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microeconomics principles applications
Microeconomics 15th Canadian Edition Campbell R. Mcconnell, Stanley L. Brue, Sean M. Flynn, Thomas P. Barbiero - Solutions
4. Danny “Dimes” Donahue is a neighbourhood’s nine-year-old entrepreneur. His most recent venture is selling homemade brownies he bakes himself. At a price of $1.50 each, he sells 100. At $1 each, he sells 300. Is demand elastic or inelastic over this price range? If demand had the same
3. Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $30 per basketball and $600 when the price is set at $20 per basketball.Without using the midpoint formula, can you tell whether demand is elastic, inelastic, or unit elastic over this price
2. Investigate how demand elasticities are affected by increases in demand. Shift each of the demand curves in Figures 6-2a, 6-2b, and 6-2c to the right by 10 units. For example, point a in Figure 6-2a would shift to the right from location (10 units, $2)to (20 units, $2) while point b would shift
1. Look at the demand curve in Figure 6-2a. Use the midpoint formula and points a and b to calculate the elasticity of demand for that range of the demand curve. Do the same for the demand curves in Figures 6-2b and 6-2c using, respectively, points c and d for Figure 6-2b and points e and f for
7. True or False? The incidence of property taxes that are levied on rented houses and apartments is high—meaning that they are paid almost entirely by the landlords, who are billed by the government for those taxes. [LO6.6]
2. What are the major determinants of price elasticity of demand?Use those determinants and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic: [LO6.1]a. Bottled waterb. Toothpastec. Crest toothpasted. Ketchupe. Diamond bracelets f.
1. Graph the accompanying demand data and then use the midpoint formula for Ed to determine price elasticity of demand for each of the four possible $1 price changes.What can you conclude about the relationship between the slope of a curve and its elasticity? Explain in a non-technical way why
5. What is the tax incidence of a sales tax when demand is highly inelastic? Highly elastic? What effect does the elasticity of supply have on the incidence of a sales tax? [LO6.6]
3. The income elasticities of demand for movies, dental services, and clothing have been estimated to be +3.4, +1.0, and +0.5, respectively. Interpret these coefficients. What does it mean if an income elasticity coefficient is negative? [LO6.5]
1. Explain why the choice between 1, 2, 3, 4, 5, 6, 7, and 8 movie tickets or 1000, 2000, 3000, 4000, 5000, 6000, 7000, and 8000 movie tickets makes no difference in determining elasticity in Table 6-1. [LO6.1]
Question What is the purpose of charging different groups of customers different prices? Supplement the three broad examples in this Last Word with two examples of your own. (Hint: Think of price discounts based on group characteristics or time of purchase.)
LO6.6 Apply the concept of elasticity to real-world situations.
2. Political advertising is often directed at winning over so-called swing voters, whose votes might go either way. Suppose that two political parties—the Freedom Party and the Liberty Party—disagree on whether to build a new road. Polling shows that of 1000 total voters, 450 are firmly for the
1. Look back at Figures A5-1a and 1b, which show the costs and benefits to voters Adams, Benson, and Conrad of two different public goods that the government will produce if a majority of Adams, Benson, and Conrad support them. Suppose that Adams, Benson, and Conrad have decided to have a single
3. True or False? The median-voter model explains why politicians so often stake out fringe positions that appeal only to a small segment of the electorate. [LOA5.1]
2. We can apply voting paradoxes to the highway construction example of Chapter 4. Suppose there are only five people in a society and each favours one of the five highway construction options listed in Table 4.4. (“No new construction” is one of the five options.) Explain which of these
1. 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: [LOA5.1]
3. Critique this statement: “The problem with our democratic institutions is that they don’t correctly reflect the will of the people! If the people—rather than self-interested politicians or lobbyists—had control, we wouldn’t have to worry about government taking actions that don’t
2. Discuss the following: Majority voting ensures that government will produce only those public goods for which benefits exceed costs. [LOA5.1]
1. 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 benefitsreceived or an ability-to-pay tax system? Use the information in both panels of Figure A5-1 to show how society
2. Consider a corrupt provincial government in which each housing inspector examines two newly built structures each week. All the builders in the province are unethical and want to increase their profits by using substandard construction materials, but they can’t do that unless they can bribe a
