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Principles Of Economics 6th Edition Robert H. Frank, Ben Bernanke Professor, Kate Antonovics, Ori Heffetz - Solutions
A Bangladeshi worker who immigrates to America is likely to find that his average labor productivity is much higher in the United States than it was at home.The worker is, of course, the same person he was when he lived in Bangladesh.How can the simple act of moving to the United States increase
Why did medieval China stagnate economically?The Sung period in China (A.D. 960–1270) was one of considerable technological sophistication;its inventions included paper, waterwheels, water clocks, gunpowder, and possibly the compass. Yet no significant industrialization occurred, and in
Why has U.S. labor productivity grown so rapidly since 1995?During the 1950s and 1960s, most industrialized countries experienced rapid growth in real GDP and average labor productivity. Between 1947 and 1973, for example, U.S. labor productivity grew by 2.8 percent per year.2 Between 1973 and
A new kind of wrapping paper has been invented that makes candy-wrapping quicker and easier. The use of this paper increases the number of candies a person can wrap by hand by 200 per hour, and the number of candies a person can wrap by machine by 300 per hour. Using the data from Examples 18.3 and
Using the assumptions made in Examples 18.3 and 18.5, explain why the boss should give the single available candy-wrapping machine to Lucy rather than Ethel. (Hint: Apply the Principle of Increasing Opportunity Cost.)
Will a candy-wrapping machine make Lucy and Ethel more productive?Continuing with Example 18.3, suppose that Lucy and Ethel’s boss acquired an electric candy-wrapping machine, which is designed to be operated by one worker. Using this machine, an untrained worker can wrap 500 candies per hour.
Why did West Germany and Japan recover so successfully from the devastation of World War II?Germany and Japan sustained extensive destruction of their cities and industries during World War II and entered the postwar period impoverished. Yet within 30 years both countries not only had been rebuilt
Refer back to Example 18.3. Suppose Ethel attends additional classes in candy wrapping and learns how to wrap 500 candies per hour. Find the output per week and output per hour for Lucy and Ethel, both individually and as a team
Are Lucy and Ethel more productive as a team or by themselves?Lucy and Ethel have jobs wrapping chocolate candies and placing them into boxes. Lucy, a novice wrapper, can wrap only 100 candies per hour. Ethel, who has had on-the-job training, can wrap 300 candies per hour. Each works 40 hours per
Suppose that real GDP per capita in the United States had grown at 2.5 percent per year, as Japan’s did, instead of the actual 1.8 percent per year, from 1870 to 2010. How much larger would real GDP per person have been in the United States in 2010?
What is the difference between 2% interest and 6% interest, compounded annually?Continuing with Example 18.1, what would your great-great-grandfather’s $10.00 deposit have been worth after 215 years if the annual interest rate had been 2 percent? 6 percent?
What is compound interest?In 1800 your great-great-grandfather deposited $10.00 in a checking account at 4 percent interest. Interest is compounded annually (so that interest paid at the end of each year receives interest itself in later years). Great-Great-Grandpa’s will specified that the
Compare and contrast the benefits of economic growth with its costs.
Discuss the determinants of average labor productivity within a particular country and use these concepts to analyze per capita GDP differences across countries.
Explain why GDP per capita is the product of average labor productivity and the proportion of the population that is employed and use this decomposition to discuss the sources of economic growth.
