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Principles of economics 6th Edition N. Gregory Mankiw - Solutions

The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories.a. If investors believed that capital taxes would remain low, how would the government’s action
Chapter 2 explains the difference between positive analysis and normative analysis. In the debate about whether the central bank should aim for zero inflation, which areas of disagreement involve positive statements and which involve normative judgments?
Why are the benefits of reducing inflation permanent and the costs temporary? Why are the costs of increasing inflation permanent and the benefits temporary? Use Phillips-curve diagrams in your answer
Suppose the federal government cuts taxes and increases spending, raising the budget deficit to 12 percent of GDP. If nominal GDP is rising 5 percent per year, are such budget deficits sustainable forever? Explain. If budget deficits of this size are maintained for twenty years, what is likely to
Explain how each of the following policies redistributes income across generations. Is the redistribution from young to old or from old to young?a. An increase in the budget deficitb. More generous subsidies for education loansc. Greater investments in highways and bridgesd. An increase in Social
The chapter says that budget deficits reduce the income of future generations but can boost output and income during a recession. Explain how both of these statements can be true
What is the fundamental trade-off that society faces if it chooses to save more? How might the government increase national saving?
Suppose the government reduced the tax rate on income from savings and raised taxes on labor income to avoid increasing the budget deficit.a. Who would benefit from this tax change most directly?b. What would happen to the capital stock over time? What would happen to the capital available to each
Why is a country better off not isolating itself from all other countries? Why do we have markets, and, according to economists, what roles should government play in them?
List and briefly explain the three principles that describe how the economy as a whole works.
Give three examples of important trade-offs that you face in your life.
What is the opportunity cost of seeing a movie?
Water is necessary for life. Is the marginal benefit of a glass of water large or small?
Why should policymakers think about incentives?
Why isn’t trade among countries like a game with some winners and some losers?
What does the “invisible hand” of the marketplace do?
Explain the two main causes of market failure and give an example of each.
Why is productivity important?
What is inflation and what causes it?
How are inflation and unemployment related in the short run?
Describe some of the trade-offs faced by each of the following:a. a family deciding whether to buy a new carb. a member of Congress deciding how much to spend on national parksc. a company president deciding whether to open a new factoryd. a professor deciding how much to prepare for classe. a
You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in dollars, but the benefits of the vacation are psychological. How can you compare the benefits to the costs?
You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. What is the true cost of going skiing? Now suppose you had been planning to spend the day studying at the library. What is the cost of going skiing in this case? Explain.
You win $100 in a basketball pool. You have a choice between spending the money now or 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?
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 salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1
The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he or she receives in Social Security benefits is typically reduced.a. How does the provision of Social Security affect people’s incentive to save
A 1996 bill reforming the federal government’s antipoverty 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 equality and efficiency?
Your roommate is a better cook than you are, but you can clean more quickly than your roommate can. If your roommate did all the cooking and you did all the cleaning, would your chores take you more or less time than if you divided each task evenly? Give a similar example of how specialization and
Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved.a. regulating cable TV pricesb. providing some poor people with vouchers that can be used to buy
Discuss each of the following statements from the standpoints of equality and efficiency.a. “Everyone in society should be guaranteed the best healthcare possible.”b. “When workers are laid off, they should be able to collect unemployment benefits until they find a new job”
In what ways is your standard of living different from that of your parents or grandparents when they were your age? Why have these changes occurred?
Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in productivity? Who do you suppose benefits from the higher productivity? Is society getting a free lunch?
In 2010, President Barack Obama and Congress enacted a healthcare reform bill in the United States. Two goals of the bill were to provide more Americans with health insurance (via subsidies for lower-income households financed by taxes on higher-income households) and to reduce the cost of
Imagine that you are a policymaker trying to decide whether to reduce the rate of inflation.To make an intelligent decision, what would you need to know about inflation, unemployment, and the trade-off between them?
