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microeconomics principles applications
Microeconomics 4th Edition R. Glenn Hubbard, Anthony Patrick O’Brien - Solutions
Why do consumers pay attention to celebrity endorsements of products?
In which of the following situations are social influences on consumer decision making likely to be greater: choosing a restaurant for dinner or choosing a brand of toothpaste to buy? Briefly explain.
[Related to the Making the Connection on page 320] In studying the consumption of very poor families in China, Robert Jensen and Nolan Miller found that in both Hunan and Gansu “Giffen behavior is most likely to be found among a range of households that are poor (but not too poor or too
Assume two goods: pizza and Coke. Along an individual’s demand curve for pizza, as the price of pizza falls, does the marginal utility per dollar spent on pizza always equal the marginal utility per dollar spent on Coke? In other words, does the rule of equal marginal utility per dollar spent
Suppose the wage you are being paid doubles. Is there an income and substitution effect involved in your decision about how many hours you choose to work? If so, what is being substituted for what?
Suppose the market for ice cream cones is made up of three consumers: Josh, Jon, and Tim. Use the information in the following table to construct the market demand curve for ice cream cones. Show the information in a table and in a graph. Josh Jon Tim Price $1.75 Quantity Demanded (cones per week)
The chapter states that “when the price of an inferior good falls, the income effect and substitution effect work in opposite directions.” Explain what this statement means.
Considering only the income effect, if the price of an inferior good declines, would a consumer want to buy a larger quantity or a smaller quantity of the good? Does this mean that the demand curves for inferior goods should slope upward? Briefly explain.
What would need to be true for a demand curve to be upward sloping?
How is the market demand curve derived from consumers’individual demand curves?
Explain how a downward-sloping demand curve results from consumers adjusting their consumption choices to changes in price.
When the price of pizza falls in the Super Bowl example on pages 317–318, both the income effect and the substitution effect cause you to want to consume more pizza. If pizza were an inferior good, how would the analysis be changed? In this case, is it possible that a lower price for pizza might
[Related to the Don’t Let This Happen to You on page 316] Mary is buying corn chips and soda. She has 4 bags of corn chips and 5 bottles of soda in her shopping cart. The marginal utility of the fourth bag of corn chips is 10, and the marginal utility of the fifth bottle of soda is also 10. Is
Suppose the price of a bag of Frito’s corn chips declines from $0.69 to $0.59. Which is likely to be larger: the income effect or the substitution effect? Briefly explain.
[Related to Solved Problem 10.1 on page 314] Joe has$55 to spend on apples and oranges. Given the information in the following table, is Joe maximizing utility?Briefly explain. Marginal Utility of Price Quantity Total Utility Last Unit Apples $0.50 50 1,000 20 Oranges $0.75 40 500 30
[Related to Solved Problem 10.1 on page 314] Joe has $16 to spend on Twinkies and Ho-Hos. Twinkies have a price of $1 per pack, and Ho-Hos have a price of$2 per pack. Use the information in the graphs below to determine the number of Twinkies packs and the number of Ho-Hos packs Joe should buy to
You have six hours to study for two exams tomorrow. The following table shows the relationship between hours of study and test scores:a. Use the rule for determining optimal purchases to decide how many hours you should study each subject. Treat each point on an exam as 1 unit of utility and assume
If consumers should allocate their income so that the last dollar spent on every product gives them the same amount of additional utility, how should they decide the amount of their income to save?
Does the law of diminishing marginal utility hold true in every situation? Is it possible to think of goods for which consuming additional units, at least initially, will result in increasing marginal utility?
How does a change in the price of a product cause both a substitution effect and an income effect?
What is meant by a consumer’s budget constraint? What is the rule of equal marginal utility per dollar spent?
What is the definition of marginal utility? What is the law of diminishing marginal utility? Why is marginal utility more useful than total utility in consumer decision making?
What is the economic definition of utility? Is utility measurable?
Use indifference curves and budget lines to understand consumer behavior.
Describe the behavioral economics approach to understanding decision making.
Define utility and explain how consumers choose goods and services to maximize their utility.