The towns of Sawyer and Thatcher each have a labor force of 1,200 people. In Sawyer, 100 people were unemployed for the entire year, while the rest of the labor force was employed continuously. In Thatcher, every member of the labor force was unemployed for 1 month and employed for 11 months.(LO4,
For each of the following scenarios, state whether the unemployment is frictional, structural, or cyclical. Justify your answer. (LO5)a. Ted lost his job when the steel mill closed down. He lacks the skills to work in another industry and so has been unemployed over a year.b. Alice was laid off
Ellen is downloading labor market data for the most recent month, but her connection is slow and so far this is all she has been able to get:Find the labor force, the working-age population, the number of employed workers, and the number of unemployed workers. (LO4) Unemployment rate Participation
The following is a report from a not-very-efficient BLS survey taker: “There were 65 people in the houses I visited, 10 of them children under 16; 25 people had fulltime jobs, and 5 had part-time jobs. There were 10 retirees, 5 full-time homemakers, 5 full-time students over age 16, and 2 people
Skilled or unskilled workers can be used to produce a small toy. Initially, assume that the wages paid to both types of workers are equal. (LO3)a. Suppose that electronic equipment is introduced that increases the marginal product of skilled workers (who can use the equipment to produce more toys
How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line? (LO3)a. Demand for the type of car made by the plant increases.b. A sharp increase in the price of gas causes many commuters to switch to mass transit.c. Because of
How would each of the following factors be likely to affect the economywide supply of labor? (LO2)a. The age at which people are eligible for Medicare is increased.b. Increased productivity causes real wages to rise.c. War preparations lead to the institution of a national draft, and many young
Production data for Bob’s Bicycle Factory are as follows:a. Bikes sell for $130 each. Find the marginal product and the value of the marginal product for each worker (don’t forget about Bob’s cost for parts).b. Make a table showing Bob’s demand curve for labor.c. Repeat part b for the case
List three types of unemployment and their causes.Which of these types is economically and socially the least costly? Explain. (LO5)
What are the costs of a high unemployment rate?Do you think providing more generous government benefits to the unemployed would increase these costs, reduce these costs, or leave them unchanged?Discuss. (LO5)
True or false: A high participation rate in an economy implies a low unemployment rate. Explain. (LO4)
What are two major factors contributing to increased inequality in wages? Briefly, why do these factors raise wage inequality? Contrast possible policy responses to increasing inequality in terms of their effects on economic efficiency. (LO3)
Why have real wages risen by so much in the United States in the past century? Why did real wage growth stagnate beginning in the early 1970s? (LO3)
Acme Corporation is considering hiring Jane Smith.Based on her other opportunities in the job market, Jane has told Acme that she will work for them for$40,000 per year. How should Acme determine whether to employ her? (LO2)
List and discuss the three important labor market trends given in the first section of the chapter. (LO1)
Following are August 2014 Bureau of Labor Statistics U.S. employment data for African Americans.Find the labor force, the working-age population, the unemployment rate, and the participation rate for African Americans and compare your results to those in Table 17.5. Employed Unemployed 16.69
As we just discussed, relatively weak growth in productivity and relatively strong growth in labor supply after about 1973 can explain (1) the slowdown in real wage growth and (2) the more rapid expansion in employment after about 1973. Show this point graphically by drawing two supply and demand
Labor unions typically favor tough restrictions on immigration, while employers tend to favor more liberal rules. Why? (Hint: How is an influx of potential workers likely to affect real wages?)
You want a career in broadcasting. The local radio station is offering an unpaid summer internship that would give you valuable experience. Your alternative to the internship is to earn $3,000 working in a car wash. How would you decide which job to take? Would a decision to take the internship
Will you clean your neighbor’s basement or go to the beach?You were planning to go to the beach today, but your neighbor asks you to clean out his basement. You like the beach a lot more than fighting cobwebs. Do you take the job?
Refer back to Example 17.3. How many workers will BCC hire after the 50 percent increase in productivity if the going wage for technicians is $50,000 per year?Compare this figure to the demand for workers at a $50,000 wage before the increase in productivity.
Do productivity improvements hurt workers?Suppose BCC adopts a new technology that reduces the number of components to be assembled, permitting each technician to build 50 percent more machines per year. Assume that the price of computers is $3,000 per machine. How many technicians will BCC hire if
Refer to Example 17.2. How many workers will BCC hire if the going wage for technicians is $100,000 per year and the price of computers is $5,000? Compare your answer to the demand for technicians at a wage of $100,000 when the price of computers is $3,000.
Will BCC hire more workers if the price of computers rises?Suppose an increase in the demand for BCC’s computers raises the price of its computers to $5,000 each. How many technicians will BCC hire now if the real wage is $60,000 per year? If the real wage is $50,000?
