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Principles of economics 6th Edition N. Gregory Mankiw - Solutions
A person who consumes wine and cheese gets a raise, so his income increases from $3,000 to $4,000. Show what happens if both wine and cheese are normal goods. Now show what happens if cheese is an inferior good.
The price of cheese rises from $6 to $10 per pound, while the price of wine remains $3 per glass. For a consumer with a constant income of $3,000, show what happens to consumption of wine and cheese. Decompose the change into income and substitution effects.
Can an increase in the price of cheese possibly induce a consumer to buy more cheese? Explain
Jennifer divides her income between coffee and croissants (both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in the United States.a. Show the effect of the frost on Jennifer’s budget constraint.b. Show the effect of the frost on Jennifer’s
Compare the following two pairs of goods:• Coke and Pepsi• Skis and ski bindingsa. In which case are the two goods complements? In which case are they substitutes?b. In which case do you expect the indifference curves to be fairly straight? In which case do you expect the indifference curves to
You consume only soda and pizza. One day, the price of soda goes up, the price of pizza goes down, and you are just as happy as you were before the price changes.a. Illustrate this situation on a graph.b. How does your consumption of the two goods change? How does your response depend on income and
Mario consumes only cheese and crackers.a. Could cheese and crackers both be inferior goods for Mario? Explain. b. Suppose that cheese is a normal good for Mario while crackers are an inferior good. If the price of cheese falls, what happens to Mario’s consumption of crackers?
Jim buys only milk and cookies.a. In year 1, Jim earns $100, milk costs $2 per quart, and cookies cost $4 per dozen. Draw Jim’s budget constraint.b. Now suppose that all prices increase by 10 percent in year 2 and that Jim’s salary increases by 10 percent as well. Draw Jim’s new budget
State whether each of the following statements is true or false. Explain your answers.a .“All Giffen goods are inferior goods.”b.“All inferior goods are Giffen goods.”
A college student has two options for meals: eating at the dining hall for $6 per meal, or eating a Cup O’ Soup for $1.50 per meal. His weekly food budget is $60.a. Draw the budget constraint showing the trade-off between dining hall meals and Cups O’ Soup. Assuming that he spends equal amounts
Consider your decision about how many hours to work.a. Draw your budget constraint assuming that you pay no taxes on your income. On the same diagram, draw another budget constraint assuming that you pay 15 percent tax.b. Show how the tax might lead to more hours of work, fewer hours, or the same
Sarah is awake for 100 hours per week. Using one diagram, show Sarah’s budget constraints if she earns $6 per hour, $8 per hour, and $10 per hour. Now draw indifference curves such that Sarah’s labor-supply curve is upward sloping when the wage is between $6 and $8 per hour, and backward
Draw the indifference curve for someone deciding how to allocate time between work and leisure. Suppose the wage increases. Is it possible that the person’s consumption would fall? Is this plausible? Discuss.
Daniel is a diligent student who loves getting as, but he also loves watching movies. Daniel is awake for 100 hours each week, and studying and watching movies are his only two activities. Daniel must study for 20 hours per week for each a he earns. Each movie is 2 hours long.a. Draw Daniel’s
Consider a couple’s decision about how many children to have. Assume that over a lifetime a couple has 200,000 hours of time to either work or raise children. The wage is $10 per hour. Raising a child takes 20,000 hours of time.a. Draw the budget constraint showing the trade-off between lifetime
The welfare system provides income to some needy families. Typically, the maximum payment goes to families that earn no income; then, as families begin to earn income, the welfare payment declines gradually and eventually disappears. Let’s consider the possible effects of this program on a
Five consumers have the following marginal utility of apples and pears:The price of an apple is $2, and the price of a pear is $1. Which, if any, of these consumers are optimizing over their choice of fruit? For those who are not, how should they change theirspending?
A person who buys a life insurance policy pays a certain amount per year and receives for his family a much larger payment in the event of his death. Would you expect buyers of life insurance to have higher or lower death rates than the average person? How might this be an example of moral hazard?