The following appeared in an article in BusinessWeek that argued against free trade: “The U.S. is currently in a precarious position. In addition to geopolitical threats, we face a severe economic shock. We have already lost trillions of dollars and millions of jobs to foreigners.” If a country
President George W. Bush and President Barack Obama had trouble getting Congress to ratify free trade agreements the United States had negotiated with South Korea, Colombia, and Panama. According to an article in the New York Times, “When the Democrats controlled Congress, they resisted the trade
[Related to the Chapter Opener on page 273] In a forum in the New York Times on the Buy American provision in the American Recovery and Reinvestment Act, the editors posed the following question: “Why is the buy-American idea objectionable, or, alternatively, under what circumstances should it be
Suppose you are explaining the benefits of free trade and someone states, “I don’t understand all the principles of comparative advantage and gains from trade. I just know that if I buy something produced in America, I create a job for an American, and if I buy something produced in Brazil, I
Steven Landsburg, an economist at the University of Rochester, wrote the following in an article in the New York Times:Free trade is not only about the right of American consumers to buy at the cheapest possible price; it’s also about the right of foreign producers to earn a living. Steelworkers
[Related to the Making the Connection on page 294]The following excerpt is from a newspaper story on President Bill Clinton’s proposal to create a group within the Word Trade Organization (WTO) responsible for developing labor standards. The story was published just before the 1999 WTO meeting in
What is dumping? Who benefits and who loses from dumping? What problems arise when anti-dumping laws are implemented?
What is protectionism? Who benefits and who loses from protectionist policies? What are the main arguments people use to justify protectionism?
What is globalization? Why are some people opposed to globalization?
What events led to the General Agreement on Tariffs and Trade (GATT)? Why did the WTO eventually replace GATT?
[Related to the Making the Connection on page 291]An economic analysis of a proposal to impose a quota on steel imports into the United States indicated that the quota would save 3,700 jobs in the steel industry but cost about 35,000 jobs in other U.S. industries. Why would a quota on steel imports
[Related to Solved Problem 9.4 on page 289] Suppose that the United States currently both produces kumquats and imports them. The U.S. government then decides to restrict international trade in kumquats by imposing a quota that allows imports of only 6 million pounds of kumquats into the United
According to an editorial in the Washington Post: “Sugar protectionism is a burden on consumers and a job-killer.”a. In what sense does the United States practice “sugar protectionism”?b. In what way is sugar protectionism a burden on consumers? In what way is it a job-killer?c. If sugar
Suppose China decides to pay large subsidies to any Chinese company that exports goods or services to the United States. As a result, these companies are able to sell products in the United States at far below their cost of production.In addition, China decides to bar all imports from the United
A student makes the following argument:Tariffs on imports of foreign goods into the United States will cause the foreign companies to add the amount of the tariff to the prices they charge in the United States for those goods. Instead of putting a tariff on imported goods, we should ban importing
The United States has about 9,000 rice farmers. In 2006, these rice farmers received $780 million in subsidy payments from the U.S. government (or nearly $87,000 per farmer). These payments result in U.S. farmers producing much more rice than they otherwise would, a substantial amount of which is
When Congress was considering a bill to impose quotas on imports of textiles, shoes, and other products, the late Milton Friedman, a Nobel Prize–winning economist, made the following comment: “The consumer will be forced to spend several extra dollars to subsidize the producers [of these goods]
[Related to the Chapter Opener on page 273] Which U.S. firms are most likely to be unfavorably affected by a provision which states that only U.S. firms can participate in programs financed by federal spending?
The United States produces beef and also imports beef from other countries.a. Draw a graph showing the demand and supply of beef in the United States. Assume that the United States can import as much as it wants at the world price of beef without causing the world price of beef to increase.Be sure
Two U.S. senators made the following argument against allowing free trade: “Fewer and fewer Americans support our government’s trade policy. They see a shrinking middle class, lost jobs and exploding trade deficits. Yet supporters of free trade continue to push for more of the same—more
Political commentator B. Bruce-Briggs once wrote the following in the Wall Street Journal: “This is not to say that the case for international free trade is invalid; it is just irrelevant.It is an ‘if only everybody . . .’ argument. . . . In the real world almost everybody sees benefits in
The G20 is a group of central bankers and finance ministers from 19 countries and the European Union who have a common goal of promoting global economic stability. In a letter to the editor of the New York Times, Victor K. Fung, the chairman of the International Chamber of Commerce, comments on the
In a public opinion poll, 47 percent of people responding believed that free trade hurts the U.S. economy, while only 23 percent believed that it helps the economy. (The remaining people were uncertain about the effects of free trade or believed that it did not make much difference.)What is “free
Who gains and who loses when a country imposes a tariff or a quota on imports of a good?
