Ernie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water: Cost of first bottle $1 Cost of second bottle $3 Cost of third bottle $5 Cost of fourth bottle $7 a. From this information, derive Ernie’s supply schedule. Graph his supply curve for bottled water. b. If the price of a bottle of water is $4, how many bottles does Ernie produce and sell? How much producer surplus does Ernie get from these sales? Show Ernie’s producer surplus in your graph. c. If the price rises to $6, how does quantity supplied change? How does Ernie’s producer surplus change? Show these changes in your graph.
> Melissa buys an iPhone for $240 and gets consumer surplus of $160. a. What is her willingness to pay? b. If she had bought the iPhone on sale for $180, what would her consumer surplus have been? c. If the price of an iPhone were $500, what would her cons
> If all quantities produced rise by 10 percent and all prices fall by 10 percent, which of the following occurs? a. Real GDP rises by 10 percent, while nominal GDP falls by 10 percent. b. Real GDP rises by 10 percent, while nominal GDP is unchanged. c. Re
> What is the difference between the unilateral and multilateral approaches to achieving free trade? Give an example of each.
> China is a major producer of grains, such as wheat, corn, and rice. Some years ago, the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports. a. Draw the graph that describes
> The main difference between imposing a tariff and handing out licenses under an import quota is that a tariff increases a. consumer surplus. b. producer surplus. c. international trade. d. government revenue.
> Daniel Patrick Moynihan, the late senator from New York, once introduced a bill that would levy a 10,000 percent tax on certain hollow-tipped bullets. a. Do you expect that this tax would raise much revenue? Why or why not? b. Even if the tax would raise
> If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, he should look for goods with ________ elasticities of demand and ________ elasticities of supply. a. small, small b. small, large c. large, small d. large, l
> Consider a market in which Bert from problem 4 is the buyer and Ernie from problem 5 is the seller. a. Use Ernie’s supply schedule and Bert’s demand schedule to find the quantity supplied and quantity demanded at prices of $2, $4, and $6. Which of these
> Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyer’s willingness to pay is a. negative. b. zero. c. positive but less than the marginal seller’s cost. d. positive and greater than the marginal
> How does a tax on a good affect the price paid by buy- ers, the price received by sellers, and the quantity sold?
> If the government places a $500 tax on luxury cars, will the price paid by consumers rise by more than $500, less than $500, or exactly $500? Explain.
> Jen values her time at $60 an hour. She spends 2 hours giving Colleen a massage. Colleen was willing to pay as much at $300 for the massage, but they negotiate a price of $200. In this transaction, a. consumer surplus is $20 larger than producer surplus.
> When a good is taxed, the burden of the tax falls mainly on consumers if a. the tax is levied on consumers. b. the tax is levied on producers. c. supply is inelastic, and demand is elastic. d. supply is elastic, and demand is inelastic.
> What do we call a good with an income elasticity less than zero?
> The price of coffee rose sharply last month, while the quantity sold remained the same. Five people suggest various explanations: Leonard: Demand increased, but supply was perfectly inelastic. Sheldon: Demand increased, but it was perfectly inelastic. Pe
> Over time, technological advance increases consumers’ incomes and reduces the price of smart phones. Each of these forces increases the amount consumers spend on smart phones if the income elasticity of demand is greater than ________ and if the price el
> Does a change in producers’ technology lead to a movement along the supply curve or to a shift in the supply curve? Does a change in price lead to a movement along the supply curve or to a shift in the supply curve?
> Using supply-and-demand diagrams show the effect of the following events on the market for sweatshirts. a. A hurricane in South Carolina damages the cotton crop. b. The price of leather jackets falls. c. All colleges require morning exercise in appropria
> Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold? a. an increase in the price of peanut better, a complement to jelly b. an increase in the price of Marshmallow
> Why do economists oppose policies that restrict trade among nations?
> The following table describes the production possibilities of two cities in the country of Baseballia: Pairs of Red Socks Pairs of White Socks per Worker per Hour per Worker per Hour Boston 3 3 Chicago 2 1 a. Without trade, what is the price of white soc
> Kayla can cook dinner in 30 minutes and wash the laundry in 20 minutes. Her roommate takes half as long to do each task. How should the roommates allocate the work? a. Kayla should do more of the cooking based on her comparative advantage. b. Kayla shoul
> Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which leads to a surplus? Why?
> Draw and explain a production possibilities frontier for an economy that produces milk and cookies. What happens to this frontier if a disease kills half of the economy’s cows?
> Classify each of the following statements as positive or normative. Explain. a. Society faces a short-run trade-off between inflation and unemployment. b. A reduction in the rate of money growth will reduce the rate of inflation. c. The Federal Reserve s
> Which of the following is a positive, rather than a normative, statement? a. Law X will reduce national income. b. Law X is a good piece of legislation c. Congress ought to pass law X. d. The president should veto law X.
> What does the “invisible hand” of the marketplace do?