1. Suppose that there are 1 million federal workers at the lowest level of the federal bureaucracy and that above them are multiple layers of supervisors and supervisors of supervisors.Assume that each higher level is one-tenth the size of the one below it because the government is using a 10:1
4. occur when politicians commit to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures. [LO5.2]a. Budget deficitsb. Debt crisesc. Loan guaranteesd. Unfunded liabilities
3. Tammy Hall is the mayor of a large Canadian city. She has just established the Office of Window Safety. Because windows sometimes break and spray glass shards, every window in the city will now have to pass an annual safety inspection. Property owners must pay the $5-per-window cost—and, by
1. Select all of the following that correctly complete the following sentence: To an economist, a coercive government can be useful in order to [LO5.1]a. Reallocate resources in order to improve efficiencyb. Fight negative externalitiesc. Ensure low gasoline pricesd. Provide a low-risk economic
6. Critique the following statement: “Thank goodness we have so many government regulatory agencies. They keep Big Business in check.” [LO5.2]
5. Explain the reasoning behind the following statement:“Politicians would make more rational economic decisions if they weren’t running for re-election every few years.” [LO5.2]
3. What is rent seeking, and how does it differ from the kinds of profit maximization and profit seeking that we discussed in previous chapters? Provide an actual or a hypothetical example of rent seeking by a firm in an industry, a union, and a professional association (for example, physicians or
2. Jean Baptiste Colbert was the minister of finance under King Louis XIV of France. He famously observed that “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” How does his comment relate
1. What are the three major cost-reducing features of the Singapore health care system? Which one do you think has the largest effect on holding down the price of medical care in Singapore? How difficult do you think it would be to implement the missing elements in Canada? Explain.
LOA5.1 (Appendix) Explain the difficulties of conveying economic preferences through majority voting.
1. Consider a used-car market with asymmetric information.Owners of used cars know what their vehicles are worth but have no way of credibly demonstrating those values to potential buyers. Thus, potential buyers must always worry that the used car they are being offered may be a “lemon” (a car
3. True or False? A market may collapse and have relatively few transactions between buyers and sellers if buyers have more information than sellers. [LOA4.1]
2. Government inspectors who check on the quality of services provided by retailers as well as government requirements for licensing in various professions are both attempts to resolve [LOA4.1]a. The moral hazard problemb. The asymmetric information problem
1. People drive faster when they have auto insurance. This is an example of [LOA4.1]a. Adverse selectionb. Asymmetric informationc. Moral hazard
3. Put 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: [LOA4.1]a. A person with a terminal illness buys several life insurance policies through the mail.b. A person drives carelessly because he or she
1. Because medical records are private, an individual applying for private health insurance in Canada will know more about his own health conditions than will the insurance companies to which he is applying for medical services not covered by our national health care system. Is this likely to
5. On the basis of the following three individual demand schedules for a particular good, 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 and (b) the collective demand schedule on the
3. Look at Tables 4-1 and 4-2 together. What is the total surplus if Bob buys a unit from Carlos? If Beata buys a unit from Courtney? If Bob buys a unit from Chad? If you match up pairs of buyers and sellers so as to maximize the total surplus of all transactions, what is the largest total surplus
7. Use marginal cost/marginal benefit analysis to determine if the following statement is true or false: “The optimal amount of pollution abatement for some substances, such as dirty water from storm drains, is very low; the optimal amount of abatement for other substances, such as cyanide
6. Match each of the following characteristics or scenarios with either the term negative externality or the term positive externality. [LO4.4]a. Overallocation of resourcesb. Tammy installs a very nice front garden, raising the property values of all the other houses on her block.c. Market demand
3. What are the two characteristics of public goods? Explain the significance of each for public provision as opposed to private provision. What is the free-rider problem as it relates to public goods? Is Canadian border patrol a public good or a private good? Why? How about satellite TV? Explain.
