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economics

Economics 18th edition Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn - Solutions

Explain how featherbedding and other restrictive work practices can reduce labor productivity. Why might strikes reduce the economy’s output less than the loss of production by the struck firms?
What is the estimated size of the union wage advantage? How might this advantage diminish the efficiency with which labor resources are allocated in the economy? Normally, labor resources of equal potential productivity flow from low-wage employment to high-wage employment. Why does that not happen
Contrast the voice mechanism and the exit mechanism for communicating dissatisfaction. In what two ways do labor unions reduce labor turnover? How might such reductions increase productivity?
How does the economist’s use of the term “rent” differ from everyday usage? Explain: “Though rent need not be paid by society to make land available, rental payments are very useful in guiding land into the most productive uses.”
Explain why economic rent is a surplus payment when viewed by the economy as a whole but a cost of production from the standpoint of individual firms and industries. Explain: “Land rent performs no ‘incentive function’ for the overall economy.”
In the 1980s land prices in Japan surged upward in a “speculative bubble.” Land prices then fell for 11 straight years between 1990 and 2001. What can we safely assume happened to land rent in Japan over those 11 years? Use graphical analysis to illustrate your answer
How does Henry George’s proposal for a single tax on land relate to the elasticity of the supply of land? Why are there so few remaining advocates of George’s proposal?
If money is not an economic resource, why is interest paid and received for its use? What considerations account for the fact that interest rates differ greatly on various types of loans? Use those considerations to explain the relative sizes of the interest rates on the following: a. A 10-year
Why is the supply of loanable funds upsloping? Why is the demand for loanable funds downsloping? Explain the equilibrium interest rate. List some factors that might cause it to change.
Suppose that the interest rate is 4 percent. What is the future value of $100 four years from now? How much of the future value is total interest? By how much would total interest be greater at a 6 percent interest rate than at a 4 percent interest rate?
Here is the deal: You can pay your college tuition at the beginning of the academic year or the same amount at the end of the academic year. You either already have the money in an interest-bearing account or will have to borrow it. Deal or no deal? Explain your financial reasoning. Relate your
What are the major economic functions of the interest rate? How might the fact that many businesses finance their investment activities internally affect the efficiency with which the interest rate performs its functions?
Distinguish between nominal and real interest rates. Which is more relevant in making investment and R&D decisions? If the nominal interest rate is 12 percent and the inflation rate is 8 percent, what is the real rate of interest?
Historically, usury laws that put below-equilibrium ceilings on interest rates have been used by some states to make credit available to poor people who could not otherwise afford to borrow. Critics contend that poor people are those most likely to be hurt by such laws. Which view is correct?
How do the concepts of accounting profit and economic profit differ? Why is economic profit smaller than accounting profit? What are the three basic sources of economic profit? Classify each of the following according to those sources: a. A firm’s profit from developing and patenting a new
Why is the distinction between insurable and uninsurable risks significant for the theory of profit? Carefully evaluate: “All economic profit can be traced to either uncertainty or the desire to avoid it.” What are the major functions of economic profit?
Explain the absence of economic profit in a purely competitive, static economy. Realizing that the major function of profit is to allocate resources according to consumer preferences, describe the allocation of resources in such an economy.
What is the combined rent, interest, and profit share of the income earned by Americans in a typical year if proprietors’ income is included within the labor (wage) share?
Assume that you borrow $5000 and pay back the $5000 plus $250 in interest at the end of the year. Assuming no inflation, what is the real interest rate? What would the interest rate be if the $250 of interest had been discounted at the time the loan was made? What would the interest rate be if you
Describe Thomas Malthus’ theory of human reproduction. Does it make sense for some species—say bacteria or rabbits? What do you think makes humans different?
Suppose that the current (first) generation consists of 1 million people, half of whom are women. If the total fertility rate is 1.3 and the only way people die is of old age, how big will the fourth generation (the great-grandchildren) be? How much smaller (in percentage terms) is each generation
Demographers have been very surprised that total fertility rates have fallen below 2.0, especially because most people in most countries tell pollsters that they would like to have at least two children. Can you think of any possible economic factors that may be causing women in so many countries
Resource consumption per person in the United States is either flat or falling, depending on the resource. Yet living standards are rising due to improvements in technology that allow more output to be produced for every unit of input used in production. What does this say about the likelihood of
Suppose that you hear two people arguing about energy. One says that we are running out of energy. The other counters that we are running out of cheap energy, explain which person is correct and why.
