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macroeconomics principles

Macroeconomics 2nd Edition Daron Acemoglu, David Laibson, John List - Solutions

15. If your goal is to minimize the deadweight loss from a tax, would you tax goods for which demand is elastic or goods for which demand is inelastic, everything else being equal? Explain using a diagram.
14. Why are there two different views on the effect of taxation on labor supply in the United States?
13. Explain the terms “paternalism” and “consumer sovereignty.”
12. How would you depict the trade-off between equity and efficiency on a graph? How would a government decide where it wants to be on this curve?
11. What is a black market? What types of goods are likely to be traded in a black market? What problems do black markets pose in an economy?
10. What are the costs associated with government intervention in an economic system? Given that there are costs involved with government intervention in an economy, why do governments choose to intervene in markets?
9. What is meant by direct regulation? Give a few examples of direct regulation.
8. Are lump-sum taxes regressive or progressive? Is the deadweight loss of taxation the same for different types of taxes?
7. What is meant by tax incidence? Is the entire burden of the tax always borne by those on whom it is imposed?
6. What are the different types of tax systems? Give one example of each type of tax system.
5. How do governments use spending and taxation to reduce inequality and poverty in an economy?
3. How does the federal government raise revenue? What is the largest source of revenue for the federal government? Do state governments raise revenue from the same sources as the federal government? 4. What are the factors underlying government taxation and spending decisions?
2. Government spending in the United States has grown over time and now accounts for more than 40 percent of U.S. national income. Does this mean that the government has been consistently running a budget deficit?
1. When does a government run a budget surplus?
12. Suppose demand is QD = 16 - P and supply is QS = P. There is a constant positive externality of $4 per unit 1Marginal external benefit = $42. Find the maximum possible social surplus.
11. Three roommates—Tinker, Evers, and Chance—share an apartment. It is really cold outside, and they are considering turning up the thermostat in the apartment by 1, 2, 3, or 4 degrees. They know that each time they raise the temperature in the apartment by 1 degree, their heating bill will
10. A three-person city is considering a fireworks display. Anne is willing to pay $50 to see the fireworks, Bob is willing to pay $15, and Charlie is willing to pay $15. The cost of the fireworks is $60.a. In terms of efficiency, should the fireworks display be offered?b. Will any single citizen
9. There is a road between the suburbs and downtown. The road is congested at rush hour. If 100 people use the road at rush hour, the trip takes 30 minutes. If the 101st person enters the road, everyone has to slow down, and the trip now takes 31 minutes. People value their time at $6 per hour
8. A college campus must decide whether to spend $40,000 to clear sidewalks of snow during the winter. There are 4,000 students. One thousand of these students are willing to pay up to $30 each to walk on a snowless sidewalk. The other 3,000 are willing to pay $8 each.a. In terms of efficiency,
7. Many cities tax or ban plastic grocery bags. The rationale for these taxes and bans is an externalities argument: plastic bags are an eyesore; take up space in landfills; and damage fish, birds, and other wildlife.a. In a diagram, show the efficient number of plastic bags and the equilibrium
6. Malaria is spread by mosquitoes. That is, a mosquito spreads malaria by biting an infected person and later infusing malaria into a different person. A study by Jeffrey Sachs and others shows a strong correlation between the incidence of malaria in a country and poverty. Malaria is known to
5. There are 20 fish in a lake and 10 fishers who catch fish. There are two days allowed for fishing, and after the first day, whatever fish remain will double in number. The options are 1 (fish lightly) or 2 (fish intensely). On the first day each fisher gets 1 or 2 fish, based on this choice. On
4. Suppose you are willing to pay $15 for one framed painting in your dorm room and $5 more for a second painting. Your roommate is willing to pay $10 for one painting and has no interest in a second painting.a. Sketch your individual demand curve for paintings (a step function with maximum
3. Jones and Smith live in the same apartment building. Jones loves to play his opera recordings so loudly that Smith can hear them. Smith hates opera. Jones receives $100 worth of benefits from his music, and Smith suffers $60 worth of damages.a. From an efficiency perspective, should Jones be
2. A friend in your environmental economics study group suggests that taxes on pollution are ineffective because they do not eliminate all pollution. Based on the ideas from this chapter, explain what is wrong with this argument. Should the goal of any policy be to eliminate all pollution? If not,
1. The European Union banned certain pesticides for 2 years after studies found links between the use of these insecticides and a decline in the bee population. In particular, research has shown that the use of imidacloprid, clothianidin, and thiamethoxam on flowering crops has adversely affected
13. What is meant by the tragedy of the commons? Use an example to explain your answer.
12. Why is the market demand curve for public goods calculated as a vertical summation of individual demand curves?
11. When does the free-rider problem arise?
10. Why is it difficult for the market to deliver socially efficient quantities of goods like clean air or street lighting?