What is a tariff? What is a quota? Give an example, other than a quota, of a non-tariff barrier to trade.
[Related to the Making the Connection on page 284]Explain why there are advantages to a movie studio operating in southern California, rather than in, say, Florida.
[Related to the Don’t Let This Happen to You on page 282]In 2011, President Barack Obama described a trade agreement reached with the government of Colombia as a “‘winwin’for both our countries.” Is everyone in both countries likely to win from the agreement? Briefly explain.Based on Kent
Imagine that the graph below shows Tanzania’s production possibilities frontier for cashew nuts and mangoes.Assume that the output per hour of work is 8 bushels of cashew nuts or 2 bushels of mangoes, and that Tanzania has 1,000 hours of labor. Without trade, Tanzania evenly splits its labor
Hal Varian, an economist at the University of California, Berkeley, has made two observations about international trade:a. Trade allows a country “to produce more with less.”b. There is little doubt who wins [from trade] in the long run: consumers.Briefly explain whether you agree with either
An article in the New Yorker magazine states, “the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans.But . . . the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries.”Explain how it is
Is free trade likely to benefit a large, populous country more than a small country with fewer people? Briefly explain.
Briefly explain whether you agree with the following statement: “Most countries exhaust their comparative advantage in producing a good or service before they reach complete specialization.”
[Related to Solved Problem 9.3 on page 280] A political commentator makes the following statement:The idea that international trade should be based on the comparative advantage of each country is fine for rich countries like the United States and Japan. Rich countries have educated workers and
[Related to Solved Problem 9.3 on page 280] The following table shows the hourly output per worker in two industries in Chile and Argentina:a. Explain which country has an absolute advantage in the production of hats and which country has an absolute advantage in the production of beer.b. Explain
What are the main sources of comparative advantage?
What is meant by a country specializing in the production of a good? Is it typical for countries to be completely specialized?Briefly explain.
In a 2007 debate among Democratic presidential candidates, Barack Obama made the following statement:“Well, look, people don’t want a cheaper T-shirt if they’re losing a job in the process.” What did Obama mean by the phrase “losing a job in the process”? Using the economic concept of
Patrick J. Buchanan, a former presidential candidate, argued in his book on the global economy that there is a flaw in David Ricardo’s theory of comparative advantage:Classical free trade theory fails the test of common sense. According to Ricardo’s law of comparative advantage . . . if America
In January 2008, the Bank of France published a report, stating that in 2006, hourly labor productivity in the United States was higher than the productivity in Japan.If U.S. workers can produce more goods and services per hour than Japanese workers, why does the United States continue to import
The following table shows for Greece and Italy the hourly output per worker measured as quarts of olive oil and pounds of pasta:Calculate the opportunity cost of producing olive oil and pasta in both Greece and in Italy. Output per Hour of Work Olive Oil Pasta Greece 4 2 Italy 4 8
Briefly explain whether you agree with the following argument:“Unfortunately, Bolivia does not have a comparative advantage with respect to the United States in the production of any good or service.” (Hint: You do not need any specific information about the economies of Bolivia or the United
In a newspaper column, Frank Wolak, a professor of economics at Stanford, referred to “the economic forces that lead to most children’s toys being developed in the United States and mass-produced in China and other developing countries.” What economic forces is he referring to? If a U.S.
Why do the goods that countries import and export change over time? Use the concept of comparative advantage in your answer.
A WTO publication calls comparative advantage “arguably the single most powerful insight in economics.” What is comparative advantage? What makes it such a powerful insight?Based on World Trade Organization, “Understanding the WTO,”www.wto.org/english/thewto_e/whatis_e/tif_e/fact3_e.htm.
What is the difference between absolute advantage and comparative advantage? Will a country always be an exporter of a good where it has an absolute advantage in production? Briefly explain.
[Related to the Making the Connection on page 276]Douglas Irwin, a professor of economics at Dartmouth College, wrote the following in a column in the New York Times:General Electric and Caterpillar have opposed the Buy American provision because they fear it will hurt their ability to win
Why might a smaller country, such as the Netherlands, be more likely to import and export larger fractions of its GDP than would a larger country, such as China or the United States?
Briefly explain whether you agree with the following statement:“Japan has always been much more heavily involved in international trade than are most other nations. In fact, today Japan exports a larger fraction of its GDP than Germany, Great Britain, or the United States.”