A community has a nighttime energy demand of 50 megawatts but a peak daytime demand of 75 megawatts. It has the chance to build a 90-megawatt coal-fired plant that could easily supply all of its energy uses even at peak daytime demand. Should it necessarily proceed? Could there be lower-cost
Recall the model of nonrenewable resource extraction presented in Figure.Choosing the optimal extraction levelSuppose that a technological breakthrough means that extraction costs will fall in the future (but not in the present). What will this do to future profits and, therefore, to current user
If the current market price rises, does current extraction increase or decrease? What if the future market price rises? Do these changes in current extraction help to ensure that the resource is extracted and used when it is most valuable?
Suppose that a government wants to reduce its economy’s dependence on coal and decides as a result to tax coal mining companies $1 per ton for every ton of coal that they mine. Assuming that coal mining companies treat this tax as an increase in extraction costs this year, what effect will the
User cost is equal to the present value of future profits in the model presented in Figure.Choosing the optimal extraction levelWill the optimal quantity to mine in the present year increase or decrease if the market rate of interest rises? Does your result make any intuitive sense?
Various cultures have come up with their own methods to limit catch size and prevent fishery collapse. In old Hawaii, certain fishing grounds near shore could be used only by certain individuals. And among lobstermen in Maine, strict territorial rights are handed out so that only certain people can
Aquaculture is the growing of fish, shrimp, and other seafood in enclosed cages or ponds. The cages and ponds not only keep the seafood from swimming away but also provide aquaculturalists with strong property rights over their animals. Does this provide a good incentive for low-cost production as
The figure in the Last Word section shows that a 10-fold increase in a country’s GDP per person is associated with about a 20-point increase in EPI. Do you think that this pattern can be extrapolated out into the future? That is, could the United States (which currently has an EPI of 78.5) gain
On the basis of the three individual demand schedules below, and assuming these three people are the only ones in the society, determine(a) The market demand schedule on the assumption that the good is a private good (b) The collective demand schedule on the assumption that the good is a public
Use your demand schedule for a public good, determined in question 1, and the following supply schedule to ascertain the optimal quantity of this public good. Why is this the optimal quantity? P Qd$19 ......... 10 16 ......... 8 13 ......... 6 10 ......... 4 7 ......... 2 4
The following table shows the total costs and total benefits in billions for four different antipollution programs of increasing scope.Which program should be undertaken?Why?
Why are spillover costs and spillover benefits also called negative and positive externalities? Show graphically how a tax can correct for a negative externality and how a subsidy to producers can correct for a positive externality. How does a subsidy to consumers differ from a subsidy to producers
An apple grower€™s orchard provides nectar to a neighbor€™s bees, while the beekeeper€™s bees help the apple grower by pollinating the apple blossoms. Use Figure 16.2b to explain why this situation of dual positive externalities might lead to an underallocation of
Explain: “Without a market for pollution rights, dumping pollutants into the air or water is costless; in the presence of the right to buy and sell pollution rights, dumping pollutants creates an opportunity cost for the polluter.” What is the significance of this opportunity cost to the
Explain the following statement, using the MB curve in Figure to illustrate:Society€™s optimal amount of pollution abatementThe optimal amount of pollution abatement for some substances, say, water from storm drains, is very low; the optimal amount of abatement for other substances, say,
Explain the tragedy of the commons, as it relates to pollution.
What is the climate-change problem? Using an example other than one in the text, explain how climate-change might hurt one industry, particular region, or country but help another. Distinguish between a carbon-tax and a cap-and-trade strategy for reducing greenhouse gases. Which of the two
Explain how marketable emission credits add to overall economic efficiency, compared to across-the-board limitations on maximum discharges of air pollutants by firms.
Why is it in the interest of new homebuyers and builders of new homes to have government building codes and building inspectors?
Place an “M” beside the items in the following list that describe a moral hazard problem and an “A” beside those that describe an adverse selection problem:a. A person with a terminal illness buys several life insurance policies through the mail.b. A person drives carelessly because he or
Explain how a global-positioning antitheft device installed by one car owner can produce a positive spillover to thousands of others in a city.
Explain how affirmative and negative majority votes can sometimes lead to inefficient allocations of resources to public goods. Is this problem likely to be greater under a benefits-received or under an ability-to-pay tax system? Use the information in Figures 17.1a and 17.1b to show how society
Explain the paradox of voting through reference to the accompanying table, which shows the ranking of three public goods by voters Jay, Dave, and Conan:
Suppose there are only five people in a society and each favors one of the five highway construction options in Table 16.2 (include no highway construction as one of the options).Cost-Benefit Analysis for a National HighwayConstruction Project (in Billions)Explain which of these highway options
How does the problem of limited and bundled choice in the public sector relate to economic efficiency? Why are public bureaucracies alleged to be less efficient than private enterprises?
Explain: “Politicians would make more rational economic decisions if they weren’t running for reelection every few years.”