9. How do public goods differ from common pool resources? Explain.
8. Classify the following goods as private goods, common pool resources, club goods, or public goods.a. Health insuranceb. Radio spectrumc. A video on YouTubed. A mosquito control program in a citye. A library’s collection of e-books
7. What are Pigouvian taxes and subsidies? How do governments decide when to levy a tax or provide a subsidy?
6. How does a command-and-control policy differ from a market-based policy?
5. What is the Coase Theorem? Under what conditions will the Coase Theorem break down?
4. What does it mean to say that an individual or firm has internalized an externality?
3. If the production of a particular good causes a negative externality, would the equilibrium quantity in a competitive market be less than the efficient quantity or would it be greater than the efficient quantity?
2. Explain whether the following are examples of externalities.a. Alisha did not sleep well, because her neighbor was playing loud music.b. Rochelle was late for a job interview, because her alarm did not go off.c. José, who is allergic to pollen, is sick from the flowers that grow in his garden.
1. Why are externalities called market failures? Are pecuniary externalities also an example of market failure?
11. Suppose domestic demand is QD = 16 - P and domestic supply is Qs = P. The world price is $2 and the import tariff is $3 per unit. First make a sketch, and then find the following values. Each value will be represented by an area in your sketch.a. Consumer surplusb. Producer surplusc.
10. Dominic is willing to pay $12 for a single pizza; Stephany is willing to pay $7; and Tyler is willing to pay $5. There are no other potential consumers of pizza. Cheezbuzz, the supplier of pizza, has a cost of $1 for the first pizza, $2 for the second pizza, $3 for the third, $4 for the fourth,
9. Suppose your country imports wheat. The price of wheat rises from P1 to P2 and your country continues to import wheat. Present and discuss a diagram to answer the following questions. Did imports rise or fall? Did consumer surplus rise or fall? Did producer surplus rise or fall? Did social
8. The world price can be higher than the domestic price; this generates exports rather than imports. Copy the following supply and demand curves for pounds of cheese in Wisconsin. Notice that the world price is above the domestic equilibrium price.a. Highlight the pounds of cheese exported from
7. The remote island nations of Nearway and Farway produce fish and coconuts and have recently decided to engage in trade with one another. Use the table to answer the following questions. Coconuts Fish Characteristic Nearway Farway Nearway Farway Optimal production without trade 200 300 100 200
6. Consider the following three countries. Each can produce wheat, sheep, ore, brick, or wood. Production per worker is shown in the table. Each country has an equal number of workers. Redistan Whiteny Blueland Wheat 1 1 2 Sheep 1 2 2 Ore 1 2 0 Brick 2 1 3 Wood 2 1 1a. Which country has an absolute
5. Amanda is a student working part-time at an insurance company. Amanda can work only 5 hours a day. Her manager informs her that she needs to review 250 documents and process 250 insurance claims in the next 10 days. The following table shows how many documents and claims Amanda can work on in a
4. There are 10 workers in Thailand, and each can produce either 2 computers or 30 tons of rice. There are 20 workers in the United States, and each can produce either 5 computers or 40 tons of rice.a. Draw the PPC for each country. In each case, identify the intercepts and the slopes of the
3. Suppose a country has 100 westerners and 100 easterners. A westerner can produce either 6 units of food or 2 units of national defense; an easterner can produce either 2 units of food or 1 unit of national defense.a. Show that easterners have a comparative advantage in the production of
2. A country has two types of workers, skilled and unskilled. Workers can produce either computers or steel. Output per worker is as follows.Output per Worker Type of Worker Computers Steel Unskilled 3 2 Skilled 5 3 Do skilled workers have an absolute advantage in the production of computers? Do
1. Justin has 5 days in a work week; each day he can create either 2 Android apps or 1 Apple app. Pallas also has 5 days to work; each day she can produce either 2 Android apps or 3 Apple apps.a. Sketch the production possibilities curve (PPC) for Justin. Place Android apps on the horizontal
14. Consider the following diagram. The discussion in the text implies that if this country imposes a tariff, social surplus will fall by the sum of area A and area B. Intuitively, why is A part of the deadweight loss from this tariff? Intuitively, why is B part of the deadweight loss from this
13. Since the “winners” from free trade can more than compensate the “losers,” why does it matter if wages and employment fall when a country engages in free trade?
