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business
micro economics

Economics 6th edition R. Glenn Hubbard - Solutions

We saw in the chapter opener that the T. Cain Grocery offers its employees a health care plan with a high deductible of $4,500 per year. What effect do high-deductible plans have on how often employees visit doctors or otherwise use health care services? If the federal government were to require
In the United States, what has been the trend in health care spending as a percentage of GDP? Compare the increases in health care spending per person in the United States with the increases in health care spending per person in other high-income countries. What implications do current trends in
Briefly discuss how economists explain the rapid increases in health care spending.
What arguments do economists and policymakers who believe that the federal government should have a larger role in the health care system make in criticizing the ACA?
What arguments do economists and policymakers who believe that market-based reforms are the key to improving the health care system make in criticizing the ACA?
Figure 7.7 on page 236 shows that the Congressional Budget Office forecasts that only about 10 percent of future increases in spending on Medicare as a percentage of GDP will be due to the aging of the population. What factors explain the other 90 percent of the increase?
Improvements in technology usually result in lower costs of production or new and improved consumer goods and services. Assume that an improvement in medical technology results in an increase in life expectancy for people 65 years of age and older. How would this technological advance be likely to
Some economists and policymakers have argued that one way to control federal government spending on Medicare is to have a board of experts decide whether new medical technologies are worth their higher costs. If the board decides that they are not worth the costs, Medicare would not pay for them.
The text refers to health care as a normal good. Briefly explain why. In the future, is it possible that health care in the United States could become an inferior good? Briefly explain how it would be possible to tell if this change had occurred.
What are the three major types of firms in the United States? Briefly discuss the most important characteristics of each type.
Two economists at the Brookings Institution argue that "new firms rather than existing ones have accounted for a disproportionate share of disruptive and thus highly productivity enhancing innovations in the past-the automobile, the airplane, the computer and personal computer, air conditioning,
An Associated Press article noted that some groups have filed law suits over what the groups describe as "overzealous licensing schemes, in occupations such as hair braiders, yoga teachers and casket makers." a. What effect might such government licensing requirements have on the rate of new
The principal-agent problem arises almost everywhere in the business world, and it also crops up even closer to home. Discuss the principal-agent problem that exists in the college classroom. Who is the principal? Who is the agent? What potential conflicts in objectives exist between this principal
In a public corporation, the principal-agent problem between ownership and top management results from asymmetric information. What information, if known, would prevent this principal-agent problem?
Salespeople, whether selling life insurance, automobiles, or pharmaceuticals, typically get paid on commission instead of a straight hourly wage. How does paying a commission help solve the principal-agent problem between the owners of a business and their salespeople?
Private equity firms, such as Blackstone and Kohlberg Kravis Roberts & Co., search for firms where the managers appear not to be maximizing profits. A private equity firm can buy stock in these firms and have its employees elected to the firms' boards of directors and may even acquire control of
What is limited liability? Why does the government grant limited liability to the owners of corporations?
Why is limited liability more important for firms trying to raise funds from a large number of investors than for firms trying to raise funds from a small number of investors?
What does it mean to say that there is a separation of ownership from control in large corporations?
How is the separation of ownership from control related to the principal-agent problem?
Suppose that shortly after graduating from college, you decide to start your own business. Will you be likely to organize the business as a sole proprietorship, a partnership, or a corporation? Explain your reasoning.
An article discussing the reasons that the Connecticut state legislature passed a general incorporation law observes that prior to the passage of the law, investors were afraid that large businesses "were not a safe bet for their money." Briefly explain the author's reasoning.
Evaluate the following argument: I would like to invest in the stock market, but I think that buying shares of stock in a corporation is too risky. Suppose I buy $10,000 of Twitter stock, and the company ends up going bankrupt. Because as a stockholder I'm part owner of the company, I might be
According to an article in the Economist, historian David Faure has argued that the Chinese economy failed to grow rapidly during the nineteenth century because "family-run companies ... could not raise sufficient capital to exploit the large-scale opportunities tied to the rise of the steam
What is the difference between direct finance and indirect finance? If you borrow money from a bank to buy a new car, are you using direct finance or indirect finance?
What effect would the following events be likely to have on the price of Google's stock? a. A competitor launches a search engine that is better than Google's. b. The corporate income tax is abolished. c. Google's board of directors becomes dominated by close friends and relatives of its top
Briefly explain whether you agree with the following statement: "The total value of the shares of Microsoft stock traded on the NASDAQ last week was $250 million, so the firm actually received more revenue from stock sales than from selling software."
