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economics

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

Define the price elasticity of demand and the income elasticity of demand.
List and explain the four determinants of the price elasticity of demand discussed in the chapter.
What is the main advantage of using the midpoint method for calculating elasticity?
If the elasticity is greater than 1, is demand elastic or inelastic? If the elasticity equals 0, is demand perfectly elastic or perfectly inelastic?
On a supply-and-demand diagram, show equilibrium price, equilibrium quantity, and the total revenue received by producers.
If demand is elastic, how will an increase in price change total revenue? Explain.
How is the price elasticity of supply calculated? Explain what it measures.
What is the price elasticity of supply of Picasso paintings?
Is the price elasticity of supply usually larger in the short run or in the long run? Why?
How can elasticity help explain why drug interdiction could reduce the supply of drugs, yet possibly increase drug-related crime?
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 novelsb. Beethoven recordings or classical music recordings in generalc. subway rides during the next six months or subway rides during the next five yearsd.
Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:a. As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) Business travelers and (ii) Vacationers? (Use the midpoint method in your
Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run.a. if the price of heating oil rises from $1.80 to $2.20 per gallon, what happens to the quantity of heating oil demanded in the short run? In the long run? (Use the midpoint method in your
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 equilibrium price of coffee mugs rose sharply last month, but the equilibrium quantity was the same as ever. Three people tried to explain the situation. Which explanations could be right? Explain your logic.Billy: Demand increased, but supply was totally inelastic.Marian: Supply increased, but
Suppose that your demand schedule for DVDs is as follows:a. Use the midpoint method to calculate your price elasticity of demand as the price of DVDs increases from $8 to $10 if(i) Your income is $10,000 and (ii) Your income is $12,000.b. Calculate your income elasticity of demand as your income
You have the following information about good X and good Y:• Income elasticity of demand for good X: –3• Cross-price elasticity of demand for good X with respect to the price of good Y: 2 Would an increase in income and a decrease in the price of good Y unambiguously decrease the demand for
Maria has decided always to spend one-third of her income on clothing.a. What is her income elasticity of clothing demand?b. What is her price elasticity of clothing demand?c. If Maria’s tastes change and she decides to spend only one-fourth of her incomeon clothing, how does her demand curve
The New York Times reported (Feb. 17, 1996) that subway ridership declined after a fare increase:“There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline.”a.
Two drivers—Tom and Jerry—each drive up to a gas station. Before looking at the price, each places an order. Tom says, “I’d like 10 gallons of gas.” Jerry says, “I’d like $10 worth of gas.” What is each driver’s price elasticity of demand?
Consider public policy aimed at smoking.a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?b. If the government permanently
You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. Should you increase or decrease the price of admission? Explain.
Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that technological advance doubles the supply of both products (that is, the quantity supplied at each price is twice what it was).a. What happens to the equilibrium price and quantity in each market?b.
Several years ago, flooding along the Missouri and the Mississippi rivers destroyed thousands of acres of wheat.a. Farmers whose crops were destroyed by the floods were much worse off, but farmers whose crops were not destroyed benefited from the floods. Why?b. What information would you need about
Explain why the following might be true: A drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in Kansas reduces the total revenue that Kansas farmers receive.
Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which leads to a surplus? Why?
In a supply-and-demand diagram, show how a tax on car buyers of $1,000 per car affects the quantity of cars sold and the price of cars. In another diagram, show how a tax on car sellers of $1,000 per car affects the quantity of cars sold and the price of cars. In both of your diagrams, show the
Give an example of a price ceiling and an example of a price floor.
Which causes a shortage of a good—a price ceiling or a price floor? Justify your answer with a graph.
What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?
Explain why economists usually oppose controls on prices.
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 the tax, the amount sellers receive net of the
What determines how the burden of a tax is divided between buyers and sellers? Why?
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?
The government has decided that the free-market price of cheese is too low.a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply- and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or
A recent study found that the demand and supply schedules for Frisbees are as followsa. What are the equilibrium price and quantity of Frisbees?b. Frisbee manufacturers persuade the government that Frisbee production improves scientists€™ understanding of aerodynamics and thus is
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 tax. Show the price paid by consumers, the
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 payrolltax paid by workers. Would this accomplish the senator’s goal? Explain.
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.
