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. Graph his demand curve for bottled water.
b. If the price of a bottle of water is $4, how many bottles does Bert buy? How much consumer surplus does Bert get from his purchases? Show Bert’s consumer surplus in your graph.
c. If the price falls to $2, how does quantity demanded change? How does Bert’s consumer surplus change? Show these changes in your graph.
> 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.
> 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
> 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?
> 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.
> The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price. a. supply, higher b. supply, lower c. demand, higher d. demand, lower
> Is absolute advantage or comparative advantage more important for trade? Explain your reasoning using the example in your answer to question 3.
> Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year. a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushe
> Which goods will a nation typically import? a. those goods in which the nation has an absolute advantage b. those goods in which the nation has a comparative advantage c. those goods in which other nations have an absolute advantage d. those goods in whi
> An economy consists of three workers: Larry, Moe, and Curly. Each works 10 hours a day and can pro- duce two services: mowing lawns and washing cars. In an hour, Larry can either mow one lawn or wash one car; Moe can either mow one lawn or wash two cars;
> An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers’ preferences, it would a. expand the production possibilities frontier. b. contract the production possibilities frontier.
> Why should policymakers think about incentives?
> You win $100 in a basketball pool. You have a choice between spending the money now and putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the $100 now?
> A marginal change is one that a. is not important for public policy. b. incrementally alters an existing plan. c. makes an outcome inefficient. d. does not influence incentives.
> Describe three ways a government policymaker can try to raise the growth in living standards in a society. Are there any drawbacks to these policies?
> What is a market? What are the characteristics of a perfectly competitive market?
> In what way is a college degree a form of capital?
> Societies choose what share of their resources to devote to consumption and what share to devote to investment. Some of these decisions involve private spending; others involve government spending. a. Describe some forms of private spending that represen
> Most economists are ________ that natural resources will eventually limit economic growth. As evidence, they note that the prices of most natural resources, adjusted for overall inflation, have tended to ________ over time. a. concerned, rise b. concerne
> If the price of imported French wine rises, is the CPI or the GDP deflator affected more? Why?
> Suppose that people consume only three goods, as shown in this table: a. What is the percentage change in the price of each of the three goods? b. Using a method similar to the CPI, compute the percentage change in the overall price level. c. If you were
> If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase a. both the CPI and the GDP deflator. b. neither the CPI nor the GDP deflator. c. the CPI but not the GDP deflator. d. the GDP deflator
> List the four components of expenditure. Which is the largest?
> A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for $3. What is the total contribution of these transactions to GDP?
> The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded.
> Which of the following does NOT add to U.S. GDP? a. Air France buys a plane from Boeing, the U.S. air- craft manufacturer. b. General Motors builds a new auto factory in North Carolina. c. The city of New York pays a salary to a policeman. d. The federal
> What is a competitive market? Briefly describe a type of market that is not perfectly competitive.
> The textile industry of Autarka advocates a ban on the import of wool suits. Describe five arguments its lobbyists might make. Give a response to each of these arguments.
> Draw the supply-and-demand diagram for an importing country. Identify consumer surplus and producer surplus before trade is allowed. Identify consumer surplus and producer surplus with free trade. What is the change in total surplus?
> When China’s clothing industry expands, the increase in world supply lowers the world price of clothing. a. Draw an appropriate diagram to analyze how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that imp
> When a nation opens itself to trade in a good and be- comes an importer, a. producer surplus decreases, but consumer surplus and total surplus both increase. b. producer surplus decreases, consumer surplus increases, and so the impact on total surplus is
> If the government doubles the tax on gasoline, can you be sure that revenue from the gasoline tax will rise? Can you be sure that the deadweight loss from the gasoline tax will rise? Explain.
> How do the elasticities of supply and demand affect the deadweight loss of a tax? Why do they have this effect?
> Consider the market for rubber bands. a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use the tools of consumer surplus and producer surplus in
> Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping. If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax a. increases by less than 50 percent and may even decline.
> Draw the supply and demand curves for turkey. In the equilibrium, show producer and consumer surplus. Explain why producing more turkeys would lower total surplus.
> In a supply-and-demand diagram, show producer and consumer surplus at the market equilibrium.
> Explain each of the following statements using supply-and-demand diagrams. a. “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country.” b. “When the weather turns warm in New England every summer, the price
> Suppose the demand for French bread rises. Explain what happens to producer surplus in the market for French bread. Explain what happens to producer surplus in the market for flour. Illustrate your answers with diagrams.
> John has been working as a tutor for $300 a semester. When the university raises the price it pays tutors to $400, Jasmine enters the market and begins tutoring as well. How much does producer surplus rise as a result of this price increase? a. by less t
> What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?
> A recent study found that the demand-and-supply schedules for Frisbees are as follows: a. What are the equilibrium price and quantity of Frisbees? b. Frisbee manufacturers persuade the government that Frisbee production improves scientistsâ€
> A $1 per unit tax levied on consumers of a good is equivalent to a. a $1 per unit tax levied on producers of the good. b. a $1 per unit subsidy paid to producers of the good. c. a price floor that raises the good’s price by $1 per unit. d. a price ceil
> How might a drought that destroys half of all farm crops be good for farmers? If such a drought is good for farmers, why don’t farmers destroy their own crops in the absence of a drought?