> A 1996 bill reforming the federal government’s anti- poverty programs limited many welfare recipients to only two years of benefits. a. How does this change affect the incentives for working? b. How might this change represent a trade-off between equalit
> Governments may intervene in a market economy in order to a. protect property rights. b. correct a market failure due to externalities. c. achieve a more equal distribution of income. d. All of the above.
> Does a higher rate of saving lead to higher growth temporarily or indefinitely?
> In the 1990s and the first decade of the 2000s, investors from the Asian economies of Japan and China made significant direct and portfolio investments in the United States. At the time, many Americans were unhappy that this investment was occurring. a.
> When the Japanese car maker Toyota expands one of its car factories in the United States, what is the likely impact of this event on the gross domestic product and gross national product of the United States? a. GDP rises and GNP falls. b. GNP rises and
> Explain the meaning of nominal interest rate and real interest rate. How are they related?
> Give an example of a price ceiling and an example of a price floor.
> A small nation of ten people idolizes the TV show The Voice. All they produce and consume are karaoke machines and CDs, in the following amounts: a. Using a method similar to the CPI, compute the percentage change in the overall price level. Use 2017 as
> If the CPI is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power as ________ today a. $400 b. $500 c. $700 d. $900
> Why should policymakers care about GDP?
> List the four components of GDP. Give an example of each.
> Below are some data from the land of milk and honey. a. Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2016 as the base year. b. Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2017 and 2018 from
> Which is the largest component of GDP? a. consumption b. investment c. government purchases d. net exports.
> List five arguments often given to support trade restrictions. How do economists respond to these arguments?
> The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $20, and the equilibrium quantity is 3 million T-shirts. One day, after reading Adam Smith’s The Wealth of Nations while on vacation, the preside
> Which of the following trade policies would benefit producers, hurt consumers, and increase the amount of trade? a. the increase of a tariff in an importing country b. the reduction of a tariff in an importing country c. starting to allow trade when the
> What happens to the deadweight loss and tax revenue when a tax is increased?
> Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket. As a result of this policy, do more or fewer people attend classical music concerts? Explain.
> Give three examples of important trade-offs that you face in your life.
> After economics class one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic. In what sense is taxing food a “good” way to raise revenue? In what sense is it not a “good” way to
> The Laffer curve illustrates that, in some circum- stances, the government can reduce a tax on a good and increase the a. deadweight loss. b. government’s tax revenue. c. equilibrium quantity. d. price paid by consumers.
> Name two types of market failure. Explain why each may cause market outcomes to be inefficient.
> When a market is in equilibrium, the buyers are those with the ________ willingness to pay and the sellers are those with the ________ costs. a. highest, highest b. highest, lowest c. lowest, highest d. lowest, lowest
> Suppose the government removes a tax on buyers of a good and levies a tax of the same size on sellers of the good. How does this change in tax policy affect the price that buyers pay sellers for this good, the amount buyers are out of pocket (including a
> A senator wants to raise tax revenue and make workers better off. A staff member proposes raising the payroll tax paid by firms and using part of the extra revenue to reduce the payroll tax paid by workers. Would this accomplish the senator’s goal? Expla
> Which of the following would increase quantity supplied, increase quantity demanded, and decrease the price that consumers pay? a. the imposition of a binding price floor b. the removal of a binding price floor c. the passage of a tax levied on producers
> If demand is elastic, how will an increase in price change total revenue? Explain.
> Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane destroys half the coffee bean crop. Use appropriately labeled diagrams to answer the following questions. a. What happens to the price of coffee beans? b. What happens to
> When the government imposes a binding price floor, it causes a. the supply curve to shift to the left. b. the demand curve to shift to the right. c. a shortage of the good to develop. d. a surplus of the good to develop.
> An increase in the supply of a good will decrease the total revenue producers receive if a. the demand curve is inelastic. b. the demand curve is elastic. c. the supply curve is inelastic. d. the supply curve is elastic.
> What are the supply schedule and the supply curve, and how are they related? Why does the supply curve slope upward?
> Over the past 40 years, technological advances have reduced the cost of computer chips. How do you think this has affected the market for computers? For computer software? For typewriters?
> If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods? a. Prices and quantities both rise. b. Prices and quantities both fall. c. Prices rise and quantities fall. d. Prices fall and quantities rise.
> If two parties trade based on comparative advantage and both gain, in what range must the price of the trade lie?
> England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. a. Which country has the abs
> Suppose that in the United States, producing an air- craft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor and producing a shirt takes 4 hours of labor. What will these
> Name one economic interaction that isn’t covered by the simplified circular-flow diagram.
> Classify the following topics as relating to microeconomics or macroeconomics. a. a family’s decision about how much income to save b. the effect of government regulations on auto emissions c. the impact of higher national saving on economic growth d. a
> All of the following topics fall within the study of microeconomics EXCEPT a. the impact of cigarette taxes on the smoking behavior of teenagers. b. the role of Microsoft’s market power in the pricing of software. c. the effectiveness of antipoverty prog
> Define the price elasticity of demand. • Explain the relationship between total revenue and the price elasticity of demand.