12. The mercantilist economic doctrine was widely followed from the sixteenth to the eighteenth centuries in Europe. Mercantilists advocated the use of tariffs to restrict trade, as they believed that countries that export more than they import will enjoy increased wealth. What could be the problem
11. If opening an economy up to trade always benefits both trading partners, why is free trade controversial?
10. What is the problem with the argument that infant industries need to be protected from foreign competition?
9. What are some of the common arguments against free trade?
8. What are the sources of a country’s comparative advantage?
7. Many service-sector jobs in the United States have moved to foreign countries where these jobs are done at a fraction of the cost they incur domestically. The outsourcing of jobs overseas is heavily debated by politicians, policymakers, and economists in the United States. Based on your
6. How has the pattern of trade changed in the United States since 1960? What are the types of goods that are causing the shift in the balance of imports and exports in the United States?
5. Explain the impact, if any, of each of the following on the PPC.a. Europe’s population fell by 30–60 percent following an outbreak of bubonic plague, also known as the Black Death, in the fourteenth century.b. In the next 20 years, a sizable proportion of the U.S. labor force is expected to
4. What does a production possibilities curve (PPC) show? What is the difference between a PPC that is linear and one that curves away from the origin?
3. What is meant by terms of trade? How is it determined?
2. Is it true that a country needs to have an absolute advantage in the production of a good to benefit from trade in that good? Explain.
1. Consider the figure at the right. The blue line shows how many units of goods A and B a worker in Taiwan can produce, and the tan line shows the number of units of goods A and B that a worker in Korea can produce. Does this figure indicate anything about either worker having a comparative or
13. Ashley is willing to pay $7, Bill is willing to pay $5, and Carrie is willing to pay $1.a. Sketch the demand curve.b. Write out the demand schedule for each integer price up to $8 ($0, $1, $2, . . . , $8).c. Find the consumer surplus if the price is $2.d. What if another buyer shows up who is
12. According to reports in the Chinese media, commuters in Beijing are facing a somewhat paradoxical situation: they find it difficult to get a cab while hundreds of cabs lie idle during rush hour. The demand for taxis in Beijing has increased as average incomes have risen. Governmentdetermined
11. The equilibrium rent in a town is $500 per month, and the equilibrium number of apartments is 100. The city now passes a rent control law that sets the maximum rent at $400. The diagram that follows summarizes the supply and demand for apartments in this city.a. Use the figure to complete the
10. Suppose a market for cheap sunglasses is in a long-run competitive equilibrium and that the price is $10. Every producer of sunglasses sells 5,000 pairs. A cloudy summer decreases the demand for sunglasses, which causes the market price to change. As a consequence, in the short run, will each
9. You run a small classroom market experiment with only three buyers and three sellers. The willingness to pay (reservation value) for buyer A is $7; for buyer B it is $5; and for buyer C it is $3. The willingness to accept (reservation value) for seller X is $2; for seller Y it is $4; and for
8. The following tables show a small firm’s long-run average cost of manufacturing a good at two different plants:Plant 1 Quantity Total Cost Average Cost Marginal Cost 1 $50 2 $106 3 $164 4 $224 5 $287 6 $355 7 $430 8 $520 9 $618 Plant 2 Quantity Total Cost Average Cost Marginal Cost 1 $20 2
7. Compared to the market for cars, the market for vintage buttons has fewer buyers and sellers. Social surplus is likely to be higher in the market for cars than in the vintage button market. Is it then correct to assume that the outcome in the car market is Pareto efficient while in the vintage
6. The market for electric drills in a certain country is characterized by a large number of buyers and sellers, and every buyer who wants a drill and can afford one has bought one. In other words, the market for drills is in equilibrium.a. Does this also mean that the market is Pareto
5. Sara and Jim are going to lunch together and rank the restaurant options in the following way. Which restaurant choices would be Pareto efficient?Sara’s Preferences Jim’s Preferences Chipotle 4th 3rd Naf Naf 1st 4th Panera 2nd 5th Potbelly 3rd 2nd Blaze 5th 1st
4. Let us continue with the electric car example from Problem 3. Suppose the market for electric cars is competitive.a. Show that the equilibrium price in this market is $40,000.b. Which firms will produce an electric car if the price is $40,000?c. Which consumers will buy an electric car when the
3. There are four consumers willing to pay the following amounts for an electric car:Each firm can produce at most one car. Suppose we want to maximize the difference between consumers’ willingness to pay for electric cars and the cost of producing those cars; that is, we want to maximize social
2. Consider the supply and demand curves shown in Section 7.1 (graphed in Exhibit 7.2). Suppose the price is limited to $55 at minimum (a “price floor”).a. At the price of $55, which people buy? What is the consumer surplus?b. At the price of $55, two iPhones will be purchased, but there are
1. The following diagram shows the market demand and market supply for sweaters. Calculate consumer surplus, producer surplus, and social surplus in this market.
11. Are there real-world markets that resemble double oral auctions? Suppose you had to organize a double oral auction for a good that has perfectly elastic demand. Do you expect prices to approach the competitive equilibrium?