A column in the Wall Street Journal listed "trying to forecast what stocks will do next" as one of the three mistakes investors make repeatedly. Briefly explain why trying to forecast stock prices would be a mistake for the average investor.
In a letter to his company's stockholders, Warren Buffett offered the following opinion: "Most investors, of course, have not made the study of business prospects a priority in their lives. . . . I have good news for these non-professionals: The typical investor doesn't need this skill." Briefly
Why is a bond considered to be a loan but a share of stock is not? Why do corporations issue both bonds and shares of stock?
How do the stock and bond markets provide information to businesses? Why do stock and bond prices change over time?
Suppose that a firm in which you have invested is losing money. Would you rather own the firm's stock or the firm's bonds? Briefly explain.
Suppose you originally invested in a firm when it was small and unprofitable. Now the firm has grown to be large and profitable. Would you be better off if you had bought the firm's stock or the firm's bonds? Briefly explain.
If you deposit $20,000 in a savings account at a bank, you might earn 1 percent interest per year. Someone who borrows $20,000 from a bank to buy a new car might have to pay an interest rate of 6 percent per year on the loan. Knowing this, why don't you just lend your money directly to the car
Were the shares of stock issued as a result of Twitter's initial public offering (IPO) sold in a primary market or a secondary market? Was the IPO an example of direct finance or indirect finance?
According to an article in the Wall Street Journal, in May 2015, Moody's Investors Service cut its rating on McDonald's bonds from A3 to A2. a. What is Moody's top bond rating? Under what circumstances would Moody's, or the other bond rating agencies, be likely to cut the rating on a firm's
Investors use the bond ratings from Moody's, S&P, and Fitch to determine which bonds they will buy and the prices they are willing to pay for them. The rating services charge the firms and governments that issue bonds, rather than investors, for their services. Critics argue that the rating
What is the difference between a firm's assets and its liabilities? Give an example of an asset and an example of a liability.
What is the difference between a firm's balance sheet and its income statement?
Distinguish between a firm's explicit costs and its implicit costs and between a firm's accounting profit and its economic profit.
Would a business be expected to survive in the long run if it earned a positive accounting profit but a negative economic profit? Briefly explain.
Paolo currently has $100,000 invested in bonds that earn him 10 percent interest per year. He wants to open a pizza restaurant and is considering either selling the bonds and using the $100,000 to start his restaurant or borrowing $100,000 from a bank, which would charge him an annual interest rate
Paolo and Alfredo are twins who both want to open pizza restaurants. Their parents have always liked Alfredo best, and they buy two pizza ovens and give both to him. Unfortunately, Paolo must buy his own pizza ovens. Does Alfredo have a lower cost of producing pizza than Paolo does because Alfredo
Dane decides to give up a job earning $200,000 per year as a corporate lawyer and converts the duplex that he owns into a UFO museum. (He had been renting out the duplex for $20,000 a year.) His explict costs are $75,000 per year paid to his assistants and $10,000 per year for utilities. Fans flock
Twitter was founded in 2006, but it wasn't until 2013 that Twitter filed its first annual report with the Securities and Exchange Commission (SEC). Briefly explain why.
Jay Ritter, a professor at the University of Florida, was quoted in the Wall Street Journal as saying about Facebook: "It's entirely possible for a company to have solid growth prospects while its stock is overvalued." a. What does it mean to say that a stock is "overvalued"? b. Why might a firm's
What was the source of the problems encountered by many financial firms during the crisis of 2007-2009?
The following is from an article in USA Today: In what some call a worldwide corporate governance movement, shareholders are pushing for stronger corporate-governance laws, teaming with investors from different countries and negotiating behind the scenes with businesses. What is corporate
Michael Dell founded PCs Limited in 1984. The firm had an initial public offering (IPO) in 1988, under the name Dell Computer Corporation, which enabled the company to raise money it used for expansion. In 2013, Michael Dell and a private equity firm bought back ownership of the company from its
An article on forbes.com about corporate fraud stated that "misleading accounting and disclosure practices weaken the integrity of capital markets." The article noted that using incentive contracts for top managers can create a "'perverse' incentive to manipulate stock prices because their
On June 19, 2015 the closing price of a share of Facebook stock was $82.51. About 21.5 million shares of stock were traded on this date. Go to wsj. com for a recent trading day and use Facebook's stock symbol (FB) to find the following. a. The closing price of Facebook stock b. The market value of
Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research. stlouisfed.org/fred2/) and download and graph the data series for the Nasdaq Composite Index from February 1971 until the most recent day available. Go to the Web site of the National Bureau of Economic Research (nber.