> Why isn’t trade among countries like a game with some winners and some losers?
> The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your sales people report that the introduction of competing products has reduced the expected sales of your n
> Adam Smith’s “invisible hand” refers to a. the subtle and often hidden methods that businesses use to profit at consumers’ expense. b. the ability of free markets to reach desirable outcomes, despite the self-interest of market participants. c. the abil
> Explain how higher saving leads to a higher standard of living. What might deter a policymaker from trying to raise the rate of saving?
> What is the opportunity cost of investing in capital? Do you think a country can overinvest in capital? What is the opportunity cost of investing in human capital? Do you think a country can overinvest in human capital? Explain.
> Because capital is subject to diminishing returns, higher saving and investment do not lead to higher a. income in the long run. b. income in the short run. c. growth in the long run. d. growth in the short run.
> Over a long period of time, the price of a candy bar rose from $0.20 to $1.20. Over the same period, the CPI rose from 150 to 300. Adjusted for overall inflation, how much did the price of the candy bar change?
> Because consumers can sometimes substitute cheaper goods for those that have risen in price, a. the CPI overstates inflation. b. the CPI understates inflation. c. the GDP deflator overstates inflation. d. the GDP deflator understates inflation.
> Define real GDP and nominal GDP. Which is a better measure of economic well-being? Why?
> Many years ago, Peggy paid $500 to put together a re- cord collection. Today, she sold her albums at a garage sale for $100. How does this sale affect current GDP?
> Define the price elasticity of demand and the income elasticity of demand.
> As the chapter states, GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative mea- sure of economic well-being?
> An American buys a pair of shoes made in Italy. How do the U.S. national income accounts treat the transaction? a. Net exports and GDP both rise. b. Net exports and GDP both fall. c. Net exports fall, while GDP is unchanged. d. Net exports are unchanged,
> Describe what a tariff is and its economic effects
> Consider the arguments for restricting trade. a. Imagine that you are a lobbyist for timber, an established industry suffering from low-priced foreign competition, and you are trying to get Congress to pass trade restrictions. Which two or three of the f
> If a nation that imports a good imposes a tariff, it will increase a. the domestic quantity demanded. b. the domestic quantity supplied. c. the quantity imported from abroad. d. all of the above.
> Why do experts disagree about whether labor taxes have small or large deadweight losses?
> Suppose that the government imposes a tax on heating oil. a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain. b. Would the revenue collected from this tax likely be greater in
> Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve. If a 10 cent per pound tax is increased to 15 cents, the government’s tax revenue a. increases by less than 50 percent and may even decline. b. increases by exactly 50
> What is efficiency? Is it the only goal of economic policymakers?
> It is a hot day, and Bert is thirsty. Here is the value he places on each bottle of water: Value of first bottle $7 Value of second bottle $5 Value of third bottle $3 Value of fourth bottle $1 a. From this information, derive Bert’s demand schedule. Gra
> For each of the following pairs of goods, which good would you expect to have more elastic demand and why? a. required textbooks or mystery novels b. Beethoven recordings or classical music recordings in general c. subway rides during the next 6 months o
> An efficient allocation of resources maximizes a. consumer surplus. b. producer surplus. c. consumer surplus plus producer surplus. d. consumer surplus minus producer surplus.
> Explain why economists usually oppose controls on prices.
> Suppose the federal government requires beer drinkers to pay a $2 tax on each case of beer purchased. (In fact, both the federal and state governments impose beer taxes of some sort.) a. Draw a supply-and-demand diagram of the market for beer without the
> Which of the following would increase quantity supplied, decrease quantity demanded, and increase the price that consumers pay? a. the imposition of a binding price floor b. the removal of a binding price floor c. the passage of a tax levied on producers
> On a supply-and-demand diagram, show equilibrium price, equilibrium quantity, and the total revenue received by producers.
> A price change causes the quantity demanded of a good to decrease by 30 percent, while the total revenue of that good increases by 15 percent. Is the demand curve elastic or inelastic? Explain.
> The ability of firms to enter and exit a market over time means that, in the long run, a. the demand curve is more elastic. b. the demand curve is less elastic. c. the supply curve is more elastic. d. the supply curve is less elastic.
> On the appropriate diagram, show what happens to the market for pizza if the price of tomatoes rises. On a separate diagram, show what happens to the market for pizza if the price of hamburgers falls.
> Harry’s income declines, and as a result, he buys more pumpkin juice. Is pumpkin juice an inferior or a nor- mal good? What happens to Harry’s demand curve for pumpkin juice?
> Consider the markets for film streaming services, TV screens, and tickets at movie theaters. a. For each pair, identify whether they are complements or substitutes: • Film streaming and TV screens • Film streaming and movie tickets • TV screens and mo
> A life-saving medicine without any close substitutes will tend to have a. a small elasticity of demand. b. a large elasticity of demand. c. a small elasticity of supply. d. a large elasticity of supply.
