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macroeconomics principles
Macroeconomics 2nd Edition Daron Acemoglu, David Laibson, John List - Solutions
1. Fixing up old houses requires plumbing and carpentry work. Jack (who is a jack of all trades but is a master of none) is a decent carpenter and a decent plumber but is not particularly good at either. He can fix up two houses in a year if he does all the carpentry and plumbing himself. His wage
14. If some sellers exit a competitive market, how will this affect equilibrium?
13. How does the long-run supply curve differ from the shortrun supply curve for a perfectly competitive firm? Explain your answer.
12. The following graph shows the long-run ATC cost curve for a perfectly competitive firm:Refer to points A, B, and C on the graph, and identify where the firm would experience economies of scale, constant returns to scale, and diseconomies of scale.
11. In each of the following cases, identify whether a competitive firm’s producer surplus will increase, decrease, or remain unchanged. i. The demand for the product increases. ii. The firm’s MC of production increases. iii. The market price of the product falls.
10. What is meant by producer surplus? How is producer surplus in a competitive market calculated?
9. Would a profit-maximizing firm continue to operate if the price in the market fell below its average cost of production in the short run?
8. The following graph shows three supply curves with varying degrees of price elasticity:Identify the perfectly elastic, perfectly inelastic, and unitelastic supply curves.
7. Is it possible for accounting profit to be positive but economic profit to be negative? Explain with an example.
6. How does a firm in a competitive market decide what level of output to produce in order to maximize its profit?
5. Why is it that the industry demand curve slopes downward when the demand curves faced by individual firms in perfectly competitive markets are horizontal?
4. Use a graph to show the relationship between the MC curve and the ATC curve for a competitive firm. What can you conclude about ATC when MC is less than ATC?
3. How would the introduction of legal or technical barriers to entry affect the long-run equilibrium in a perfectly competitive market?
2. Do you think sellers in a perfectly competitive market can price their goods differently? Explain your answer.
1. Suppose one firm accounts for 55 percent of the global market share for a product, while 147 other firms account for the remaining 45 percent of the market. With such a large number of buyers and sellers, is this market likely to be competitive? Explain your answer.
13. Suppose demand is given by QD = 6 - P.a. Graph the demand curve.b. If the price is $2, what is the consumer surplus?c. If the price goes up to $4, what is the new consumer surplus? This new surplus should be lower; explain why
12. Nadia consumes two goods: food and clothing. The price of food is $2, the price of clothing is $5, and her income is $1,000. Nadia always spends 40 percent of her income on food regardless of the price of food, the price of clothing, or her income.a. What is her price elasticity of demand for
11. Walmart and Target are both discount retailers. However, during the recession of 2007–2009, Target’s samestore sales fell while sales at Walmart actually increased. Examine the following statements and identify the ones that could explain this outcome. i. Walmart stocks more goods like
10. Three years after graduating from college you get a promotion and a 20 percent raise. Your consumption habits change accordingly. Use the following information to determine your income elasticity of demand, and state whether the good is a normal good, an inferior good, or a luxury good.a. You
9. You work at a convenience store and make note of changes to sales after the price of liquid soap unexpectedly increases by 10 percent. You notice that sale of shampoo goes up by 5 percent and sale of lotion goes down by 2 percent. Calculate the cross-price elasticities, and comment on whether
8. Consider the following demand schedule: Price Quantity $9 52 $11 48 $13 40a. Use the midpoint formula to calculate the elasticity of demand (i) when the price rises from $9 to $11 and (ii) when the price rises from $11 to $13.b. When the price rises from $9 to $11, does expenditure rise, fall,
7. The total benefit for burgers and beers is given below. Burgers cost $10 and beers cost $20. Total Benefit (Burgers) Total Benefit (Beers) 1 15 30 2 30 50 3 45 60 4 60 65a. What is the marginal benefit of a third beer?b. What is the “bang for the buck” of a second burger?c. Using the “bang
6. You get a new job in a tropical climate and so you need to buy shorts (s) and T-shirts (t). Your budget constraint is given by $20s + $5t = $60.a. Based on this formula, what must be the price of a T-shirt? In other words, how much does one T-shirt cost?b. Complete the following table, which
5. Hanna has $100 to spend on movies and concerts. Suppose the price of a movie ticket is $10 and the price of a concert ticket is $50.a. Create the budget constraint for movie tickets and concert tickets for Hanna.b. Show the change in the budget constraint that would occur if the price of
4. Akio consumes two goods, books and sweaters. His income is $24, the price of a sweater is $4, and the price of a book is $2.a. Suppose Akio’s parents give him $8 for his birthday. Draw Akio’s budget set.b. Now suppose Akio’s parents had given him two sweaters for his birthday instead of
3. Suppose the price of X is $40, the price of Y is $50, and a consumer has income of $400.a. Draw the budget constraint for this consumer. What is the opportunity cost of buying one unit of good X?b. Which of the following combinations of X and Y will be represented by a point on the consumer’s
2. Maya earns $1,000 per month and spends her income on clothing and books. Suppose the price of books is $40 and the price of clothing is $25.a. Show Maya’s budget constraint in a diagram. Identify the slope and intercepts of this budget constraint.b. Suppose the price of books rises to $50,
1. Each school-week night you can play video games, talk on the phone, or watch a movie. You have a total of five nights to spend doing one of these three things. Play Video Games Talk on Phone Watch a Movie Quantity (nights): Total Benefit Marginal Benefit Total Benefit Marginal Benefit Total
16. During an economic slump, such as the 2008 recession, what pricing strategies could a fast-food chain such as McDonald’s use to maintain its sales? Use some of the concepts discussed in this chapter in your answer.
