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Principles of economics 6th Edition N. Gregory Mankiw - Solutions
Assume the United States is an importer of televisions and there are no trade restrictions. U.S. consumers buy 1 million televisions per year, of which 400,000 are produced domestically and 600,000 are imported.a. Suppose that a technological advance among Japanese television manufacturers causes
Consider a small country that exports steel. Suppose that a “pro-trade” government decides to subsidize the export of steel by paying a certain amount for each ton sold abroad. How does this export subsidy affect the domestic price of steel, the quantity of steel produced, the quantity of steel
Give an example of a negative externality and a positive externality. Explain why market outcomes are inefficient in the presence of these externalities.
Give an example of a private solution to an externality. What is the Coase theorem? Why are private economic participants sometimes unable to solve the problems caused by an externality?
Give an example of a negative externality and an example of a positive externality.
Draw a supply-and-demand diagram to explain the effect of a negative externality that occurs as a result of a firm’s production process.
In what way does the patent system help society solve an externality problem?
What are corrective taxes? Why do economists prefer them to regulations as a way to protect the environment from pollution?
List some of the ways that the problems caused by externalities can be solved without government intervention.
Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your roommate smokes in the room? Is this outcome efficient? How do you and your roommate reach this solution?
Consider two ways to protect your car from theft. The Club (a steering wheel lock) makes it difficult for a car thief to take your car. Lojack (a tracking system) makes it easier for the police to catch the car thief who has stolen it. Which of these types of protection conveys a negative
Do you agree with the following statements? Why or why not?a. “The benefits of corrective taxes as a way to reduce pollution have to be weighed against the deadweight losses that these taxes cause.”b. “When deciding whether to levy a corrective tax on consumers or producers, the government
Consider the market for fire extinguishers.a. Why might fire extinguishers exhibit positive externalities?b. Draw a graph of the market for fire extinguishers, labeling the demand curve, the social-value curve, the supply curve, and the social-cost curve.c. Indicate the market equilibrium level of
A local drama company proposes a new neighborhood theater in San Francisco. Before approving the building permit, the city planner completes a study of the theater’s impact on the surrounding community.a. One finding of the study is that theaters attract traffic, which adversely affects the
Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people who do not drink and drive.a. Illustrate the market for alcohol, labeling the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of
Many observers believe that the levels of pollution in our society are too high.a. If society wishes to reduce overall pollution by a certain amount, why is it efficient to have different amounts of reduction at different firms?b. Command-and-control approaches often rely on uniform reductions
The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment:First bottle.......$5Second bottle.....4Third bottle.....3Fourth bottle ........2Fifth bottle......1Further bottles....0a. The cost of producing Zlurp is $1.50,
Ringo loves playing rock ‘n’ roll music at high volume. Luciano loves opera and hates rock ‘n’ roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls.a. What is the externality here?b. What command-and-control policy might the landlord impose? Could
Figure shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by settinga price with a corrective tax or by setting a quantity with pollution permits. Suppose there is a sharp improvement in the technology for controlling pollution.a.
Suppose that the government decides to issue tradable permits for a certain form of pollution.a. Does it matter for economic efficiency whether the government distributes or auctions the permits? Why or why not?b. If the government chooses to distribute the permits, does the allocation of permits
There are three industrial firms in Happy Valley.The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits.a. Who sells permits and how many do they sell? Who buys permits and how many do they buy? Briefly explain why the sellers and buyers are each
Define public goods and common resources and give an example of each.
What is the free-rider problem? Why does the free-rider problem induce the government to provide public goods? How should the government decide whether to provide a public good?
Why do governments try to limit the use of common resources?
Explain what is meant by a good being “excludable.” Explain what is meant by a good being “Rival in consumption.” Is a slice of pizza excludable? Is it Rival in consumption?
Define and give an example of a public good. Can the private market provide this good on its own? Explain.
What is cost–benefit analysis of public goods? Why is it important? Why is it hard?
