Macroeconomics 1st Edition Paul Krugman, Robin Wells - Solutions

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16. Use a diagram to illustrate how each of the following events affects the equilibrium price and quantity of pizza.a. The price of mozzarella cheese rises.b. The health hazards of hamburgers are widely publicized.c. The price of tomato sauce falls.d. The incomes of consumers rise and pizza is an
15. This year, the small town of Middling experiences a sudden doubling of the birth rate. After three years, the birth rate returns to normal. Use a diagram to illustrate the effect of these events on the following.a. The market for an hour of babysitting services in Middling this yearb. The
14. Will Shakespeare is a struggling playwright in sixteenth-century London. As the price he receives for writing a play increases, he is willing to write more plays. For the following situations, use a diagram to illustrate how each event affects the equilibrium price and quantity in the market
13. Demand twisters: Sketch and explain the demand relationship in each of the following statements.a. I would never buy a Miley Cyrus album! You couldn’t even give me one for nothing.b. I generally buy a bit more coffee as the price falls. But once the price falls to $2 per pound, I’ll buy
12. After several years of decline, the market for handmade acoustic guitars is making a comeback. These guitars are usually made in small workshops employing relatively few highly skilled luthiers. Assess the impact on the equilibrium price and quantity of handmade acoustic guitars as a result
11. Fans of rock and rock stars often bemoan the high price of concert tickets. One superstar has argued that it isn’t worth hundreds, even thousands, of dollars to hear him and his band play. Let’s assume this star sold out arenas around the country at an average ticket price of $75.a. How
10. Aaron Hank is a star hitter for the Bay City baseball team. He is close to breaking the major league record for home runs hit during one season, and it is widely anticipated that in the next game he will break that record. As a result, tickets for the team’s next game have been a hot
9. In recent years, the number of car producers in China has increased rapidly. In fact, China now has more car brands than the United States. In addition, car sales have climbed every year and automakers have increased their output at even faster rates, causing fierce competition and a decline in
8. The following table shows a demand schedule for a normal good. Price Quantity demanded $23 70 21 90 19 110 17 130a. Do you think that the increase in quantity demanded (say, from 90 to 110 in the table) when price decreases (from $21 to $19) is due to a rise in consumers’ income? Explain
7. Find the flaws in reasoning in the following statements, paying particular attention to the distinction between shifts of and movements along the supply and demand curves. Draw a diagram to illustrate what actually happens in each situation.a. “A technological innovation that lowers the cost
6. Suppose that the supply schedule of Maine lobsters is as follows:Now suppose that Maine lobsters can be sold in France. The French demand schedule for Maine lobsters is as follows: Price of lobster (per pound) Quantity of lobster supplied (pounds) $25 100 20 300 15 500 10 700 5 900b. What is the
5. Let’s assume that each person in the United States consumes an average of 37 gallons of soft drinks (nondiet) at an average price of $2 per gallon and that the U.S. population is 294 million. At a price of $1.50 per gallon, each individual consumer would demand 50 gallons of soft drinks. From
4. Show in a diagram the effect on the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the following events.a. The market for newspapers in your town Case 1: The salaries of journalists go up. Case 2: There is a big news event in your town, which is
3. The market for many goods changes in predictable ways according to the time of year, in response to events such as holidays, vacation times, seasonal changes in production, and so on. Using supply and demand, explain the change in price in each of the following cases. Note that supply and
2. In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events. In each case, show the effect on equilibrium price and quantity.a. The price of tacos increases.b. All hamburger sellers raise the price of their french fries.c. Income
1. A survey indicated that chocolate is the most popular flavor of ice cream in America. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream.a. A severe drought in the Midwest causes dairy farmers to
• In the case of a shortage or surplus, how price moves the market back to equilibrium
• How the supply and demand curves determine a market’s equilibrium price and equilibrium quantity
• The difference between movements along a curve and shifts of a curve
• What the demand curve and the supply curve are
• What a competitive market is and how it is described by the supply and demand model
10. Studies have found a relationship between a country’s yearly rate of economic growth and the yearly rate of increase in airborne pollutants. It is believed that a higher rate of economic growth allows a country’s residents to have more cars and travel more, thereby releasing more
9. This table illustrates annual salaries and income tax owed by five individuals. Despite receiving different and owing salaries and owe different amounts of income tax, these five individuals are otherwise identical. Name Annual salary Annual income tax owed Susan $22,000 $3,304 Eduardo 63,000
8. An insurance company has found that the severity of property damage in a fire is positively related to the number of firefighters arriving at the scene.a. Draw a diagram that depicts this finding with number of firefighters on the horizontal axis and amount of property damage on the vertical
7. The accompanying table shows the relationship between workers’ hours of work per week and their hourly wage rate. Apart from the fact that they receive a different hourly wage rate and work different hours, these five workers are otherwise identical.Name Quantity of labor (hours per week) Wage