Continuing with Example 17.1, how many workers will BCC hire if the going wage for technicians is $35,000 per year?
How many workers should BCC hire?Suppose that the going wage for computer technicians is $60,000 per year. BCC managers know that this is the wage being offered by all their competitors, so they cannot hire qualified workers for less. How many technicians will BCC hire? What would the answer be if
Differentiate among the three types of unemployment defined by economists and the costs associated with each.
Define and calculate the unemployment rate and the participation rate.
Explain how changes in the supply of and the demand for labor explain trends in real wages and employment since 1960.
Apply a supply and demand model to understand the labor market.
Discuss three important trends that have characterized labor markets in the United States since 1960.
Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a 2 percent real return per year. (LO5)a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 110 in one year and 121 in two years. What nominal rate of interest should
On January 1, 2012, Albert invested $1,000 at 6 percent interest per year for three years. The CPI on January 1, 2012, stood at 100. On January 1, 2013, the CPI (times 100) was 105; on January 1, 2014, it was 110; and on January 1, 2015, the day Albert’s investment matured, the CPI was 118. Find
The following table lists the actual per-gallon prices for unleaded regular gasoline for June of each year between 1978 and 1986, together with the values of the CPIs for those years. For each year from 1979 to 1986, find the CPI inflation rate and the change in the real price of gasoline, both
The typical consumer’s food basket in the base year 2015 is as follows:30 chickens at $3.00 each 10 hams at $6.00 each 10 steaks at $8.00 each A chicken feed shortage causes the price of chickens to rise to $5.00 each in the year 2016. Hams rise to $7.00 each, and the price of steaks is
According to the U.S. Census Bureau ( www.census.gov ), nominal income for the typical family of four in the United States (median income) was $23,618 in 1985,$34,076 in 1995, $46,326 in 2005, and $49,276 in 2010. In purchasing power terms, how did family income compare in each of those four years?
Consider the table below. It shows a hypothetical income tax schedule, expressed in nominal terms, for the year 2014:The legislature wants to ensure that families with a given real income are not pushed up into higher tax brackets by inflation. The CPI (times 100) is 175 in 2014 and 185 in 2016.
Refer to the CPI data given in Problem 2. A report found that the real entry-level wage for college graduates declined by 8 percent between 1990 and 1997. The nominal entry-level wage in 1997 was $13.65 per hour. (LO2)a. What was the real entry-level wage in 1997?b. What was the real entry-level
Here are values of the CPI (multiplied by 100) for each year from 1990 to 2000. For each year beginning with 1991, calculate the rate of inflation from the previous year.What happened to inflation rates over the 1990s? (LO1) 1990 130.7 1991 136.2 1992 140.3 1993 144.5 1994 148.2 1995 152.4 1996
Government survey takers determine that typical family expenditures each month in the year designated as the base year are as follows:20 pizzas at $10 each Rent of apartment, $600 per month Gasoline and car maintenance, $100 Phone service (basic service plus 10 long-distance calls), $50 In the year
True or false: If both the potential lender and the potential borrower correctly anticipate the rate of inflation, inflation will not redistribute wealth from the creditor to the debtor. Explain. (LO5)
“It’s true that unexpected inflation redistributes wealth, from creditors to debtors, for example. But what one side of the bargain loses, the other side gains. So from the perspective of the society as a whole, there is no real cost.” Do you agree? Discuss. (LO4)
Give two reasons why the official inflation rate may understate the “true” rate of inflation. Illustrate by examples.(LO3)
Describe how indexation might be used to guarantee that the purchasing power of the wage agreed to in a multiyear labor contract will not be eroded by inflation.(LO2)
Why is it important to adjust for inflation when comparing nominal quantities (for example, workers’ average wages) at different points in time? What is the basic method for adjusting for inflation? (LO2)
What is the difference between the price level and the rate of inflation in an economy? (LO1)
Explain why changes in the cost of living for any particular individual or family may differ from changes in the official cost-of-living index, the CPI. (LO1)
Why is the real interest rate important?Following are interest rates on 10-year government bonds for selected years since 1975.In which of these years did the financial investors who bought government bonds get the best deal? The worst deal? Year 1975 Interest rate (%) Inflation rate (%) Real
How are the price level, relative prices, and inflation related?Suppose the value of the CPI is 1.20 in the year 2013, 1.32 in 2014, and 1.40 in 2015.Assume also that the price of oil increases 8 percent between 2013 and 2014 and another 8 percent between 2014 and 2015. What is happening to the
Why does substitution bias matter?Suppose the CPI basket for 2010, the base year, is as follows:Assume that consumers are equally happy to drink coffee or tea with their scones. In 2010, coffee and tea cost the same, and the average person drinks equal amounts of coffee and tea.In the year 2015,
The minimum wage is not indexed to inflation, but suppose it had been starting in 1950. What would the nominal minimum wage have been in 2015? See Concept Check 16.5 for the data necessary to answer this question.
