and the Liberty Party-disagree on whether to build a new road. Polling shows that of 1
> Look back at Figures 1a and 1b, which show the costs and benefits to voters Adams, Benson, and Conrad of two different public goods that the government will produce if a majority of Adams, Benson, and Conrad support them. Suppose that Adams, Benson, and
> Lorena likes to play golf. The number of times per year that she plays depends on both the price of playing a round of golf as well as Lorena’s income and the cost of other types of entertainment—in particular, how mu
> Currently, at a price of $1 each, 100 popsicles are sold per day in the perpetually hot town of Rostin. Consider the elasticity of supply. In the short run, a price increase from $1 to $2 is unit elastic (Es = 1.0). So how many popsicles will be sold ea
> Assume that a grower of flower bulbs sells its annual output of bulbs to an Internet retailer for $70,000. The retailer, in turn, brings in $160,000 from selling the bulbs directly to final customers. What amount would these two transactions add to perso
> What is the formula for measuring the price elasticity of supply? Suppose the price of apples goes up from $20 to $22 a box. In direct response, Goldsboro Farms supplies 1,200 boxes of apples instead of 1,000 boxes. Compute the coefficient of price elast
> Danny “Dimes” Donahue is a neighborhood’s 9-year-old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $1.50 each, he sells 100. At a price of $1.00 each, he sells 300. Is demand elastic or inelastic
> Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $30 per basketball and $600 when the price is set at $20 per basketball. Without using the midpoint formula, can you tell whether demand is elastic
> Investigate how demand elasticities are affected by increases in demand. Shift each of the demand curves in Figures 6.2a, 6.2b, and 6.2c to the right by 10 units. For example, point a in Figure 6.2a would shift rightward from location (10 units, $2) to (
> Look at the demand curve in Figure 6.2a. Use the midpoint formula and points a and b to calculate the elasticity of demand for that range of the demand curve. Do the same for the demand curves in Figures 6.2b and 6.2c using, respectively, points c and d
> Select all of the following that are true. To an economist, a coercive government can be useful in order to: a. Reallocate resources in order to improve efficiency. b. Fight negative externalities. c. Ensure low gasoline prices. d. Provide a low-risk e
> Consider a specific example of the special-interest effect and the collective-action problem. In 2012, it was estimated that the total value of all corn‐production subsidies in the United States totaled about $3 billion. The population of the United Sta
> Suppose that there are 1 million federal workers at the lowest level of the federal bureaucracy and that above them there are multiple layers of supervisors and supervisors-of-supervisors. Assume that each higher level is one-tenth the size of the one b
> “The problem with our democratic institutions is that they don’t correctly reflect the will of the people! If the people-rather than self-interested politicians or lobbyists-had control, we wouldn’t have to worry about government taking actions that don
> “Majority voting ensures that government will produce only those public goods for which benefits exceed costs.” Why?
> Suppose that annual output in year 1 in a 3-good economy is 3 quarts of ice cream, 1 bottle of shampoo, and 3 jars of peanut butter. In year 2, the output mix changes to 5 quarts of ice cream, 2 bottles of shampoo, and 2 jars of peanut butter. If the pri
> Explain how affirmative and negative majority votes can sometimes lead to inefficient allocations of resources to public goods. Is this problem likely to be greater under a benefits‐received or an ability‐to‐pay tax system? Use the information in Figures
> Draw a production possibilities curve with public goods on the vertical axis and private goods on the horizontal axis. Assuming the economy is initially operating on the curve, indicate how the production of public goods might be increased. How might the
> Draw a supply and demand graph and identify the areas of consumer surplus and producer surplus. Given the demand curve, what impact will an increase in supply have on the amount of consumer surplus shown in your diagram? Explain why.
> Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is -5.4. What can you conclude about how products A and B are related? Products C and D?
> In 2015, Paul Gauguin's painting When Will You Marry sold for $300 million. Portray this sale in a demand and supply diagram and comment on the elasticity of supply. Comedian George Carlin once mused, “If a painting can be forged well enough to fool some
> How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? a. Price falls and demand is inelastic. b. Price rises and demand is elastic. c. Price rises and supply is elastic. d.
> Calculate total-revenue data from the demand schedule in review question 1. Graph total revenue below your demand curve. Generalize about the relationship between price elasticity and total revenue.