A public school district is voting on the school budget and the resulting student-teacher ratio. A poll finds that 20 percent of the voters want a ratio of 9:1, 25 percent want a ratio of 10:1, 15 percent want a ratio of 11:1, and 40 percent want a ratio of 12:1. What outcome would you expect the
Describe at least three ways in which human decision making differs from that of the rational individual of conventional economic theory.
What is moral hazard? List three things an employer might do to reduce the severity of this problem.
What is adverse selection? Give an example of a market in which adverse selection might be a problem.
Define signaling and screening and give an example of each.
Describe the ultimatum game. What outcome from this game would conventional economic theory predict? Do experiments confirm this prediction? Explain.
Each of the following situations involves moral hazard. In each case, identify the principal and the agent, and explain why there is asymmetric information. How does the action described reduce the problem of moral hazard?a. Landlords require tenants to pay security deposits.b. Firms compensate top
Suppose that the Live-Long-and-Prosper Health Insurance Company charges $5,000 annually for a family insurance policy. The company’s president suggests that the company raise the annual price to $6,000 to increase its profits. If the firm followed this suggestion, what economic problem might
A case study in this chapter describes how a boyfriend can signal to a girlfriend that he loves her by giving an appropriate gift. Do you think saying “I love you” can also serve as a signal? Why or why not?
Some AIDS activists believe that health insurance companies should not be allowed to ask applicants if they are infected with the HIV virus that causes AIDS. Would this rule help or hurt those who are HIV-positive? Would it help or hurt those who are not HIV-positive? Would it exacerbate or
The government is considering two ways to help the needy: giving them cash or giving them free meals at soup kitchens. Give an argument for giving cash. Give an argument, based on asymmetric information, for why the soup kitchen may be better than the cash handout.
Ken walks into an ice-cream parlor.Waiter: “We have vanilla and chocolate today.”Ken: “I’ll take vanilla.”Waiter: “I almost forgot. We also have strawberry.”Ken: “In that case, I’ll take chocolate.” What standard property of decision making is Ken violating?
Three friends are choosing a restaurant for dinner. Here are their preferences:a. If the three friends use a Borda count to make their decision, where do they go to eat?b. On their way to their chosen restaurant, they see that the Mexican and French restaurants are closed, so they use a Borda count
Three friends are choosing a TV show to watch. Here are their preferences:a. If the three friends try using a Borda count to make their choice, what would happen?b. Monica suggests a vote by majority rule. She proposes that first they choose between Dexter and Glee, and then they choose between the
Five roommates are planning to spend the weekend in their dorm room watching movies, and they are debating how many movies to watch. Here is their willingness to pay:Buying a DVD costs $15, which the roommates split equally, so each pays $3 per movie.a. What is the efficient number of movies to
Explain why the following reactions might reflect some deviation from rationality.a. After a widely reported earthquake in California, many people call their insurance company to apply for earthquake insurance.b. In January, many fitness clubs offer special annual membership fees to attract
What two things does gross domestic product measure? How can it measure two things at once?
Which contributes more to GDP—the production of a pound of hamburger or the production of a pound of caviar? Why?
List the four components of expenditure. Which is the largest?
Define real GDP and nominal GDP. Which is a better measure of economic well-being? Why?
Why should policymakers care about GDP?
List the four components of GDP. Give an example of each.
Why do economists use real GDP rather than nominal GDP to gauge economic well-being?
In the year 2010, the economy produces 100 loaves of bread that sell for $2 each. In the year 2011, the economy produces 200 loaves of bread that sell for $3 each. Calculate nominal GDP, real GDP, and the GDP deflator for each year. (Use 2010 as the base year.) By what percentage does each of these
Why is it desirable for a country to have a large GDP? Give an example of something that would raise GDP and yet be undesirable.