How much do workers get paid when they have an indexed contract?A labor contract provides for a first-year wage of $12.00 per hour and specifies that the real wage will rise by 2 percent in the second year of the contract and by another 2 percent in the third year. The CPI is 1.00 in the first
How do you compare workers’ real wages?Production workers are nonsupervisory workers, such as those who work on factory assembly lines. The average U.S. production worker earned $3.40 per hour in 1970 and$20.14 in 2013. Compare the real wages for this group of workers in these years
In 1950 the minimum wage prescribed by federal law was $0.75 per hour. In 2013 it was $7.25 per hour. How does the real minimum wage in 2013 compare to that of 1950? The CPI was 0.24 in 1950 and 2.29 in 2013.
In 2009 Alex Rodriguez of the New York Yankees earned $27.5 million. In that year the CPI was 2.15. How did Rodriguez’s 2009 real earnings compare to Bond’s 2001 real earnings, as stated in Example 16.3?
Who earned more, Babe Ruth or Barry Bonds?Let’s return to the question posed at the beginning of this chapter. When Barry Bonds earned $10.3 million in 2001, was he better or worse off than Babe Ruth was in 1930 earning $80,000?
Below are CPI values for the years 1929 through 1933. Find the rates of inflation between 1929 and 1930, 1930 and 1931, 1931 and 1932, and 1932 and 1933.How did inflation rates in the 1930s differ from those since 2009? Year CPI 1929 0.171 1930 0.167 1931 0.152 1932 0.137 1933 0.130
The consumer price index captures the cost of living for the “typical” or average family. Suppose you were to construct a personal price index to measure changes in your own cost of living over time. In general, how would you go about constructing such an index? Why might changes in your
Returning to the three-good example in Tables 16.1 and 16.2 , find the year 2015 CPI if the rent on the apartment falls from $500 in 2010 to $400 in 2015. The prices for hamburgers and movie tickets in the two years remain the same as in the two tables.
How do we measure the typical family’s cost of living?Suppose that in addition to the three goods and services the typical family consumed in 2010, they also bought four sweaters at $30 each. In the year 2015, the same sweaters cost $50 each. The prices of the other goods and services in 2010 and
Summarize the connections among inflation, nominal interest rates, and real interest rates.
Distinguish between inflation and relative price changes in order to find the true costs of inflation.
Discuss the two most important biases in the CPI.
Show how the CPI is used to adjust dollar amounts to eliminate the effects of inflation.
Explain how the consumer price index(CPI) is constructed and use it to calculate the inflation rate.