Congress and the president decide that the United States should reduce air pollution by reducing its use of gasoline. They impose a $0.50 tax for each gallon of gasoline sold.a. Should they impose this tax on producers or consumers? Explain carefully using a supply-and-demand diagram.b. If the
A case study in this chapter discusses the federal minimum-wage law.a. Suppose the minimum wage is above the equilibrium wage in the market for unskilled labor. Using a supply and- demand diagram of the market for unskilled labor, show the market wage, the number of workers who are employed, and
The U.S. government administers two programs that affect the market for cigarettes. Media campaigns and labeling requirements are aimed at making the public aware of the dangers of cigarette smoking. At the same time, the Department of Agriculture maintains a price-support program for tobacco
A subsidy is the opposite of a tax. With a $0.50 tax on the buyers of ice-cream cones, the government collects $0.50 for each cone purchased; with a $0.50 subsidy for the buyers of ice cream cones, the government pays buyers $0.50 for each cone purchased.a. Show the effect of a $0.50 per cone
In the spring of 2008, Senators John McCain and Hillary Clinton (who were then running for president) proposed a temporary elimination of the federal gasoline tax, effective only during the summer of 2008, in order to help consumers deal with high gasoline prices. a. During the summer, when
Draw a demand curve for turkey. In your diagram, show a price of turkey and the consumer surplus at that price. Explain in words what this consumer surplus measures.
Draw a supply curve for turkey. In your diagram, show a price of turkey and the producer surplus at that price. Explain in words what this producer surplus measures.
Draw the supply and demand for turkey. In the equilibrium, show producer and consumer surplus. Explain why producing more turkeys would lower total surplus.
Explain how buyers’ willingness to pay, consumer surplus, and the demand curve are related.
Explain how sellers’ costs, producer surplus, and the supply curve are related.
In a supply-and-demand diagram, show producer and consumer surplus in the market equilibrium.
What is efficiency? Is it the only goal of economic policymakers?
What does the invisible hand do?
Name two types of market failure. Explain why each may cause market outcomes to be inefficient.
Melissa buys an iPod for $120 and gets consumer surplus of $80.a. What is her willingness to pay?b. If she had bought the iPod on sale for $90, what would her consumer surplus have been?c. If the price of an iPod were $250, what would her consumer surplus have been?
An early freeze in California sours the lemon crop. Explain what happens to consumer surplus in the market for lemons. Explain what happens to consumer surplus in the market for lemonade. Illustrate your answers with diagrams.
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.
It is a hot day, and Bert is thirsty. Here is the value he places on a bottle of water:Value of first bottle..... $7Value of second bottle.....5Value of third bottle.....3Vale of fourth bottle.....1a. From this information, derive Bert’s demand schedule. Graph his demand curve for bottled
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......$1Cost of first bottle........3Cost of first
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 prices brings supply and demand into
The cost of producing flat-screen TVs has fallen over the past decade. Let’s consider some implications of this fact.a. Draw a supply-and-demand diagram to show the effect of falling production costs on the price and quantity of flat-screen TVs sold.b. In your diagram, show what happens to
There are four consumers willing to pay the following amounts for haircuts:Jerry: $7Oprah: $2Ellen: $8Phil: $5There are four haircutting businesses with the following costs:Firm A: $3Firm B: $6Firm C: $4Firm D: $2Each firm has the capacity to produce only one haircut. For efficiency, how many
Suppose a technological advance reduces the cost of making computers.a. Draw a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the market for computers.b. Computers and typewriters are substitutes. Use a supply-and-demand diagram to show
A friend of yours is considering two cell phone service providers. Provider A charges $120 per month for the service regardless of the number of phone calls made. Provider B does not have a fixed service fee but instead charges $1 per minute for calls. Your friend’s monthly demand for minutes of
Consider how health insurance affects the quantity of healthcare services performed. Suppose that the typical medical procedure has a cost of $100, yet a person with health insurance pays only $20 out of pocket. Her insurance company pays the remaining $80. (The insurance company recoups the $80
Draw the supply and demand curves for cookies. If the government imposes a tax on cookies, show what happens to the price paid by buyers, the price received by sellers, and the quantity sold. In your diagram, show the deadweight loss from the tax. Explain the meaning of the deadweight loss.
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.
What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus compare to the tax revenue? Explain.
Draw a supply-and-demand diagram with a tax on the sale of the good. Show the deadweight loss. Show the tax revenue.
How do the elasticities of supply and demand affect the deadweight loss of a tax? Why do they have this effect?
Why do experts disagree about whether labor taxes have small or large deadweight losses?
What happens to the deadweight loss and tax revenue when a tax is increased?