LO4.4 Explain how positive and negative externalities cause underallocations and overallocations of resources.
2. The table below shows two demand schedules for a given style of men’s shoes—that is, how many pairs per month will be demanded at various prices at a men’s clothing store in Winnipeg called Stromnord. [LOA3.1]Suppose that Stromnord has exactly 65 pairs of this style of shoe in inventory at
1. Demand and supply often shift in the retail market for gasoline. Here are two demand curves and two supply curves for litres of gasoline in the month of May in a small town in New Brunswick. Some of the data are missing. [LOA3.1]
6. Governments can use subsidies to increase demand. For instance, a government can pay farmers to use organic fertilizers rather than traditional fertilizers. That subsidy increases the demand for organic fertilizer. Consider two industries, one in which supply is nearly vertical and the other in
6. Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the table below. [LO3.6]
5. Advanced Analysis Assume that demand for a commodity is represented by the equation P = 10 − 0.2Qd and supply by the equation P = 2 + 0.2Qs, where Qd and Qs are quantity demanded and quantity supplied, respectively, and P is price.Using the equilibrium condition Qs = Qd, solve the equations to
3. Refer to the expanded table below from Review Question 8. [LO3.4]a. What is the equilibrium price? At what price is there neither a shortage nor a surplus? Fill in the surplus–shortage column and use it to confirm your answers.b. Graph the demand for wheat and the supply of wheat. Be sure to
2. The figure that follows shows the supply curve for tennis balls, S1. Use the figure and the table to give your answers to the following questions. [LO3.3]
1. Suppose there are three buyers of candy in a market: Tex, Dex, and Rex. The market demand and the individual demands of Tex, Dex, and Rex for candy are given in the table below. [LO3.2]a. Fill in the missing values in the table.b. Which buyer demands the least at a price of $5? The most at a
8. Suppose the total demand for wheat and the total supply of wheat per month in the Winnipeg grain market are as shown in the table here. Suppose also that the government establishes a price ceiling of $3.70 for wheat. What might prompt the government to establish this ceiling? Explain carefully
6. Critically evaluate the following statement: “In comparing the two equilibrium positions in Figure 3-7b, I note that a smaller amount is actually demanded at a lower price. This refutes the law of demand.” [LO3.5]
5. Suppose that in the market for computer memory chips, the equilibrium price is $50 per chip. If the current price is$55 per chip, there will be of memory chips. [LO3.4]a. A shortageb. A surplusc. An equilibrium quantityd. None of the above
1. Demand curve D in Figure 3-6 is downsloping becausea. Producers offer less product for sale as the price of the product falls.b. Lower prices of a product create income and substitution effects, which lead consumers to purchase more of it.c. The larger the number of buyers in a market, the lower
LOA3.1 (Appendix) Illustrate how supply and demand analysis can provide insights into actual-economy situations.
LO3.6 Identify what government-set prices are and how they can cause surpluses and shortages.