We discussed how the opportunity cost of sending children to school affects the level of school enrollment across countries. The United Nations Human Development Report 2013 reports the following data for per capita income in 2012(in the equivalent of 2011 U.S. dollars): (LO4)a. Which country would
The nation of Potchatoonie produces hockey pucks, cases of root beer, and sandals.The following table provides prices and quantities of the three goods in the years 2011 and 2014.Assume that 2011 is the base year. Find nominal GDP and real GDP for both years. (LO3) Pucks Root Beer Sandals Year
The government is considering a policy to reduce air pollution by restricting the use of “dirty” fuels by factories. In deciding whether to implement the policy, how, if at all, should the likely effects of the policy on real GDP be taken into account? Discuss. (LO4)
Calculate GDP for an economy that features the following data. (LO2) Consumption expenditures Exports Government purchases of goods and services Construction of new homes and apartments Sales of existing homes and apartments Imports Beginning-of-year inventory stocks End-of-year inventory stocks
For each of the following transactions, state the effect both on U.S. GDP and on the four components of aggregate expenditure. (LO2)a. Your mother buys a new car from a U.S. producer.b. Your mother buys a new car imported from Sweden.c. Your mother’s car rental business buys a new car from a U.S.
MNLogs harvested logs (with no inputs from other companies) from its property in northern Minnesota. It sold these logs to MNLumber for $1,500 and MNLumber cut and planed the logs into lumber. MNLumber then sold the lumber for $4,000 to MNFurniture. MNFurniture used the lumber to produce 100 tables
Intelligence Incorporated produces 100 computer chips and sells them for $200 each to Bell Computers. Using the chips and other labor and materials, Bell produces 100 personal computers. Bell sells the computers, bundled with software that Bell licenses from Macrosoft at $50 per computer, to PC
How would each of the following transactions affect the GDP of the United States? (LO1)a. The U.S. government pays $1 billion in salaries for government workers.b. The U.S. government pays $1 billion to Social Security recipients.c. The U.S. government pays a U.S. firm $1 billion for newly produced
George and John, stranded on an island, use clamshells for money. Last year George caught 300 fish and 5 wild boars. John grew 200 bunches of bananas. In the two-person economy that George and John set up, fish sell for 1 clamshell each, boars sell for 10 clamshells each, and bananas go for 5
Would you say that real GDP per person is a useful measure of economic well-being? Defend your answer. (LO4)
Al’s Shoeshine Stand shined 1,000 pairs of shoes last year and 1,200 pairs this year. He charged $4 for a shine last year and $5 this year. If last year is taken as the base year, find Al’s contribution to both nominal GDP and real GDP in both years. Which measure would be better to use if you
Give examples of each of the four types of aggregate expenditure. Which of the four represents the largest share of GDP in the United States? Can an expenditure component be negative? Explain. (LO2)
A large part of the agricultural sector in developing countries is subsistence farming, in which much of the food that is produced is consumed by the farmer and the farmer’s family. Discuss the implications of this fact for the measurement of GDP in poor countries. (LO1)
Why do economists use market values when calculating GDP? What is the economic rationale for giving high-value items more weight in GDP than low-value items? (LO1)
Why do far fewer children complete high school in poor countries than in rich countries?One possible explanation is that people in poor countries place a lower priority on getting an education than people in rich countries. This seems unlikely since immigrants from poor countries often put a heavy
Why do people work fewer hours today than their great-grandparents did?Americans start work later in life, retire earlier, and in many cases work fewer hours per week than people of 50 or 100 years ago. The opportunity cost of working less—retiring earlier, for example, or working fewer hours per
Can nominal and real GDP ever move in different directions?In most countries, both nominal and real GDP increase in almost every year. It is possible, however, for them to move in opposite directions. The last time this happened in the United States was 1990–1991. Using 2005 as a base year, real
Suppose production and prices of pizzas and calzones in 2009 and 2013 are as follows:These data are the same as those in Table 15.3 , except that pizza production has tripled rather than doubled between 2009 and 2013. Find real GDP in 2013 and 2009, and calculate the growth in real output over the
How much did real GDP grow during the president’s term?Using data from Table 15.3 and assuming that 2009 is the base year, find real GDP for the years 2013 and 2009. By how much did real output grow between 2009 and 2013?
Extending Example 15.5, suppose that 25,000 of the automobiles purchased by households are imported rather than domestically produced. Domestic production remains at 1,000,000 autos valued at $15,000 each. Once again, find GDP in terms of (a) the market value of production and (b) the components of
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