15. If a good is considered to be a luxury good, does it mean that the Law of Demand does not hold?
14. Examine the accuracy of the following statement: “Given that burgers and fries are complementary goods, if the price of fries increases, the quantity demanded of both goods will fall.”
13. What can income elasticity of demand tell us about the nature of a good?
12. How is cross-price elasticity of demand used to determine whether two goods are substitutes or complements?
11. How is the price elasticity of demand calculated using the arc elasticity method?
10. What does the price elasticity of demand show? In the market for sweaters, suppose Green’s price elasticity of demand is 0.2, Smith’s price elasticity is 1.2, and the price elasticity of all the other consumers is greater than 0.2 but less than 1.2. Could the market price elasticity be less
9. Why does a demand curve with a constant slope not have a constant elasticity?
8. Consider a good that you do not like at all, perhaps turnips. Given the market price for turnips, what would be your consumer surplus?
7. Do all consumers receive the same level of consumer surplus? Explain with an example.
5. What is meant by consumer surplus? How is it calculated? 6. Consider the following supply and demand diagram:Identify which of the three areas labeled A, B, and C represents consumer surplus in this market.
4. Why is a consumer’s satisfaction maximized when the marginal benefit from the last dollar she spent on one good is equal to the marginal benefit from the last dollar she spent on another good?
3. Consider the following figures in which the light blue line is the original budget constraint for a consumer and the dark blue line is the new one. Examine each case and explain what could have caused the change.
2. How does a consumer’s budget set differ from his budget constraint? For a consumer with a given level of income, will the budget set have more combinations of goods or will the number of combinations be higher for the budget constraint?
1. Why are consumers in a competitive market considered to be price-takers?
14. Note: This problem requires some basic algebra. The demand for computers is QD = 15 - 2P, where P is the price of computers. Initially, the supply of computers is QS = P.a. Find the original equilibrium price and quantity.b. Suppose the prices of memory chips and motherboards (two important
13. Suppose demand in a market is described by the equation QD = 6 - P.a. Sketch demand.b. Write out the demand schedule for each integer price up to $6 ($0, $1, $2, . . . , $6).c. What if another buyer shows up who is “willing to pay any amount” for one unit. If we take her word at face value,
12. As part of U.S. sugar policy (in 2013), the government offered to buy raw sugar from domestic sugarcane mills at an average price of 18.75 cents per pound. This government offer was made for as much raw sugar as the sugarcane mills produced. Any raw sugar purchased by the government was not
11. Lobsters are plentiful and easy to catch in August but scarce and difficult to catch in November. In addition, vacationers shift the demand for lobsters further to the right in August than in any other month. Compare the equilibrium price and quantity of lobsters in August to the equilibrium
10. New York decides to reduce the consumption of sugary soda by imposing a minimum price of $2.50 per soda. The current equilibrium price is $1.50. Sketch the supply and demand for soda and show the effect of this policy. Clearly label the excess supply in your diagram.