Go to wsj.com and find the dividend per share for each of the following firms. a. Microsoft b. Apple c. Coca-Cola d. Facebook To find the dividend per share, enter the company's name in the search box on the home page. Which pays the highest dividend? Which has the highest dividend yield? Which
The following table lists the closing stock prices for three financial firms-Morgan Stanley, Citigroup Inc. and PNC Bank-for Friday, June 19, 2015. The table also includes the most recent dividends paid to shareholders by these firms.Fill in the blank cells in the table by computing (a) the value
Why is money you receive at some future date worth less to you than money you receive today? If the interest rate rises, what effect does this have on the present value of payments you receive in the future?
Suppose that eLake, an online auction site, is paying a dividend of $2 per share. You expect this dividend to grow 2 percent per year, and the interest rate is 10 percent. What is the most you would be willing to pay for a share of stock in eLake? If the interest rate is 5 percent, what is the most
Use the information in the following table for calendar year 2014 to prepare an income statement for McDonald's Corporation. Be sure to include entries for operating income and net income. Revenue from company restaurants..................................$18,169 million Revenue from franchised
Use the information in the following table on the financial situation of Starbucks Corporation as of September 28, 2014 (the end of the firm's financial year), to prepare a balance sheet for the firm. Be sure to include an entry for stockholders' equity. Current
The current ratio is equal to a firm's current assets divided by its current liabilities. Use the information in Figure 8A.2 on page 281 to calculate Twitter's current ratio on December 31, 2014. Investors generally prefer that a firm's current ratio be greater than 1.5. What problems might a firm
Give the formula for calculating the present value of a bond that will pay a coupon of $100 per year for 10 years and that has a face value of $1,000.
Compare the formula for calculating the present value of the payments you will receive from owning a bond to the formula for calculating the present value of the payments you will receive from owning a stock. What are the key similarities? What are the key differences?
What is the key difference between a firm's income statement and its balance sheet? What is listed on the left side of a balance sheet? What is listed on the right side?
Before the 2013 season, the Los Angeles Angels signed outfielder Josh Hamilton to a contract that would pay him an immediate $10 million signing bonus and the following amounts: $15 million for the 2013 season, $15 million for the 2014 season, $23 million for the 2015 season, $30 million for the
A winner of the Pennsylvania Lottery was given the choice of receiving $18 million at once or $1,440,000 per year for 25 years. a. If the winner had opted for the 25 annual payments, how much in total would she have received? b. At an interest rate of 10 percent, what would be the present value of
Before the start of the 2000 baseball season, the New York Mets decided that they didn't want Bobby Bonilla playing for them any longer. But Bonilla had a contract with the Mets for the 2000 season that would have obliged the Mets to pay him $5.9 million. When the Mets released Bonilla, he agreed
Briefly explain whether the value of U.S. exports is typically larger or smaller than the value of U.S. imports.
Are imports and exports now a smaller or larger fraction of GDP than they were 40 years ago?
Briefly explain whether you agree with the following statement: "International trade is more important to the U.S. economy than it is to most other economies."
If the United States were to stop trading goods and services with other countries, which U.S. industries would be likely to see their sales decline the most? Briefly explain.
Why might a smaller country, such as the Netherlands, be more likely to import and export larger fractions of its GDP than would a larger country, such as China or the United States?
New Balance manufactures shoes in the United States, so you might expect that the firm would benefit from a tariff on shoes. Yet New Balance did not actively oppose the Obama administration's attempts to eliminate the shoe tariff imposed on countries that would be part of the Trans-Pacific
A World Trade Organization (WTO) publication calls comparative advantage "arguably the single most powerful insight in economics." What is comparative advantage? What makes it such a powerful insight?
In the 2012 Summer Olympic Games, Ashton Eaton (from the United States) won a gold medal in the decathlon, which requires athletes to compete in 10 different track and field events. In one of these events Eaton ran a 100-meter race in 10.35 seconds. In a separate event, Usain Bolt (from Jamaica)
An article in the New York Times quoted an economist as arguing that "global free trade and the European single market ... encourage countries to specialize in sectors where they enjoy comparative advantage. Germany's [comparative advantage] is in cars and machine tools." For the author's
Briefly explain whether you agree with the following argument: "Unfortunately, Bolivia does not have a comparative advantage with respect to the United States in the production of any good or service."