Define and give an example of a common resource. Without government intervention, will people use this good too much or too little? Why?
Think about the goods and services provided by your local government.a. Using the classification in Figure, explain which category each of the following goods falls into:Police protectionSnow plowingEducationRural roadsCity streetsb. Why do you think the government provides items that are not
Both public goods and common resources involve externalities.a. Are the externalities associated with public goods generally positive or negative? Use examples in your answer. Is the free-market quantity of public goods generally greater or less than the efficient quantity?b. Are the externalities
Charlie loves watching Teletubbies on his local public TV station, but he never sends any money to support the station during its fundraising drives.a. What name do economists have for people like Charlie?b. How can the government solve the problem caused by people like Charlie?c. Can you think of
Wireless, high-speed Internet is provided for free in the airport of the city of Communityville.a. At first, only a few people use the service. What type of a good is this and why?b. Eventually, as more people find out about the service and start using it, the speed of the connection begins to
Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch. Here is their willingness to pay for each film:a. Within the dorm room, is the showing of a movie a public good? Why or why not?b. If it costs $8 to rent a movie, how
Some economists argue that private firms will not undertake the efficient amount of basic scientific research.a. Explain why this might be so. In your answer, classify basic research in one of the categories shown in Figure.b. What sort of policy has the United States adopted in response to this
The town of Wiknam has 5 residents whose only activity is producing and consuming fish. They produce fish in two ways. Each person who works on a fish farm raises 2 fish per day. Each person who goes fishing in the town lake catches X fish per day. X depends on N, the number of residents fishing in
Many transportation systems, such as the Washington, D.C., Metro (subway), charge higher fares during rush hours than during the rest of the day. Why might they do this?
The federal government tests the safety of car models and provides the test results free of charge to the public. Do you think this information qualifies as a public good? Why or why not?
High-income people are willing to pay more than lower-income people to avoid the risk of death. For example, they are more likely to pay for safety features on cars. Do you think cost–benefit analysts should take this fact into account when evaluating public projects? Consider, for instance, a
What are the two most important sources of tax revenue for the federal government? What are the two most important sources of tax revenue for state and local governments?
What is meant by the efficiency of a tax system? What can make a tax system inefficient?
Explain the benefits principle and the ability-to-pay principle. What are vertical equity and horizontal equity? Why is studying tax incidence important for determining the equity of a tax system?
What are the two most important sources of revenue for the U.S. federal government?
Explain how corporate profits are taxed twice.
Why is the burden of a tax to taxpayers greater than the revenue received by the government?
Why do some economists advocate taxing consumption rather than income?
Give two arguments why wealthy taxpayers should pay more taxes than poor taxpayers.
What is the concept of horizontal equity and why is it hard to apply?
The information in many of the tables in this chapter can be found in the Economic Report of the President, which appears annually. Using a recent issue of the report at your library or on the Internet, answer the following questions and provide some numbers to support your answers.a. Figure shows
The chapter states that the elderly population in the United States is growing more rapidly than the total population. In particular, the number of workers is rising slowly, while the number of retirees is rising quickly. Concerned about the future of Social Security, some members of Congress
Suppose you are a typical person in the U.S. economy. You pay 4 percent of your income in a state income tax and 15.3 percent of your labor earnings in federal payroll taxes (employer and employee shares combined). You also pay federal income taxes as in Table 3. How much tax of each type do you
Some states exclude necessities, such as food and clothing, from their sales tax. Other states do not. Discuss the merits of this exclusion. Consider both efficiency and equity.
When someone owns an asset (such as a share of stock) that rises in value, he has an “accrued” capital gain. If he sells the asset, he “realizes” the gains that have previously accrued. Under the U.S. income tax, realized capital gains are taxed, but accrued gains are not.a. Explain how
Suppose that your state raises its sales tax from 5 percent to 6 percent. The state revenue commissioner forecasts a 20 percent increase in sales tax revenue. Is this plausible? Explain.