If the United States were to stop trading goods and services with other countries, which U.S. industries would be likely to see their sales decline the most? Briefly explain.
Briefly explain whether you agree with the following statement:“International trade is more important to the U.S.economy than to most other economies.”
Are imports and exports a smaller or larger fraction of GDP than they were 40 years ago?
Briefly explain whether the value of U.S. exports is typically larger or smaller than the value of U.S. imports.
Evaluate the arguments over trade policies and globalization.
Explain how countries gain from international trade.
Discuss the role of international trade in the U.S. economy.
The current ratio is equal to a firm’s current assets divided by its current liabilities. Use the information in Figure 8A.2 on page 269 to calculate Google’s current ratio on December 31, 2010. Investors generally prefer that a firm’s current ratio be greater than 1.5. What problems might a
Use the information in the following table on the financial situation of Starbucks Corporation as of October 3, 2010, to prepare a balance sheet for the firm. Be sure to include an entry for stockholders’ equity.Current assets $2,756 million Current liabilities 1,779 million Property and
Use the information in the following table for calendar year 2010 to prepare an income statement for McDonald’s Corporation’s. Be sure to include entries for operating income and net income.Revenue from company restaurants $16,233 million Revenue from franchised restaurants 7,841 million Cost
Suppose you buy the bond of a large corporation at a time when the inflation rate is very low. If the inflation rate increases during the time you hold the bond, what is likely to happen to the price of the bond?
Suppose that eLake, an online auction site, is paying a dividend of $2 per share. You expect this dividend to grow 2 percent per year, and the interest rate is 10 percent. What is the most you would be willing to pay for a share of stock in eLake? If the interest rate is 5 percent, what is the most
[Related to Solved Problem 8A.1 on page 265]Before the start of the 2000 baseball season, the New York Mets decided they didn’t want Bobby Bonilla playing for them any longer. But Bonilla had a contract with the Mets for the 2000 season that would have obliged the Mets to pay him $5.9 million.
[Related to Solved Problem 8A.1 on page 265]A winner of the Pennsylvania Lottery was given the choice of receiving $18 million at once or $1,440,000 per year for 25 years.a. If the winner had opted for the 25 annual payments, how much in total would she have received?b. At an interest rate of 10
[Related to Solved Problem 8A.1 on page 265]Before the 2008 season, the New York Yankees signed second baseman Robinson Cano to a contract that would pay him the following amounts: $3 million for the 2008 season, $6 million for the 2009 season, $9 million for the 2010 season, and $10 million for
[Related to Solved Problem 8A.1 on page 265]If the interest rate is 10 percent, what is the present value of a bond that matures in two years, pays $85 one year from now, and pays $1,085 two years from now?
What is the key difference between a firm’s income statement and its balance sheet? What is listed on the left side of a balance sheet? What is listed on the right side?
Compare the formula for calculating the present value of the payments you will receive from owning a bond to the formula for calculating the present value of the payments you will receive from owning a stock. What are the key similarities? What are the key differences?
Give the formula for calculating the present value of a bond that will pay a coupon of $100 per year for 10 years and that has a face value of $1,000.
Why is money you receive at some future date worth less to you than money you receive today? If the interest rate rises, what effect does this have on the present value of payments you receive in the future?
[Related to the Making the Connection on page 253]According to an article in the Wall Street Journal,“Currently, companies can issue shares privately without incurring onerous reporting obligations if they have fewer than 500 shareholders. The SEC is considering raising that limit, though it’s
According to a survey in 2007, 78 percent of corporate executives responding believed that the costs of complying with the Sarbanes-Oxley Act outweighed the benefits.The total costs of compliance were about $2.92 million per company. Is it possible to put a dollar value on the benefits of complying
An article in BusinessWeek stated that the Allstate Corporation, a large insurance company, would begin to require a simple majority vote of shareholders, rather than a two-thirds majority vote, to elect members to its board of directors and to remove directors in between annual meetings when
The following is from an article in USA Today:In what some call a worldwide corporategovernance movement, shareholders are pushing for stronger corporate-governance laws, teaming with investors from different countries and negotiating behind the scenes with businesses.What is corporate governance?
The board of directors of Advanced Micro Devices, Inc., issued guidelines on company stock ownership by executive officers and members of the board of directors, effective February 7, 2008. This statement details the number of required common stock shares of Advanced Micro Devices that should be
What was the source of the problems encountered by many financial firms during the crisis of 2007–2009?
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