The following table shows the hourly output per worker for Greece and Italy measured as quarts of olive oil and pounds of pasta.Calculate the opportunity cost of producing olive oil and pasta in both Greece and Italy.
Using the numbers in the table, explain which country has a comparative advantage in producing smartwatches.
Patrick J. Buchanan, a former presidential candidate, argued in his book on the global economy that there is a flaw in David Ricardo's theory of comparative advantage: Classical free trade theory fails the test of common sense. According to Ricardo's law of comparative advantage ... if America
While running for president, Barack Obama made the following statement: "Well, look, people don't want a cheaper T-shirt if they're losing a job in the process." What did Obama mean by the phrase "losing a job in the process"? Using the economic concept of comparative advantage, explain under what
Briefly explain how international trade increases a country's consumption.
Hal Varian, chief economist at Google, has made the following two observations about international trade. a. Trade allows a country "to produce more with less." b. "There is little doubt who wins [from trade] in the long run: consumers." Briefly explain whether you agree with either or both of
Suppose the graph on the next page shows Tanzania's production possibilities frontier for cashew nuts and mangoes. Assume that the output per hour of work is 8 bushels of cashew nuts or 2 bushels of mangoes and that Tanzania has 1,000 hours of labor. Without trade, Tanzania evenly splits its labor
President Barack Obama described a trade agreement reached with the government of Colombia as a "'win-win' for both our countries." Is everyone in both countries likely to win from the agreement? Briefly explain.
Instagram is a smartphone app that Facebook now owns. According to an article that discusses the climate for software firms in the San Francisco Bay Area, the success of Instagram "is a tale about the culture of the Bay Area tech scene, driven by a tightly woven web of entrepreneurs and investors
What is meant by a country specializing in the production of a good? Is it typical for countries to be completely specialized? Briefly explain.
What are the main sources of comparative advantage?
Does everyone gain from international trade? If not, explain which groups lose.
The following table shows the hourly output per worker in two industries in Chile and Argentina.a. Explain which country has an absolute advantage in the production of hats and which country has an absolute advantage in the production of beer. b. Explain which country has a comparative advantage in
A political commentator makes the following statement: The idea that international trade should be based on the comparative advantage of each country is fine for rich countries like the United States and Japan. Rich countries have educated workers and large quantities of machinery and equipment.
The following data summarize the trade between Canada and the United States in 2013 and 2014.In each year, the value of Canada's exports to the United States exceeded the value of U.S. exports to Canada. Can we conclude that foreign trade between the two countries benefited Canada more than it
Is free trade likely to benefit a large, populous country more than a small country with fewer people? Briefly explain.
An article in the New Yorker states, "the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. But ... the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries." Explain how it is possible that
What is a tariff? What is a quota? Give an example, other than a quota, of a nontariff barrier to trade.
The following graph shows the situation after the U.S. government removes a tariff on imports of canned tuna.a. Which areas show the gain in consumer surplus? b. Which area shows the loss in producer surplus? c. Which area shows the loss in government tariff revenue? d. Which areas show the gain in
According to an editorial in the Washington Post, "Sugar protectionism is a burden on consumers and a job-killer." a. In what sense does the United States practice "sugar protectionism"? b. In what way is sugar protectionism a burden on consumers? In what way is it a job-killer? c. If sugar
Suppose that the United States currently both produces kumquats and imports them. The U.S. government then decides to restrict international trade in kumquats by imposing a quota that allows imports of only 6 million pounds of kumquats into the United States each year. The figure shows the results
Suppose the government is considering imposing either a tariff or a quota on canned peaches. Assume that the proposed quota has the same effect on the U.S. price of canned peaches as the proposed tariff. Use the graph to answer the following questions.a. If the government imposes a tariff, which
An economic analysis of a proposal to impose a quota on steel imports into the United States indicated that the quota would save 3,700 jobs in the steel industry but cost about 35,000 jobs in other U.S. industries. Why would a quota on steel imports cause employment to decline in other industries?
For several years, the United States imposed a tariff on tire imports. According to an analysis by economists Gary Clyde Hufbauer and Sean Lowry of the Petersen Institute, of the additional $1.1 billion consumers spent on tires as a result of the tariff on Chinese tires, the workers whose jobs were
Who gains and who loses when a country imposes a tariff or a quota on imports of a good?

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