The Tax Reform Act of 1986 eliminated the deductibility of interest payments on consumer debt (mostly credit cards and auto loans) but maintained the deductibility of interest payments on mortgages and home equity loans. What do you think happened to the relative amounts of borrowing through
Categorize each of the following funding schemes as examples of the benefits principle or the ability-to-pay principle.a. Visitors to many national parks pay an entrance fee.b. Local property taxes support elementary and secondary schools.c. An airport trust fund collects a tax on each plane ticket
Any income tax schedule embodies two types of tax rates: average tax rates and marginal tax rates.a. The average tax rate is defined as total taxes paid divided by income. For the proportional tax system presented in Table, what are the average tax rates for people earning $50,000, $100,000, and
Each of the following expenditures is a deduction for the purposes of calculating a person’s federal income tax liability:a. Mortgage interestb. State and local taxesc. Charitable contributions If the income tax base were broadened by eliminating these deductions, tax rates could be lowered,
Farmer McDonald gives banjo lessons for $20 an hour. One day, he spends 10 hours planting $100 worth of seeds on his farm. What opportunity cost has he incurred? What cost would his accountant measure? If these seeds yield $200 worth of crops, does McDonald earn an accounting profit? Does he earn
If Farmer Jones plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 3 bushels of wheat. If he plants 2 bags, he gets 5 bushels. If he plants 3 bags, he gets 6 bushels. A bag of seeds costs $100, and seeds are his only cost. Use these data to graph the farmer’s
Suppose Honda’s total cost of producing 4 cars is $225,000 and its total cost of producing 5 cars is $250,000. What is the average total cost of producing 5 cars? What is the marginal cost of the fifth car? Draw the marginal-cost curve and the average- total-cost curve for a typical firm, and
If Boeing produces 9 jets per month, its long-run total cost is $9.0 million per month. If it produces 10 jets per month, its long-run total cost is $9.5 million per month. Does Boeing exhibit economies or diseconomies of scale?
Give an example of an opportunity cost that an accountant might not count as a cost. Why would the accountant ignore this cost?
What is marginal product, and what does it mean if it is diminishing?
Draw a production function that exhibits diminishing marginal product of labor. Draw the associated total-cost curve. (In both cases, be sure to label the axes.) Explain the shapes of the two curves you have drawn.
Define total cost, average total cost, and marginal cost. How are they related?
Draw the marginal-cost and average-total-cost curves for a typical firm. Explain why the curves have the shapes that they do and why they cross where they do.
How and why does a firm’s average-total-cost curve differ in the short run and in the long run?
Define economies of scale and explain why they might arise. Define diseconomies of scale and explain why they might arise.
This chapter discusses many types of costs: opportunity cost, total cost, fixed cost, variable cost, average total cost, and marginal cost. Fill in the type of cost that best completes each sentence:a. What you give up for taking some action is called the ______.b. _____ is falling when marginal
Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant.a. Define opportunity cost.b. What is your aunt’s opportunity cost of
A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught:Hours Quantity of Fish(in pounds)0 hours ......0 lb1.........102.........183.........244.........285.........30a. What is the marginal product of each hour spent fishing?b. Use
Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus€™s output in a given day:a. Fill in the column of marginal products. What pattern do you see? How might you explain it?b. A worker costs $100 a day, and the firm
You are the chief financial officer for a firm that sells digital music players. Your firm has the following average-total-cost schedule:Quantity Average Total Cost 600 players........ $300
Consider the following cost information for a pizzeria:a. What is the pizzeria€™s fixed cost?b. Construct a table in which you calculate the marginal cost per dozen pizzas using the information on total cost. Also, calculate the marginal cost per dozen pizzas using the information on
You are thinking about setting up a lemonade stand. The stand itself costs $200. The ingredients for each cup of lemonade cost $0.50.a. What is your fixed cost of doing business? What is your variable cost per cup?b. Construct a table showing your total cost, average total cost, and marginal cost
Your cousin Vinnie owns a painting company with fixed costs of $200 and the following schedule for variable costs:Calculate average fixed cost, average variable cost, and average total cost for each quantity. What is the efficient scale of the paintingcompany?