> What are the major determinants of price elasticity of demand? Use those determinants and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic: (a) bottled water; (b) toothpaste; (c) Crest to
> Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $30 per basketball and $600 when the price is set at $20 per basketball. Without using the midpoint formula, identify whether demand is elastic, ine
> How do the concepts of pork-barrel politics and logrolling relate to the items listed in the Last Word?
> Suppose that the pen-making industry is perfectly competitive. Also suppose that each current firm and any potential firms that might enter the industry all have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of
> Critique: “Thank goodness we have so many government regulatory agencies. They keep Big Business in check.”
> ___________________ occur when politicians commit to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures. a. Budget deficits b. Debt Crises c. Loan guarantees d. Unfunded
> A few hundred U.S. sugar makers lobby the U.S. government each year to make sure that it keeps taxing imported sugar at a high rate. They do so because the policy drives up the domestic price of sugar and increases their profits. It is estimated that the
> Tammy Hall is the mayor of a large U.S. city. She has just established the Office of Window Safety. Because windows sometimes break and spray glass shards, every window in the city will now have to pass an annual safety inspection. Property owners must p
> To an economist, any government program is too big if an analysis of that program finds that MB _______ MC. a. Is greater than b. Is less than c. Is equal to d. Is less than twice as large as e. Is more than twice as large as
> Think back to the gold standard period. If the United States suffered a recession, to what degree could it engage in expansionary monetary policy?
> Suppose Zeeland pegs its currency, the zee, at 1 zee = 36 grains of gold while Aeeland pegs its currency, the aeellar, at 1 aellar = 10 grains of gold. a. What would the exchange rate be between the zee and the aellar? b. How many aellars could you get
> True or False: Computers and increased global competition have retarded economic growth in recent decades.
> Suppose that just by doubling the amount of output that it produces each year, a firm’s per-unit production costs fall by 30 percent. This is an example of: a. Economies of scale. b. Improved resource allocation. c. Technological advance. d. The demand
> Compare and contrast the market monetarist 5-percent target for nominal GDP growth with the older, simpler monetary rule advocated by Milton Friedman.
> Refer to Figure 26.1b and assume that price is fixed at $37,000 and that Buzzer Auto needs 5 workers for every 1 automobile produced. If demand is DM and Buzzer wants to perfectly match its output and sales, how many cars will Buzzer produce and how many
> Explain: “Politicians would make more rational economic decisions if they weren’t running for reelection every few years.”
> You have just been elected president of the United States, and the present chairperson of the Federal Reserve Board has resigned. You need to appoint a new person to this position, as well as a person to chair your Council of Economic Advisers. Using Tab
> Explain the difference between “active” discretionary fiscal policy advocated by mainstream economists and “passive” fiscal policy advocated by new classical economists. Explain: “The problem with a balanced-budget amendment is that it would, in a sense,
> Use the equation of exchange to explain the rationale for a monetary rule. Why will such a rule run into trouble if V unexpectedly falls because of, say, a drop in investment spending by businesses?
> State and explain the basic equation of monetarism. What is the major cause of macroeconomic instability, as viewed by monetarists?
> Craig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time Kris moved to his right to avoid Craig. They bumped into each other. What concept does this example illustrate?
> Briefly describe the difference between a so-called real business cycle and a more traditional “spending” business cycle.
> How might relationships between so-called insiders and outsiders contribute to downward wage inflexibility?
> What is an efficiency wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at least for a time, when aggregate demand declines?
> According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability? How might adverse aggregate supply factors cause instability, according to mainstream ec
> Real GDP equals _________ times _________. LO4 a. Average hours of work; quantity of capital. b. Average hours of work; allocative efficiency. c. Labor input; labor productivity. d. Natural resources; improvements in technology.
> Assume that a national restaurant firm called BBQ builds 10 new restaurants at a cost of $1 million per restaurant. It outfits each restaurant with an additional $200,000 of equipment and furnishings. To help partially defray the cost of this expansion,
> Suppose that the equation for the SLM is Y = 0.05 + 0.04X, where Y is the average expected rate of return, 0.05 is the vertical intercept, 0.04 is the slope, and X is the risk level as measured by beta. What is the risk-free interest rate for this SML? W
> Suppose initially that two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90. a. What are the rates of return of assets A and B at their current
> Consider an asset that costs $120 today. You are going to hold it for 1 year and then sell it. Suppose that there is a 25 percent chance that it will be worth $100 in a year, a 25 percent chance that it will be worth $115 in a year, and a 50 percent chan