6. The base of a right triangle is 10, and its area is 20. What is the height of this right triangle?
5. For each of the accompanying diagrams, calculate the area of the shaded right triangle.
4. Answer each of the following questions by drawing a schematic diagram.a. Taking measurements of the slope of a curve at three points farther and farther to the right along the horizontal axis, the slope of the curve changes from −0.3, to −0.8, to −2.5, measured by the point method. Draw a
3. In the accompanying figures, the numbers on the axes have been lost. All you know is that the units shown on the vertical axis are the same as the units on the horizontal axis.a. In panel (a), what is the slope of the line? Show that the slope is constant along the line.b. In panel (b), what is
2. During the Reagan administration, economist Arthur Laffer argued in favor of lowering income tax rates in order to increase tax revenues. Like most economists, he believed that at tax rates above a certain level, tax revenue would fall because high taxes would discourage some people from
1. Study the four accompanying diagrams. Consider the following statements and indicate which diagram matches each statement. Which variable would appear on the horizontal and which on the vertical axis? In each of these statements, is the slope positive, negative, zero, or infinity?a. If the price
16. Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes and catch fish. The accompanying table shows the maximum annual output combinations of potatoes and fish that can be produced. Obviously, given their limited resources and available technology, as they use
15. Assess the following statement: “If economists just had enough data, they could solve all policy questions in a way that maximizes the social good. There would be no need for divisive political debates, such as whether the government should provide free medical care for all.”
14. The mayor of Gotham City, worried about a potential epidemic of deadly influenza this winter, asks an economic adviser the following series of questions. Determine whether a question requires the economic adviser to make a positive assessment or a normative assessment.a. How much vaccine will
13. Economists who work for the government are often called on to make policy recommendations. Why do you think it is important for the public to be able to differentiate normative statements from positive statements in these recommendations?
12. Evaluate the following statement: “It is easier to build an economic model that accurately reflects events that have already occurred than to build an economic model to forecast future events.” Do you think this is true or not? Why? What does this imply about the difficulties of building
11. Are the following statements true or false? Explain your answers.a. “When people must pay higher taxes on their wage earnings, it reduces their incentive to work” is a positive statement.b. “We should lower taxes to encourage more work” is a positive statement.c. Economics cannot always
10. A representative of the American clothing industry recently made the following statement: “Workers in Asia often work in sweatshop conditions earning only pennies an hour. American workers are more productive and as a result earn higher wages. In order to preserve the dignity of the American
9. Your dormitory roommate plays loud music most of the time; you, however, would prefer more peace and quiet. You suggest that she buy some earphones. She responds that although she would be happy to use earphones, she has many other things that she would prefer to spend her money on right now.
8. An economist might say that colleges and universities “produce” education, using faculty members and students as inputs. According to this line of reasoning, education is then “consumed” by households. Construct a circular-flow diagram to represent the sector of the economy devoted to
7. The inhabitants of the fictional economy of Atlantis use money in the form of cowry shells. Draw a circular-flow diagram showing households and firms. Firms produce potatoes and fish, and households buy potatoes and fish. Households also provide the land and labor to firms. Identify where in
6. You are in charge of allocating residents to your dormitory’s baseball and basketball teams. You are down to the last four people, two of whom must be allocated to baseball and two to basketball. The accompanying table gives each person’s batting average and freethrow average.Name Batting
5. Peter Pundit, an economics reporter, states that the European Union (EU) is increasing its productivity very rapidly in all industries. He claims that this productivity advance is so rapid that output from the EU in these industries will soon exceed that of the United States and, as a result,
4. One July, the United States sold aircraft worth $1 billion to China and bought aircraft worth only $19,000 from China. During the same month, however, the United States bought $83 million worth of men’s trousers, slacks, and jeans from China but sold only $8,000 worth of trousers, slacks, and
3. In the ancient country of Roma, only two goods, spaghetti and meatballs, are produced. There are two tribes in Roma, the Tivoli and the Frivoli. By themselves, the Tivoli each month can produce either 30 pounds of spaghetti and no meatballs, or 50 pounds of meatballs and no spaghetti, or any
2. According to data from the U.S. Department of Agriculture’s National Agricultural Statistics Service, 124 million acres of land in the United States were used for wheat or corn farming in a recent year. Of those 124 million acres, farmers used 50 million acres to grow 2.158 billion bushels of
1. Two important industries on the island of Bermuda are fishing and tourism. According to data from the Food and Agriculture Organization of the United Nations and the Bermuda Department of Statistics, in 2009 the 306 registered fishermen in Bermuda caught 387 metric tons of marine fish. And the
• A set of principles for understanding economy-wide interactions
• A set of principles for understanding how economies work through the interaction of individual choices
• A set of principles for understanding the economics of how individuals make choices
• The difference between positive economics, which analyzes how the economy works, and normative economics, which prescribes economic policy
• The circular-flow diagram, a schematic representation of the economy
• Two simple but important models: the production possibility frontier and comparative advantage
• Why models—simplified representations of reality—play a crucial role in economics
16. During the Great Depression, food was left to rot in the fields or fields that had once been actively cultivated were left fallow. Use one of the principles of economy-wide interaction to explain how this could have occurred.