A firm uses two inputs in production: capital and labor. In the short run, the firm cannot adjust the amount of capital it is using, but it can adjust the size of its workforce. What happens to the firm’s average total cost curve, the average variable cost curve, and the marginal cost curve
The city government is considering two tax proposals:A lump-sum tax of $300 o each producer of hamburgers.A tax of $1 per burger, paid by producers of hamburgers.a. Which of the following curves—average fixed cost, average variable cost, average total cost, and marginal cost—would shift as a
Jane’s Juice Bar has the following cost schedules:a. Calculate average variable cost, average total cost, and marginal cost for each quantity.b. Graph all three curves. What is the relationship between the marginal-cost curve and the average-total-cost curve? Between the marginal-cost curve
Consider the following table of long-run total costs for three different firms:Does each of these firms experience economies of scale or diseconomies ofscale?
How does a competitive firm determine its profit-maximizing level of output? Explain when does a profit-maximizing competitive firm decide to shut down? When does it decide to exit a market?
In the long run with free entry and exit, is the price in a market equal to marginal cost, average total cost, both, or neither? Explain with a diagram.
What is meant by a competitive firm?
Explain the difference between a firm’s revenue and its profit. Which do firms maximize?
Draw the cost curves for a typical firm. For a given price, explain how the firm chooses the level of output that maximizes profit. At that level of output, show on your graph the firm’s total revenue and total costs.
Under what conditions will a firm shut down temporarily? Explain.
Does a firm’s price equal marginal cost in the short run, in the long run, or both? Explain.
Does a firm’s price equal the minimum of average total cost in the short run, in the long run, or both? Explain.
Are market supply curves typically more elastic in the short run or in the long run? Explain.
Many small boats are made of fiberglass, which is derived from crude oil. Suppose that the price of oil rises.a. Using diagrams show what happens to the cost curves of an individual boat-making firm and to the market supply curve.b. What happens to the profits of boat makers in the short run? What
Bob’s lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $27 each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can you say about Bob’s short-run decision regarding shutdown and his long-run decision regarding exit?
Consider total cost and total revenue given in the following table:a. Calculate profit for each quantity. How much should the firm produce to maximize profit?b. Calculate marginal revenue and marginal cost for each quantity. Graph them. For example, the marginal cost between 2 and 3 should be
Ball Bearings, Inc. faces costs of production as follows:a. Calculate the company€™s average fixed costs, average variable costs, average total costs, and marginal costs at each level of production.b. The price of a case of ball bearings is $50. Seeing that she can€™t make a
Suppose the book-printing industry is competitive and begins in a long-run equilibrium.a. Draw a diagram describing the typical firm in the industry.b. Hi-Tech Printing Company invents a new process that sharply reduces the cost of printing books. What happens to Hi-Tech’s profits and the price
A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total cost of $8, and fixed costs of $200.a. What is its profit?b. What is its marginal cost?c. What is its average variable cost?d. Is the efficient scale of the firm
The market for fertilizer is perfectly competitive. Firms in the market are producing output, but are currently making economic losses.a. How does the price of fertilizer compare to the average total cost, the average variable cost, and the marginal cost of producing fertilizer?b. Draw two graphs,
The market for apple pies in the city of Ectenia is competitive and has the following demand schedule:Price Quantity Demanded$1.............. 1,200 pies2.............. 1,1003.............. 1,0004............... 9005.............. 8006.............. 7007.............. 6008...............
Suppose that the U.S. textile industry is competitive, and there is no international trade in textiles. In long-run equilibrium, the price per unit of cloth is $30.a. Describe the equilibrium using graphs for the entire market and for an individual producer. Now suppose that textile producers in
An industry currently has 100 firms, all of which have fixed costs of $16 and average variable cost as follows:Quantity Average Variable Cost1............ $12.............23.............34.............45.............56.............6a. Compute marginal cost and average total cost.b. The price is
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