What components of GDP (if any) would each of the following transactions affect? Explain.a. A family buys a new refrigerator.b. Aunt Jane buys a new house.c. Ford sells a Mustang from its inventory.d. You buy a pizza.e. California repaves Highway 101.f. Your parents buy a bottle of French wine.g.
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 measure of economic well-being?
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 2010 as the base year.b. Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2011 and 2012 from the preceding year. For each year, identify the
Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is $6. Year 1 is the base year.a. What is nominal GDP for
Consider the following data on U.S. GDP:a. What was the growth rate of nominal GDP between 1999 and 2009? (The growth rate of a variable X over a N-year period is calculated as 100 × [(Xfinal/Xinitial)1/N – 1].)b. What was the growth rate of the GDP deflator between 1999 and 2009?c. What
A farmer grows wheat, which he sells to a miller for $100. The miller turns the wheat into flour, which he sells to a baker for $150. The baker turns the wheat into bread, which he sells to consumers for $180. Consumers eat the bread.a. What is GDP in this economy? Explain.b. Value added is defined
Goods and services that are not sold in markets, such as food produced and consumed at home, are generally not included in GDP. Can you think of how this might cause the numbers in the second column of Table to be misleading in a comparison of the economic well-being of the United States and
The participation of women in the U.S. labor force has risen dramatically since 1970.a. How do you think this rise affected GDP?b. Now imagine a measure of well-being that includes time spent working in the home and taking leisure. How would the change in this measure of well-being compare to the
One day, Barry the Barber, Inc., collects $400 for haircuts. Over this day, his equipment depreciates in value by $50. Of the remaining $350, Barry sends $30 to the government in sales taxes, takes home $220 in wages, and retains $100 in his business to add new equipment in the future. From the
Explain briefly what the consumer price index measures and how it is constructed. Identify one reason why the CPI is an imperfect measure of the cost of living.
Henry Ford paid his workers $5 a day in 1914. If the consumer price index was 10 in 1914 and 218 in 2010, how much is the Ford paycheck worth in 2010 dollars?
Which do you think has a greater effect on the consumer price index: a 10 percent increase in the price of chicken or a 10 percent increase in the price of caviar? Why?
Describe the three problems that make the consumer price index an imperfect measure of the cost of living.
If the price of a Navy submarine rises, is the consumer price index or the GDP deflator affected more? Why?
Over a long period of time, the price of a candy bar rose from $0.10 to $0.60. Over the same period, the consumer price index rose from 150 to 300. Adjusted for overall inflation, how much did the price of the candy bar change?
Explain the meaning of nominal interest rate and real interest rate. How are they related?
The residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2010, they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50. In 2011, they buy 75 heads of cauliflower for $225, 80 bunches of broccoli for $120, and 500
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 consumer price index, compute the percentage change in the overall price level.c. If you were to learn that a bottle of
A small nation of ten people idolizes the TV show American Idol. All they produce and consume are karaoke machines and CDs, in the following amounts:a. Using a method similar to the consumer price index, compute the percentage change in the overall price level. Use 2011 as the base year, and fix
Which of the problems in the construction of the CPI might be illustrated by each of the following situations? Explain.a. The invention of the iPodb. The introduction of air bags in carsc. Increased personal computer purchases in response to a decline in their priced. More scoops of raisins in each
The New York Times cost $0.15 in 1970 and $2.00 in 2009. The average wage in manufacturing was $3.23 per hour in 1970 and $20.42 in 2009.a. By what percentage did the price of a newspaper rise?b. By what percentage did the wage rise?c. In each year, how many minutes does a worker have to work to
The chapter explains that Social Security benefits are increased each year in proportion to the increase in the CPI, even though most economists believe that the CPI overstates actual inflation.a. If the elderly consume the same market basket as other people, does Social Security provide the
When deciding how much of their income to save for retirement, should workers consider the real or the nominal interest rate that their savings will earn? Explain.
Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.a. Is the real interest rate on this loan higher or lower than expected?b. Does the lender gain or lose from this unexpectedly high inflation?