Distinguish between the benefits-received and the ability-to-pay principles of taxation. Which philosophy is more evident in our present tax structure? Justify your answer. To which principle of taxation do you subscribe? Why?
What is meant by a progressive tax? A regressive tax? A proportional tax? Comment on the progressivity or regressivity of each of the following taxes, indicating in each case where you think the tax incidence lies: (a) The Federal personal income tax; (b) A 4 percent state general sales tax; (c) A
What is the incidence of an excise tax when demand is highly inelastic? Highly elastic? What effect does the elasticity of supply have on the incidence of an excise tax? What is the efficiency loss of a tax, and how does it relate to elasticity of demand and supply?
Suppose the equation for the demand curve for some product X is P = 8 – .6Q and the supply curve is P = 2 + .4Q. What are the equilibrium price and quantity? Now suppose an excise tax is imposed on X such that the new supply equation is P = 4 + .4Q. How much tax revenue will this excise tax yield
How do the concepts of pork-barrel politics and logrolling relate to the items listed in the Last Word?
Both antitrust policy and industrial regulation deal with monopoly. What distinguishes the two approaches? How does government decide to use one form of remedy rather than the other?
Describe the major provisions of the Sherman and Clayton acts. What government entities are responsible for enforcing those laws? Are firms permitted to initiate antitrust suits on their own against other firms?
Contrast the outcomes of the Standard Oil and U.S. Steel cases. What was the main antitrust issue in the DuPont cellophane case? In what major way do the Microsoft and Standard Oil cases differ?
Why might one administration interpret and enforce the antitrust laws more strictly than another? How might a change of administrations affect a major monopoly case in progress?
How would you expect antitrust authorities to react to? a. A proposed merger of Ford and General Motors.b. Evidence of secret meetings by contractors to rig bids for highway construction projects.c. A proposed merger of a large shoe manufacturer and a chain of retail shoe stores.d. A proposed
Suppose a proposed merger of firms would simultaneously lessen competition and reduce unit costs through economies of scale. Do you think such a merger should be allowed?
In the 1980s, PepsiCo Inc., which then had 28 percent of the soft-drink market, proposed to acquire the Seven-Up Company. Shortly thereafter the Coca-Cola Company, with 39 percent of the market, indicated it wanted to acquire the Dr Pepper Company. Seven-Up and Dr Pepper each controlled about 7
Why might a firm charged with violating the Clayton Act, Section 7, try arguing that the products sold by the merged firms are in separate markets? Why might a firm charged with violating Section 2 of the Sherman Act try convincing the court that none of its behavior in achieving and maintaining
The social desirability of any particular firm should be judged not on the basis of its market share but on the basis of its conduct and performance. Make a counterargument, referring to the monopoly model in your statement.
What types of industries, if any, should be subjected to industrial regulation? What specific problems does industrial regulation entail?
In view of the problems involved in regulating natural monopolies, compare socially optimal (marginal-cost) pricing and fair-return pricing by referring again to Figure.Regulated monopolyAssuming that a government subsidy might be used to cover any loss resulting from marginal-cost pricing, which
How does social regulation differ from industrial regulation? What types of benefits and costs are associated with social regulation?
Use economic analysis to explain why the optimal amount of product safety may be less than the amount that would totally eliminate risks of accidents and deaths. Use automobiles as an example.
Under what law and on what basis did the Federal district court find Microsoft guilty of violating the antitrust laws? What was the initial district court’s remedy? How did Microsoft fare with its appeal to the court of appeals? Was the final remedy in the case a structural remedy or a behavioral
Carefully evaluate: “The supply and demand for agricultural products are such that small changes in agricultural supply result in drastic changes in prices. However, large changes in agricultural prices have modest effects on agricultural output.” Do exports increase or reduce the instability
What relationship, if any, can you detect between the facts that farmers’ fixed costs of production are large and the supply of most agricultural products is generally inelastic? Be specific in your answer.
Explain how each of the following contributes to the farm problem: a. The inelasticity of demand for farm products.b. The rapid technological progress in farming.c. The modest long-run growth in demand for farm commodities.d. The volatility of export demand.
The key to efficient resource allocation is shifting resources from low-productivity to high-productivity uses. In view of the high and expanding physical productivity of agricultural resources, explain why many economists want to divert additional resources from farming to achieve allocative
Explain and evaluate: “Industry complains of the higher taxes it must pay to finance subsidies to agriculture. Yet the trend of agricultural prices has been downward while industrial prices have been moving upward, suggesting that on balance agriculture is actually subsidizing industry.”
Because consumers as a group must ultimately pay the total income received by farmers, it makes no real difference whether the income is paid through free farm markets or through price supports supplemented by subsidies financed out of tax revenue.” Do you agree?