10. Are all efficient outcomes also equitable? Explain.
9. Sofia, a political science student, thinks that the government should intervene to revive declining industries like video stores and print newspapers. The government, she reasons, can resolve the coordination problem of getting the agents in these markets to trade. Do you agree with her?
8. If your professor decided to give all students the highest grade in the class, would that affect your classmates’ incentives to study?
7. In a command economy, a planning agency sets prices for various inputs and final goods. In a market economy, supply and demand determine the prices of various goods. In both cases, there is a set of prices operating in the economy. Then why are market economies considered more efficient than
6. What could explain why South Korea’s GDP per capita increased so much faster since the 1970s than North Korea’s GDP per capita?
5. The market for economics textbooks is in equilibrium. The government decides to relax export restrictions on paper, leading to an increase in the demand for paper. How does social surplus in the market for textbooks change? Why? Present a diagram as part of your explanation.
4. Hardware stores charge higher prices for snow shovels after a big snow storm. What role do prices play in the snow shovel market? Should the government step in and keep the prices low? Show your reasoning with a supply and demand exhibit. Be sure to discuss deadweight loss.
3. How will the invisible hand move corn prices in response to:a. a flood that destroys a great deal of the corn crop?b. a rise in the price of wheat (a substitute for corn)?c. a change in consumer tastes away from corn dogs toward hot dogs?d. an increase in the number of demanders in the corn
2. How do economic profits and losses allocate resources in an economy?
1. All else being equal, does an elastic or inelastic demand curve result in higher social surplus? How does elasticity of supply affect social surplus?
13. Suppose TC is given by TC = 16 + Q2 . This implies that MC is MC = 2Q.a. Give the formula for ATC.b. If the market price were $5, how many units of output would this firm want to supply?c. What will the price be in the long run?
12. The following table shows the long-run total costs of three different firms: Output Firm I Firm II Firm III 1 $8 $5 $7 2 $14 $12 $12 3 $18 $21 $15 4 $20 $32 $24a. Do firms I and II experience economies of scale? Or do they experience diseconomies of scale?b. Minimum efficient scale is the
11. Larry Krovitz is a salesman who works at a used-car showroom in Sydney, Australia. It’s the last week of July, but he has not yet met his sales target for the month. A customer, Harold Kumar, who wants to buy a Ford Fiesta, walks into the showroom. After taking one of the cars for a test
10. This problem asks you to think carefully about sunk costs.a. The International Space Station (ISS) is a habitable satellite that was launched by NASA and space agencies of other countries. In 2009, NASA was considering shutting down the ISS within the next 5 to 6 years. Among those who were
9. You read a story in the newspaper about a car company that has recently been fined $5 billion by government regulators. The fine is for past infractions that are no longer relevant to how the firm produces cars going forward. The article contains the statement “clearly the company will now
8. Some cities have much stricter zoning laws and regulatory controls than other cities. A recent study found that increases in the demand for housing in cities with strict zoning laws led to large increases in the price of housing. It also claimed that in cities with lax zoning laws, increases
7. There are many identical firms with a simple cost structure: Total cost for Q = 0 is $6 and total cost for Q = 1 is $8. Each firm is incapable of producing anything more; in other words, total cost is infinite for any Q larger than 1.a. What is the fixed cost? What is the marginal cost of the
6. You are one of five identical firms (i.e., you all have the same costs) that sell widgets. Each day you have a fixed cost of $9 to operate. The marginal costs of your first through fifth widgets are $1, $2, $3, $7, and $8, respectively. You have a capacity constraint of 5, and you can only
5. Every candle maker in Town A must have a license. The cost of a license is the same regardless of the number of candles a business produces.a. Assuming that the candle market is perfectly competitive: i. Does this license shift a candle maker’s short-run AFC curve? ii. Does this license shift
4. Fill in the ATC and MC columns in the following table: Output Total Cost Average Total Cost Marginal Cost 0 $14 1 15 2 18 3 24 4 36a. Use the MC curve to determine how many units this firm would supply if the market price were $10.b. Assuming free entry and exit of other firms, based on the ATC
3. You are given the following information about the ABC Widget Company’s short-run costs: Quantity of Widgets Produced Total Fixed Cost Total Variable Cost Total Cost 0 $10 — — 1 — $1 — 2 — $3 $13 3 — $6 $16 4 — $10 — 5 — — $25 6 $10 $21 —a. Find the AFC of producing 5
2. Salmon fishing in Alaska is a seasonal business; May through September is the best time to bait salmon and halibut. Toland Fisheries, a small commercial fishery, recorded its highest ever catch last year. It started this year’s fishing season with the same number of workers and equipment. With

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