9. Suppose one of your friends offered the following argument: a rightward shift in demand will cause an increase in price. The increase in price will cause a rightward shift of the supply curve, which will lead to an offsetting decrease in price. Therefore, it is impossible to tell what effect
8. Land in Sonoma, California, can be used either to grow grapes for pinot noir wine or to grow Gravenstein apples. The demand for pinot noir shifts sharply and permanently to the right. What will be the effect of the rightward shift in demand for pinot noir on the equilibrium price and quantity of
7. For each of the following situations, sketch the demand curve as accurately as possible.a. Appendectomy is a life-saving operation that some people need. Regardless of the price, the quantity demand is 300,000 every year.b. For any price above $5 absolutely nobody will buy your lemonade, but
6. There is a sharp freeze in Florida that damages the orange harvest and as a result, the price of oranges rises. Will the equilibrium price of orange juice rise, fall, or remain constant? Will the equilibrium quantity of orange juice rise, fall, or remain constant? Present a supply-and-demand
5. Brazil is the world’s largest coffee producer. There was a severe drought in Brazil in 2013–2014 that damaged Brazil’s coffee crop. The price of coffee beans doubled during the first 3 months of 2014.a. Draw and discuss a supply-and-demand diagram to explain the increase in coffee
4. Sketch generic supply and demand curves for the housing market and label the equilibrium price and quantity.a. A booming economy increases the demand for housing. Show the shift in the demand curve on your graph. What does this do to the price and quantity in the market?b. You and a friend both
3. Explain how simultaneous shifts in demand and supply curves could explain these situations:a. The price of insulin injection kits, used by diabetic patients, increases from $45 to $52, but the equilibrium quantity remains the same.b. A pest attack on the tomato crop increases the cost of
2. Demand for books is given by the following table. Price ($) Quantity of Books Demanded 0 1,000 20 600 40 200 60 0a. Plot each point on a well-labeled diagram, with quantity on the x-axis and price on the y-axis.b. Assume that the demand curve is linear between each of the points in the demand
1. Suppose the following table shows the quantity of laundry detergent that is demanded and supplied at various prices in Country 1. Price ($) Quantity Demanded (million oz.) Quantity Supplied (million oz.) 2 65 35 4 60 40 6 55 45 8 50 50 10 45 55 12 40 60 14 35 65a. Use the data in the table to
10. Why was a fixed price of $50 not the best way of allocating used laptops? Suggest other possible ways of distributing the laptops that would be efficient.
9. How do the following affect the equilibrium price in a market?a. A leftward shift in demandb. A rightward shift in supplyc. A large rightward shift in demand and a small rightward shift in supplyd. A large leftward shift in supply and a small leftward shift in demand
8. Explain how the following factors will shift the supply curve for sparkling wine.a. New irrigation technology increases the output of grapes in a vineyard.b. Following an increase in the immigration of unskilled labor, the wages of wine-grape pickers fall.c. The government sets a minimum wage
7. What is the difference between willingness to accept and willingness to pay? For a trade to take place, does the willingness to accept have to be lower, higher, or equal to the willingness to pay?
6. What does the Law of Supply state? What is the key feature of a typical supply curve?
5. What does it mean to say that we are running out of “cheap oil”? What does this imply for the price of oil in the future?
4. Explain how the following factors will shift the demand curve for Gillette shaving cream.a. The price of a competitor’s shaving cream increases.b. With an increase in unemployment, the average level of income in the economy falls.c. Shaving gels and foams, marketed as being better than shaving
3. How is the market demand schedule derived from individual demand schedules? How does the market demand curve differ from an individual demand curve?
2. What is meant by diminishing marginal benefits? Are you likely to experience diminishing marginal benefits for goods that you like a lot? Are there exceptions to the general rule of diminishing marginal benefits? (Hint: Think about batteries that you would use in a flashlight that requires two
1. What is meant by holding all else equal? How is this concept used when discussing movements along the demand curve? How is this concept used when discussing movements along the supply curve?