3. Let us put dollar amounts on the flows in the circular flow diagram of Figure 2-2. [LO2.5]a. Suppose that businesses buy a total of $100 billion of the four resources (labour, land, capital, and entrepreneurial ability)from households. If households receive $60 billion in wages,$10 billion in
2. With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also assume that the least-cost combination of resources in producing those loaves is 5 units of labour, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at per-unit prices
1. Suppose Natasha currently makes $50,000 per year working as a manager at a cable TV company. She develops two possible entrepreneurial business opportunities. In one, she will quit her job to start a hand-made soap company. In the other, she will try to develop an Internet-based competitor to
7. Franklin, John, Henry, and Harry have decided to pool their financial resources and business skills in order to open up and run a coffee shop. They will share any profits or losses that the business generates and will be personally responsible for making good on any debt that their business
5. Identify each of the following quotes as being an example of either the coordination problem, the invisible hand, creative destruction, or the incentive problem. [LO2.4]a. “If you compare a list of today’s most powerful and profitable companies with a similar list from 30 years ago, you will
4. Assume that a business firm finds that its profit is greatest when it produces $40 worth of product A. Suppose also that each of the three techniques shown in the table below will produce the desired output. [LO2.3]a. With the factor prices shown, which technique will the firm choose? Why? Will
2. Match each term with the correct definition. [LO2.2]private property self-interest freedom of enterprise competition mutually agreeable market freedom of choicea. An institution that brings buyers and sellers together.b. The right of private persons and firms to obtain, control, employ, dispose
1. Decide whether each of the following describes a command system, a market system, or a laissez-faire system. [LO2.1]a. A woman cannot open a flower shop unless the central government decides to allow it.b. Shops stock and sell the goods their customers want but the government levies a sales tax
11. Distinguish between the factor market and the product market in the circular flow model. In what way are businesses and households both sellers and buyers in this model? What are the flows in the circular flow model? [LO2.5]
10. In market economies, firms rarely worry about the availability of inputs to produce their products, whereas in command economies input availability is a constant concern. Why is there a difference? [LO2.4]
9. In a sentence, define the phrase invisible hand. [LO2.3]
7. Some large hardware stores such as Canadian Tire boast of carrying as many as 20,000 different products in each store.What motivated the producers of those individual products to make them and offer them for sale? How did the producers decide on the best combinations of factors to use? Who made
6. Evaluate and explain each of the following hypothetical statements: [LO2.2]a. The market system is a profit-and-loss system.b. Competition is the disciplinarian of the market economy.
4. What are the advantages of using capital goods in the production process? What is meant by the term division of labour?What are the advantages of specialization in the use of human and material resources? Explain why exchange is the necessary consequence of specialization. [LO2.2]5. What problem
3. Why is private property, and the protection of property rights, essential to the success of the market system? How do property rights encourage cooperation? [LO2.2]
5. What explains why millions of economic resources tend to get arranged logically and productively rather than haphazardly and unproductively?
4. In Figure 2-2,a. Households spend income in the product market.b. Firms sell resources to households.c. Households receive income through the product market.d. Households produce goods
3. In Figure 2-2,a. Money flows counterclockwise.b. Resources flow counterclockwise.c. Goods and services flow clockwise.d. Households are on the selling side of the product market.
1. The factor market is wherea. Households sell products and businesses buy products.b. Businesses sell factors of production and households sell products.c. Households sell factors of production and businesses buy factors of production (or the services of factors).d. Businesses sell factors of
LO2.4 Explain the operation of the “invisible hand” and why market economies usually do a better job than command economies at transforming economic resources into desirable output.
8. In the accompanying graph, is the slope of curve AA′ positive or negative? Does the slope increase or decrease as we move along the curve from A to A′? Answer the same two questions for curve BB′. [LOA1.1]
7. The accompanying graph shows curve XX′ and tangents at points A, B, and C. Calculate the slope of the curve at these three points. [LOA1.1]
6. Suppose that C = a + bY, where C = consumption, a = consumption at zero income, b = slope, and Y = income. [LOA1.1]a. Are C and Y positively related or negatively related?b. If graphed, would the curve for this equation slope upward or downward?c. Are the variables C and Y inversely or directly