The market for pizza is characterized by a downward-sloping demand curve and an upward-sloping supply curve.a. Draw the competitive market equilibrium. Label the price, quantity, consumer surplus, and producer surplus. Is there any deadweight loss? Explain.b. Suppose that the government forces each
Evaluate the following two statements. Do you agree? Why or why not?a. “A tax that has no deadweight loss cannot raise any revenue for the government.”b. “A tax that raises no revenue for the government cannot have any deadweight loss.”
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 your answer.b. If this market has very
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 the first year after it is imposed or in the
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 raise 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 no revenue, why might Senator Moynihan have
The government places a tax on the purchase of socks.a. Illustrate the effect of this tax on equilibrium price and quantity in the socks market. Identify the following areas both before and after the imposition of the tax: total spending by consumers, total revenue for producers, and government tax
Suppose the government currently raises $100 million through a 1-cent tax on widgets, and another $100 million through a 10-cent tax on gadgets. If the government doubled the tax rate on widgets and eliminated the tax on gadgets, would it raise more tax revenue than it does today, less tax revenue,
This chapter analyzed the welfare effects of a tax on a good. Consider now the opposite policy. Suppose that the government subsidizes a good: For each unit of the good sold, the government pays $2 to the buyer. How does the subsidy affect consumer surplus, producer surplus, tax revenue, and total
Hotel rooms in Small town go for $100, and 1,000 rooms are rented on a typical day.a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room. After the tax is imposed, the going rate for hotel rooms rises to $108, and the number of rooms rented falls to 900. Calculate the
Suppose that a market is described by the following supply and demand equations:QS = 2PQD = 300 – Pa. Solve for the equilibrium price and the equilibrium quantity.b. Suppose that a tax of T is placed on buyers, so the new demand equation isQD = 300 – (P + T).Solve for the new equilibrium. What
Draw a supply and demand diagram for wool suits in the country of Autarka. When trade is allowed, the price of a suit falls from 3 to 2 ounces of gold. In your diagram, show the change in consumer surplus, the change in producer surplus, and the change in total surplus. How would a tariff on suit
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.
When does a country become an exporter of a good? An importer?
Draw the supply-and-demand diagram for an importing country. What is consumer surplus and producer surplus before trade is allowed? What is consumer surplus and producer surplus with free trade? What is the change in total surplus?
Describe what a tariff is and its economic effects.
List five arguments often given to support trade restrictions. How do economists respond to these arguments?
What is the difference between the unilateral and multilateral approaches to achieving free trade? Give an example of each.
Mexico represents a small part of the world orange market.a. Draw a diagram depicting the equilibrium in the Mexican orange market without international trade. Identify the equilibrium price, equilibrium quantity, consumer surplus, and producer surplus.b. Suppose that the world orange price is
The world price of wine is below the price that would prevail in Canada in the absence of trade.a. Assuming that Canadian imports of wine are a small part of total world wine production, draw a graph for the Canadian market for wine under free trade. Identify consumer surplus, producer surplus, and
Suppose that Congress imposes a tariff on imported autos to protect the U.S. auto industry from foreign competition. Assuming that the United States is a price taker in the world auto market, show the following on a diagram: the change in the quantity of imports, the loss to U.S. consumers, the
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 imports clothing, such as the United States.b.
Imagine that winemakers in the state of Washington petitioned the state government to tax wines imported from California. They argue that this tax would both raise tax revenue for the state government and raise employment in the Washington state wine industry. Do you agree with these claims? Is it
Senator Ernest Hollings once wrote that “consumers do not benefit from lower-priced imports. Glance through some mail-order catalogs and you’ll see that consumers pay exactly the same price for clothing whether it is U.S.-made or imported.” Comment.
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 president decides to open the Textilian market to
China is a major producer of grains, such as wheat, corn, and rice. In 2008 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 market for grain in an exporting country. Use this
Consider a country that imports a good from abroad. For each of following statements, say whether it is true or false. Explain your answer.a. “The greater the elasticity of demand, the greater the gains from trade.”b. “If demand is perfectly inelastic, there are no gains from trade.”c.
Kawmin is a small country that produces and consumes jelly beans. The world price of jelly beans is $1 per bag, and Kawmin’s domestic demand and supply for jelly beans are governed by the following equations:Demand: QD = 8 – PSupply: QS = P,where P is in dollars per bag and Q is in bags of
Having rejected a tariff on textiles (a tax on imports), the president of Isoland is now considering the same-sized tax on textile consumption (including both imported and domestically produced textiles).a. Using Figure, identify the quantity consumed and the quantity produced in Isoland under a

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