A policymaker is deciding how to finance the construction of a new airport. He can either pay for it by increasing citizens’ taxes or by printing more money. What are some of the short-run and long-run consequences of each option?
In what sense is economics like a science? Draw a production possibilities frontier for a society that produces food and clothing. Show an efficient point, an inefficient point, and an infeasible point. Show the effects of a drought. Define microeconomics and macroeconomics.
Give an example of a positive statement and an example of a normative statement that somehow relates to your daily life. Name three parts of government that regularly rely on advice from economists.
How is economics a science?
Why do economists make assumptions?
Should an economic model describe reality exactly?
Draw and explain a production possibilities frontier for an economy that produces milk and cookies. What happens to this frontier if disease kills half of the economy’s cows?
Use a production possibilities frontier to describe the idea of “efficiency.”
What are the two subfields into which economics is divided? Explain what each subfield studies.
What is the difference between a positive and a normative statement? Give an example of each.
Why do economists sometimes offer conflicting advice to policymakers?
Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities.a. Selena pays a storekeeper $1 for a quart of milk.b. Stuart earns $4.50 per hour working at a fast-food restaurant.c. Shanna
Imagine a society that produces military goods and consumer goods, which we’ll call “guns” and “butter.”a. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape.b. Show a point that is
The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use a production possibilities frontier to illustrate society’s trade-off between two “goods”—a clean environment and the quantity of industrial output. What do you suppose determines the shape and
An economy consists of three workers: Larry, Moe, and Curly. Each works ten hours a day and can produce 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; and Curly can either mow two lawns or wash
Classify the following topics as relating to microeconomics or macroeconomics.a. a family’s decision about how much income to saveb. the effect of government regulations on auto emissionsc. the impact of higher national saving on economic growthd. a firm’s decision about how many workers to
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 should reduce the rate of money growth.d. Society
If you were president, would you be more interested in your economic advisers’ positive views or their normative views? Why?
Draw an example of a production possibilities frontier for Robinson Crusoe, a shipwrecked sailor who spends his time gathering coconuts and catching fish. Does this frontier limit Crusoe’s consumption of coconuts and fish if he lives by himself? Does he face the same limits if he can trade with
Robinson Crusoe can gather 10 coconuts or catch 1 fish per hour. His friend Friday can gather 30 coconuts or catch 2 fish per hour. What is Crusoe’s opportunity cost of catching one fish? What is Friday’s? Who has an absolute advantage in catching fish? Who has a comparative advantage in
Suppose that a skilled brain surgeon also happens to be the world’s fastest typist. Should she do her own typing or hire a secretary? Explain.
Under what conditions is the production possibilities frontier linear rather than bowed out?
Explain how absolute advantage and comparative advantage differ.
Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage.
Is absolute advantage or comparative advantage more important for trade? Explain your reasoning using the example in your answer to Question 3.
Will a nation tend to export or import goods for which it has a comparative advantage? Explain.
Why do economists oppose policies that restrict trade among nations?
Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an hour. She spends 5 hours per day studying.a. Draw Maria’s production possibilities frontier for reading economics and sociology.b. What is Maria’s opportunity cost of reading 100 pages of sociology?
American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers.a. For this situation, construct a table
Pat and Kris are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer
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 bushel of wheat in Canada? Explain the
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 absolute advantage in the production of each
The following table describes the production possibilities of two cities in the country of Baseballia:a. Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago?b. Which city has an absolute advantage in the production of each color sock?
Suppose that in a year an American worker can produce 100 shirts or 20 computers, while a Chinese worker can produce 100 shirts or 10 computers.a. Graph the production possibilities curve for the two countries. Suppose that without trade the workers in each country spend half their time producing
An average worker in Brazil can produce an ounce of soybeans in 20 minutes and an ounce of coffee in 60 minutes, while an average worker in Peru can produce an ounce of soybeans in 50 minutes and an ounce of coffee in 75 minutes.a. Who has the absolute advantage in coffee? Explain.b. Who has the
Are the following statements true or false? Explain in each case.a. “Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.”b. “Certain very talented people have a comparative advantage in everything they do.”c.