8. It is possible to use equations to do marginal analysis. Suppose your firm has a marginal revenue given by MR = 10 - Q. This means that the seventh unit of output brings in 10 - 7 = $3 of additional revenue. The marginal cost for your firm is MC = 2 + Q. This means that the seventh unit of
7. Suppose the total benefit and total cost to society of various levels of pollution reduction are as follows:(1) Pollution Reduction (units) (2) Total Benefit (3) Total Cost (4) Total Net Benefit (5) Marginal Benefit (6) Marginal Cost 0 $0 $0 — — 1 $20 $9 2 $38 $20 3 $54 $33 4 $68 $48 5 $80
6. Scott loves to go to baseball games, especially home games of the Cincinnati Reds. All else being equal, he likes to sit close to the field. He also likes to get to the stadium early to watch batting practice. The closer he parks to the stadium, the more batting practice he is able to watch (the
5. Your total benefits from consuming different quantities of gas each week are shown in the following table:Gallons/ Week Total Benefit (dollar equivalent) Marginal Benefit 0 0 — 1 4 2 8 3 11 4 14 5 16 6 18 7 19 8 19a. Complete the marginal benefit column starting with the step from 0
4. You are taking two courses this semester, biology and chemistry. You have quizzes coming up in both classes. The following table shows your grade on each quiz for different numbers of hours spent studying for each quiz. (For the purposes of this problem, assume that each hour of study time
3. Determine whether the following statements better describe optimization using total value or optimization using marginal analysis.a. John is attempting to decide on a movie (all movies have the same ticket price). He determines that the new Batman movie provides him with comparatively more of
2. You are hired as a consultant for a local restaurant. It is considering whether to close at 9:00 p.m., or whether to stay open an extra hour (10:00 p.m.). Based on wages and utility bills, the added cost (the marginal cost) of staying open for each additional hour is $200.a. If the additional
1. Advances in wireless communication technology reduce the non-financial costs of long commutes: People who ride trains can get work done, and people who drive cars have more entertainment options. If this statement is true, explain the effect on the geographic area of cities. Focus on a person
9. Is optimization analysis positive, normative, or both? Explain your answer.
8. Explain how the market for apartments allocates the scarce supply of apartments near the city center.
7. Why is marginal analysis helpful for identifying the key aspects of an optimization problem?
6. There is a proverb that states, “anything worth doing is worth doing well.” Do you think an economist would agree with this proverb?
5. Suppose you had information on the sales of otherwise identical homes just east and just west of the boundary between two school districts. How could you use those data to estimate the value parents place on the quality of their children’s schools?
4. Why does a change in one’s opportunity cost of time imply a change in one’s optimal apartment location?
3. Some people choose to live close to the city center; others choose to live away from the city center and take a longer commute to work every day. Does picking a location with a longer commute imply a failure to optimize?
2. Does the principle of optimization imply that real people always choose the best feasible option?
1. What is meant by optimization? Compare and contrast optimization using total value and optimization using marginal analysis.
9. A simple economic model predicts that a fall in the price of bus tickets means that more people will take the bus. However, you observe that some people still do not take the bus even after the price of a ticket fell.a. Is the model incorrect?b. How would you test this model?
8. Oregon expanded its Medicaid coverage in 2008. Roughly 90,000 people applied, but the state had funds to cover only an additional 30,000 people (who were randomly chosen from the total applicant pool of 90,000). How could you use the Oregon experience to estimate the impact of increased access
7. You decide to run an experiment. You invite 50 friends to a party. You randomly select 25 friends and tell them that there will be free food; most of them show up to your party. For the other 25 friends you do not mention the free food; none of these friends show up. Based on the correlation in
6. This chapter shows that in general, people with more education earn higher salaries. Economists have offered two explanations of this relationship. The human capital argument says that high schools and colleges teach people valuable skills, and employers are willing to pay higher salaries to
5. As the text explains, it can sometimes be very difficult to sort out the direction of causality.a. Why might you think that more police officers would lead to lower crime rates? Why might you think that higher crime rates would lead to more police officers?b. In 2012, the New England Journal of
4. Some studies have found that people who owned guns were more likely to be killed with a gun. Do you think this study is strong evidence in favor of stricter gun control laws? Explain.
3. Suppose you come across a study that has discovered a correlation between reading books and life expectancy: People who read more books live longer. Come up with at least one plausible way that this correlation exists even though there is no direct causal link.
2. Consider the following situation: your math professor tells your class (of five students) that the mean score on the final exam is 80 but the median is 100. How is that possible? Explain.
1. Although the mean and median are closely related, the difference between the mean and the median is sometimes of interest.a. Suppose country A has five families. Their incomes are $10,000, $20,000, $30,000, $40,000, and $50,000. What is the median family income in A? What is the mean income?b.
10. Suppose you had to find the effect of seat belt rules on road accident fatalities. Would you choose to run a randomized experiment, or would it make sense to use natural experiments here? Explain
9. This chapter discussed natural and randomized experiments. How does a natural experiment differ from a randomized one?
8. What is meant by randomization? How does randomization affect the results of an experiment?
7. Give an example of a pair of variables that have a positive correlation, a pair of variables that have a negative correlation, and a pair of variables that have zero correlation.
6. Explain why correlation does not always imply causation. Does causation always imply positive correlation? Explain your answer.
5. How does the sample size affect the validity of an empirical argument? When can only one example be enough to prove your point?
4. Suppose 5,000 people bought scoops of ice cream on a hot summer day. If the mean number of scoops bought is 2, how many total scoops were sold that day?
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