If in a given year the indexes of prices received and paid by farmers were 120 and 165, respectively, what would the parity ratio be? Explain the meaning of that ratio.
Explain the economic effects of price supports. Explicitly include environmental and global impacts in your answer. On what grounds do economists contend that price supports cause a misallocation of resources?
Use supply and demand curves to depict equilibrium price and output in a competitive market for some farm product. Then show how an above-equilibrium price floor (price support) would cause a surplus in this market. Demonstrate in your graph how government could reduce the surplus through a policy
Do you agree with each of the following statements? Explain why or why not. a. The problem with U.S. agriculture is that there are too many farmers. That is not the fault of farmers but the fault of government programs.b. The Federal government ought to buy up all U.S. farm surpluses and give them
What are the effects of farm subsidies such as those of the United States and the European Union On? (a) Domestic agricultural prices, (b) World agricultural prices, (c) The international allocation of agricultural resources?
Use public choice theory to explain the persistence of farm subsidies in the face of major criticisms of those subsidies. If the special-interest effect is so strong, what factors made it possible in 1996 for the government to end price supports and acreage allotments for several crops?
What was the major intent of the Freedom to Farm Act of 1996? Do you agree with the intent? Why or why not? Did the law succeed in reducing overall farm subsidies? Why or why not?
Distinguish the major features of direct subsidies, countercyclical payments, and marketing loan subsidies under the Food, Conservation, and Energy Act of 2008. In what way do countercyclical payments and marketing loans help reduce the volatility of farm income? In what way do direct subsidies
What groups benefit and what groups lose from the U.S. sugar subsidy program?
Use quintiles to briefly summarize the degree of income inequality in the United States. How and to what extent does government reduce income inequality?
Assume that Al, Beth, Carol, David, and Ed receive incomes of $500, $250, $125, $75, and $50, respectively. Construct and interpret a Lorenz curve for this five-person economy. What percentage of total income is received by the richest quintile and by the poorest quintile?
How does the Gini ratio relate to the Lorenz curve? Why can’t the Gini ratio exceed 1? What is implied about the direction of income inequality if the Gini ratio declines from 0.42 to 0.35? How would one show that change of inequality in the Lorenz diagram?
Why is the lifetime distribution of income more equal than the distribution in any specific year?
Briefly discuss the major causes of income inequality. With respect to income inequality, is there any difference between inheriting property and inheriting a high IQ? Explain.
What factors have contributed to increased income inequality since 1970?
Should a nation’s income be distributed to its members according to their contributions to the production of that total income or according to the members’ needs? Should society attempt to equalize income or economic opportunities? Are the issues of equity and equality in the distribution of
Do you agree? Or disagree? Explain your reasoning. “There need be no trade-off between equality and efficiency. An ‘efficient’ economy that yields an income distribution that many regard as unfair may cause those with meager incomes to become discouraged and stop trying. So efficiency may be
Comment on or explain: a. Endowing everyone with equal income will make for very unequal enjoyment and satisfaction.b. Equality is a “superior good”; the richer we become, the more of it we can afford.c. The mob goes in search of bread and the means it employs is generally to wreck the
How do government statisticians determine the poverty rate? How could the poverty rate fall while the number of people in poverty rises? Which group in each of the following pairs has the higher poverty rate? (a) Children or people age 65 or over? (b) African Americans or foreign-born noncitizens?
What are the essential differences between social insurance and public assistance programs? Why is Medicare a social insurance program whereas Medicaid is a public assistance program? Why is the earned-income tax credit considered to be a public assistance program?
The labor demand and supply data in the following table relate to a single occupation. Use them to answer the questions that follow. Base your answers on the taste-for-discrimination model.a. Plot the labor demand and supply curves for Hispanic workers in this occupation.b. What are the equilibrium
Males under the age of 25 must pay far higher auto insurance premiums than females in this age group. How does this fact relate to statistical discrimination? Statistical discrimination implies that discrimination can persist indefinitely, while the taste-for-discrimination model suggests that
Use a demand and supply model to explain the impact of occupational segregation or “crowding” on the relative wage rates and earnings of men and women. Who gains and who loses from the elimination of occupational segregation? Is there a net gain or a net loss to society? Explain.
Go to Table 1 in the Last Word and compute the ratio of average wealth to median wealth for each of the 4 years. What trend do you find?Median and Average Family Wealth,Survey Years, 1995€“2004 (in 2004 Dollars)What is your explanation for the trend? The Federal estate tax redistributes
Why would increased spending as a percentage of GDP on, say, household appliances or education in a particular economy be regarded as economically desirable? Why, then, is there so much concern about rising expenditures as a percentage of GDP on health care?

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