The United States exports corn and aircraft to the rest of the world, and it imports oil and clothing from the rest of the world. Do you think this pattern of trade is consistent with the principle of comparative advantage? Why or why not?
Bill and Hillary produce food and clothing. In an hour, Bill can produce 1 unit of food or 1 unit of clothing, while Hillary can produce 2 units of food or 3 units of clothing. They each work10 hours a day.a. Who has an absolute advantage in producing food? Who has an absolute advantage in
What is a market? What are the characteristics of a perfectly competitive market?
Make up an example of a monthly demand schedule for pizza and graph the implied demand curve. Give an example of something that would shift this demand curve, and briefly explain your reasoning. Would a change in the price of pizza shift this demand curve?
Make up an example of a monthly supply schedule for pizza and graph the implied supply curve. Give an example of something that would shift this supply curve, and briefly explain your reasoning. Would a change in the price of pizza shift this supply curve?
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.
What is a competitive market? Briefly describe a type of market that is not perfectly competitive.
What are the demand schedule and the demand curve, and how are they related? Why does the demand curve slope downward?
Popeye’s income declines, and as a result, he buys more spinach. Is spinach an inferior or a normal good? What happens to Popeye’s demand curve for spinach?
What are the supply schedule and the supply curve, and how are they related? Why does the supply curve slope upward?
Define the equilibrium of a market. Describe the forces that move a market toward its equilibrium.
Beer and pizza are complements because they are often enjoyed together. When the price of beer rises, what happens to the supply, demand, quantity supplied, quantity demanded, and the price in the market for pizza?
Describe the role of prices in market economies.
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 of hotel rooms in Caribbean resorts
“An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied.” Is this statement true or false? Explain.
Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans.a. People decide to
Consider the markets for DVDs, TV screens, and tickets at movie theaters.a. For each pair, identify whether they are complements or substitutes:• DVDs and TV screens• DVDs and movie tickets• TV screens and movie ticketsb. Suppose a technological advance reduces the cost of manufacturing TV
Over the past 30 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?
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 appropriate attire.d. New knitting machines are invented.
A survey shows an increase in drug use by young people. In the ensuing debate, two hypotheses are proposed:• Reduced police efforts have increased the availability of drugs on the street.• Cutbacks in education efforts have decreased awareness of the dangers of drug addiction.a. Use
Suppose that in the year 2015 the number of births is temporarily high. How does this baby boom affect the price of babysitting services in 2020 and 2030? (5-year-olds need babysitters, whereas 15-year-olds can be babysitters.)
Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises, what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice?
The market for pizza has the following demand and supply schedules:a. Graph the demand and supply curves. What is the equilibrium price and quantity in this market? b. If the actual price in this market were above the equilibrium price, what would drive the market toward the equilibrium? c. If the
Consider the following events: Scientists reveal that consumption of oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees more productive. Illustrate and explain what effect these changes have on the equilibrium price and quantity of
Because bagels and cream cheese are often eaten together, they are complements.a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern—a fall in the price of flour or a fall in the price of milk?
Suppose that the price of basketball tickets at your college is determined by market forces.Currently, the demand and supply schedules are as follows:a. Draw the demand and supply curves. What is unusual about this supply curve? Why might this be true?b. What are the equilibrium price and quantity
Market research has revealed the following information about the market for chocolate bars: The demand schedule can be represented by the equation QD = 1,600 – 300P, where QD is the quantity demanded and P is the price. The supply schedule can be represented by the equation QS = 1,400 + 700P,
Define the price elasticity of demand. Explain the relationship between total revenue and the price elasticity of demand.
Define the price elasticity of supply. Explain why the price elasticity of supply might be different in the long run than in the short run.
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?

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