15. In 2012, Hurricane Sandy caused massive destruction to the northeast United States. Tens of thousands of people lost their homes and possessions. Even those who weren’t directly affected by the destruction were hurt because businesses failed or contracted and jobs dried up. Using one of the
14. In August 2007, a sharp downturn in the U.S. housing market reduced the income of many who worked in the home construction industry. A Wall Street Journal news article reported that Walmart’s wire-transfer business was likely to suffer because many construction workers are Hispanics who
13. In 2010, Tim Geithner, Treasury secretary at the time, published an article defending the administration’s policies. In it he said, “The recession that began in late 2007 was extraordinarily severe. But the actions we took at its height to stimulate the economy helped arrest the free fall,
12. In each of the following situations, explain how government intervention could improve society’s welfare by changing people’s incentives. In what sense is the market going wrong?a. Pollution from auto emissions has reached unhealthy levels.b. Everyone in Woodville would be better off if
11. Governments often adopt certain policies in order to promote desired behavior among their citizens. For each of the following policies, determine what the incentive is and what behavior the government wishes to promote. In each case, why do you think that the government might wish to change
10. Discuss the efficiency and equity implications of each of the following policies. How would you go about balancing the concerns of equity and efficiency in these areas?a. The government pays the full tuition for every college student to study whatever subject he or she wishes.b. When people
9. In each of the following cases, explain whether you think the situation is efficient or not. If it is not efficient, why not? What actions would make the situation efficient?a. Electricity is included in the rent at your dorm. Some residents in your dorm leave lights, computers, and appliances
8. Which of the following situations describes an equilibrium? Which does not? If the situation does not describe an equilibrium, what would an equilibrium look like?a. Many people regularly commute from the suburbs to downtown Pleasantville. Due to traffic congestion, the trip takes 30 minutes
7. The Hatfield family lives on the east side of the Hatatoochie River, and the McCoy family lives on the west side. Each family’s diet consists of fried chicken and corn-on-the-cob, and each is self-sufficient, raising their own chickens and growing their own corn. Explain the conditions under
6. This morning you made the following individual choices: you bought a bagel and coffee at the local café, you drove to school in your car during rush hour, and you typed your roommate’s term paper because you are a fast typist—in return for which she will do your laundry for a month. For
5. In the following examples, state how you would use the principle of marginal analysis to make a decision.a. Deciding how many days to wait before doing your laundryb. Deciding how much library research to do before writing your term paperc. Deciding how many bags of chips to eatd. Deciding how
4. Use the concept of opportunity cost to explain the following.a. More people choose to get graduate degrees when the job market is poor.b. More people choose to do their own home repairs when the economy is slow and hourly wages are down.c. There are more parks in suburban than in urban areas.d.
3. Liza needs to buy a textbook for the next economics class. The price at the college bookstore is $65. One online site offers it for $55 and another site, for $57. All prices include sales tax. The accompanying table indicates the typical shipping and handling charges for the textbook ordered
2. Describe some of the opportunity costs when you decide to do the following.a. Attend college instead of taking a jobb. Watch a movie instead of studying for an examc. Ride the bus instead of driving your car
1. In each of the following situations, identify which of the twelve principles is at work.a. You choose to shop at the local discount store rather than paying a higher price for the same merchandise at the local department store.b. On your spring break trip, your budget is limited to $35 a day.c.
Suppose that Albernia’s central bank has fixed the value of its currency, the bern, to the U.S. dollar (at a rate of US$1.50 to 1 bern) and is committed to that exchange rate. Initially, the foreign exchange market for the bern is also in equilibrium, as shown in the accompanying diagram.
Starting from a position of equilibrium in the foreign exchange market under a fixed exchange rate system, how must a government react to an increase in the demand for the nation’s goods and services by the rest of the world to keep the exchange rate at its fixed value?
Based on the exchange rates for the first trading days of 2004 and 2005 shown in the accompanying table, did the U.S. dollar appreciate or depreciate during 2004? Did the movement in the value of the U.S. dollar make American goods and services more or less attractive to foreigners?