What is the approximate growth rate of real GDP per person in the United States? Name a country that has had faster growth and a country that has had slower growth.
List and describe four determinants of a country’s productivity.
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 does the level of a nation’s GDP measure? What does the growth rate of GDP measure? Would you rather live in a nation with a high level of GDP and a low growth rate or in a nation with a low level of GDP and a high growth rate?
List and describe four determinants of productivity.
Explain how higher saving leads to a higher standard of living. What might deter a policymaker from trying to raise the rate of saving?
Does a higher rate of saving lead to higher growth temporarily or indefinitely?
Why would removing a trade restriction, such as a tariff, lead to more rapid economic growth?
Describe two ways the U.S. government tries to encourage advances in technological knowledge.
Most countries, including the United States, import substantial amounts of goods and services from other countries. Yet the chapter says that a nation can enjoy a high standard of living only if it can produce a large quantity of goods and services itself. Can you reconcile these two facts?
Suppose that society decided to reduce consumption and increase investment.a. How would this change affect economic growth?b. What groups in society would benefit from this change? What groups might be hurt?
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 represent consumption and some forms that represent
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.
Suppose that an auto company owned entirely by German citizens opens a new factory in South Carolina.a. What sort of foreign investment would this represent?b. What would be the effect of this investment on U.S. GDP? Would the effect on U.S. GNP be larger or smaller?
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. In what way was it better for the United
In many developing nations, young women have lower enrollment rates in secondary school than do young men. Describe several ways in which greater educational opportunities for young women could lead to faster economic growth in these countries.
International data show a positive correlation between income per person and the health of the population.a. Explain how higher income might cause better health outcomes.b. Explain how better health outcomes might cause higher income.c. How might the relative importance of your two hypotheses be
International data show a positive correlation between political stability and economic growth.a. Through what mechanism could political stability lead to strong economic growth?b. Through what mechanism could strong economic growth lead to political stability?
From 1950 to 2000, manufacturing employment as a percentage of total employment in the U.S. economy fell from 28 percent to 13 percent. At the same time, manufacturing output experienced slightly more rapid growth than the overall economy.a. What do these facts say about growth in labor
Define private saving, public saving, national saving, and investment. How are they related?
If more Americans adopted a “live for today” approach to life, how would this affect saving, investment, and the interest rate?
What is the role of the financial system? Name and describe two markets that are part of the financial system in the U.S. economy. Name and describe two financial intermediaries.
Why is it important for people who own stocks and bonds to diversify their holdings? What type of financial institution makes diversification easier?
What is national saving? What is private saving? What is public saving? How are these three variables related?
Describe a change in the tax code that might increase private saving. If this policy were implemented, how would it affect the market for loan able funds?
What is a government budget deficit? How does it affect interest rates, investment, and economic growth?
For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain.a. a bond of the U.S. government or a bond of an East European government.b. a bond that repays the principal in year 2015 or a bond that repays the principal in year 2040.c. a bond from Coca-Cola or
Many workers hold large amounts of stock issued by the firms at which they work. Why do you suppose companies encourage this behavior? Why might a person not want to hold stock in the company where he works?
Explain the difference between saving and investment as defined by a macroeconomist. Which of the following situations represent investment? Saving? Explain.a. Your family takes out a mortgage and buys a new house.b. You use your $200 paycheck to buy stock in AT&T.c. Your roommate earns $100
Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public saving is $0.2 trillion. Assuming this economy is closed, calculate consumption, government purchases, national saving, and investment.
Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year:Y = 10,000C = 6,000T = 1,500G = 1,700The economists also estimate that the investment function is: I = 3,300 – 100 r,Where r is the country’s real interest rate, expressed
Suppose that Intel is considering building a new chip-making factory.a. Assuming that Intel needs to borrow money in the bond market, why would an increase in interest rates affect Intel’s decision about whether to build the factory?b. If Intel has enough of its own funds to finance the new
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