4. Construct a table from the data shown in the accompanying graph. Which is the dependent variable and which the independent variable? Summarize the data in equation form. [LOA1.1]5. Suppose that when the interest rate on loans is 16 percent, businesses find it unprofitable to invest in machinery
3. The following table contains data on the relationship between saving and income. Rearrange these data into a meaningful order and graph them on the accompanying grid. What is the slope of the line? What is the vertical intercept? Write the equation that represents this line. What would you
2. Indicate how each of the following might affect the data shown in Figure A1-2 of this appendix: [LOA1.1]a. IU’s athletic director schedules higher-quality opponents.b. A National Basketball Association (NBA) team locates in the city where IU also plays.c. IU signs a contract to have all of its
1. Graph and explain the relationships you would expect to find between the following: [LOA1.1]a. The number of centimetres of rainfall per month and the sale of umbrellasb. The amount of tuition and the level of enrolment at a college or universityc. The popularity of a music artist and the price
2. Erin grows pecans. The number of bushels (B) that she can produce depends on the number of centimetres of rainfall (R)that her orchards get. The relationship is given algebraically as follows: B = 3000 + 800R. Match each part of this equation with the correct term. [LOA1.1]B slope 3000 dependent
1. Indicate whether each of the following relationships is usually a direct relationship or an inverse relationship.[LOA1.1]a. A sports team’s winning percentage and attendance at its home gamesb. Higher temperatures and sweater salesc. A person’s income and how often he or she shops at
3. Look back at Figure A1-2, which shows the inverse relationship between ticket prices and game attendance at Informed University (IU). [LOA1.1]a. Interpret the meaning of both the slope and the intercept.b. If the slope of the line were steeper, what would that say about how ticket sales respond
2. Describe the graphical relationship between ticket prices and the number of people choosing to visit amusement parks. Is that relationship consistent with the fact that, historically, park attendance and ticket prices have both risen?Explain. [LOA1.1]
1. Briefly explain the use of graphs as a means of representing economic relationships. [LOA1.1]
8. Because investment and capital goods are paid for with savings, higher savings rates reflect a decision to consume fewer goods for the present in order to be able to invest in more goods for the future. On average, households in China save 40 percent of their annual income each year, whereas
7. Referring to the table in Problem 5, suppose that improvement occurs in the technology of producing forklifts but not in the technology of producing automobiles. Draw the new production possibilities curve. Now assume that a technological advance occurs in producing automobiles but not in
6. Look at Figure 1-3. Suppose that the cost of cheese falls, so that the marginal cost of producing pizza decreases. Will the MC curve shift up or down? Will the optimal amount of pizza increase or decrease? [LO1.7]
5. Below is a production possibilities table for consumer goods(automobiles) and capital goods (forklifts). [LO1.7]a. Show these data graphically. Upon what specific assumptions is this production possibilities curve based?b. If the economy is at point C, what is the cost of one more automobile? Of
4. Suppose that you are on a desert island and possess exactly 20 coconuts. Your neighbour, Friday, is a fisher, and he is willing to trade 2 fish for every 1 coconut you are willing to give him. Another neighbour, Kwame, also a fisher, is willing to trade 3 fish for every 1 coconut. [LO1.6]a. On a
3. Suppose you won $15 on a lottery ticket at the local 7-Eleven and decided to spend all the winnings on candy bars and bags of peanuts. Candy bars cost $0.75 each while bags of peanuts cost $1.50 each. [LO1.6]a. Construct a table showing the alternative combinations of the two products that are
2. Pham can work as many or as few hours as she wants at the university bookstore for $9 per hour. But due to her hectic schedule, she has just 15 hours per week that she can spend working either at the bookstore or at other potential jobs. One potential job, at a café, will pay her$12 per hour
1. Potatoes cost Janice $1 per kilogram, and she has $5 that she could possibly spend on potatoes or other items. If she feels that the first kilogram of potatoes is worth $1.50, the second kilogram is worth $1.14, the third kilogram is worth $1.05, and all subsequent kilograms are worth $0.30, how
7. What are the two major ways in which an economy can grow and push out its production possibilities curve? [LO1.8]a. Better weather and nicer carsb. Higher taxes and lower spendingc. Increases in resource supplies and advances in technologyd. Decreases in scarcity and advances in auditing
6. Explain how (if at all) each of the following events affects the location of a country’s production possibilities curve: [LO1.7]a. The quality of education increases.b. The number of unemployed workers increases.c. A new technique improves the efficiency of extracting copper from ore.d. A
5. For each of the following situations involving marginal cost (MC)and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units. [LO1.5]a. 3000 units at which MC = $10 and MB = $13b. 11 units at which MC = $4 and MB = $3c. 43,277 units at
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