In the economy of Popania in 2005, total Popanian purchases of assets in the rest of the world equaled $300 billion, purchases of Popanian assets by the rest of the world equaled$400 billion, and Popania exported goods and services equal to $350 billion. What was Popania’s balance of payments on
In the economy of Scottopia in 2005, exports equaled $400 billion of goods and $300 billion of services, imports equaled$500 billion of goods and $350 billion of services, and the rest of the world purchased $250 billion of Scottopia’s assets.What was the merchandise trade balance for Scottopia?
How would the following transactions be categorized in the U.S. balance of payments accounts? Would they be entered in the current account (as a payment to or from a foreigner) or the financial account (as a sale to or purchase of assets from a foreigner)? How will the balance of payments on the
Why open-economy considerations affect macroeconomic policy under floating exchange rates
The considerations that lead countries to choose different exchange rate regimes, such as fixed exchange rates and floating exchange rates
The importance of real exchange rates and their role in the current account
The role of the foreign exchange market and the exchange rate
The determinants of international capital flows
The meaning and measurement of the balance of payments
The United States is highly protective of its agricultural industry, imposing import tariffs, and sometimes quotas, on imports of agricultural goods. The chapter has presented three arguments for trade protection. For each argument, discuss whether it is a valid justification for trade protection
The accompanying diagram illustrates the U.S. domestic demand curve and domestic supply curve for beef.The world price of beef is PW. The United States currently imposes an import tariff on beef, so the price of beef is PT.Congress decides to eliminate the tariff. In terms of the areas marked in
Suppose that the world price of oranges is $0.30. The United States introduces an import quota of 3,000 oranges. Draw the domestic demand and supply curves and answer the following questions.a. What will the domestic price of oranges be after introduction of the quota?b. What is the value of the
The accompanying table shows the U.S. domestic demand schedule and domestic supply schedule for oranges. Suppose that the world price of oranges is $0.30 per orange.a. Draw the U.S. domestic supply curve and domestic demand curve.b. With free trade, how many oranges will the United States import or
The accompanying table indicates the U.S. domestic demand schedule and domestic supply schedule for commercial jet airplanes. Suppose that the world price of a commercial jet airplane is $100 million.a. In autarky, how many commercial jet airplanes does the United States produce, and at what price
Before the North American Free Trade Agreement (NAFTA)gradually eliminated import tariffs on goods, the autarky price of tomatoes in Mexico was below the world price and in the United States was above the world price. Similarly, the autarky price of poultry in Mexico was above the world price and
Both Canada and the United States produce lumber and music CDs with constant opportunity costs. The United States can produce either 10 tons of lumber and no CDs, or 1,000 CDs and no lumber, or any combination in between. Canada can produce either 8 tons of lumber and no CDs, or 400 CDs and no
Suppose now that each country specializes in the good in which it has the comparative advantage, and the two countries trade. Also assume that for each country the value of imports must equal the value of exports.a. What is the total quantity of oil produced? What is the total quantity of cars
Assume Saudi Arabia and the United States face the production possibilities for oil and cars shown in the accompanying table.a. What is the opportunity cost of producing a car in Saudi Arabia? In the United States? What is the opportunity cost of producing a barrel of oil in Saudi Arabia? In the
Over the years, the WTO has increasingly found itself adjudicating trade disputes that involve not just tariffs or quota restrictions but also restrictions based on quality, health, and environmental considerations. Why do you think this has occurred? What method would you, as a WTO official, use
In 2002 the U.S. imposed tariffs on steel imports, which are an input in a large number and variety of U.S. industries. Explain why political lobbying to eliminate these tariffs is more likely to be effective than political lobbying to eliminate tariffs on consumer goods such as sugar or clothing.
Why governments often engage in trade protection to shelter domestic industries from imports and how international trade agreements counteract this
How tariffs and import quotas cause inefficiency and reduce total surplus
Who gains and who loses from international trade, and why the gains exceed the losses
The sources of international comparative advantage
How comparative advantage leads to mutually beneficial international trade
Which of the following policy recommendations are consistent with the classical, Keynesian, monetarist, and/or modern consensus views of the macroeconomy?a. Since the long-run growth of real GDP is 2%, the money supply should grow at 2%.b. Decrease government spending in order to decrease
The economy of Albernia is facing a recessionary gap, and the leader of that nation calls together four of its best economists representing the classical, Keynesian, monetarist, and modern consensus views of the macroeconomy. Explain what policies each economist would recommend and why.

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Macroeconomics 1st Edition Paul Krugman, Robin Wells - Solutions

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