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microeconomics principles

Modern Principles Microeconomics 2nd Edition Tyler Cowen, Alex Tabarrok - Solutions

1.1. What is so bad about bubbles? If the price of Internet stocks or housing rises and then falls, is that such a big problem? Mter all, some people say, most of the gains going up are "paper aains" and most of the losses going down are b"paper losses." Comment on this view.
1.5. You own shares in a pharmaceutical company, PillCo. R eading the Yahoo! Finance W eb site, you see that PillCo wa sued this morning by u ers ofPillCo's new heart drug, Amphlistatin.PillCo's stock has already been trading for a few hours today.a. When the bad news about the lawsuits came out,
1.4. Warren Buffett often says that he doesn't want a lot of diver ification in his portfolio. He says that diversification means buying stocks that go up along with stocks that go down; but he only wants to buy the stock that go up! From the point of view of the typical inve tor, what is wrong
1.2. In most of your financial decisions early in life, you'll be a buyer, but let's think about the incentives of people who sell stocks, bonds, bank accounts, and other financial products.a. Walking in the shopping mall one day, you see a new store: the Dollar Store. Of course, you've seen plenty
1.1. Your brother calls you on the phone telling you that Google's share price has fallen by about 25% over the past few days. Now you can own one small slice of Coogle for only $430 a share(the price on the day this question was written).Your brother ays he is pretty sure the stock is going to
1.6.a. If you talk to a broker selling the high-fee mutual fund, what will he or she probably tell you when you ask them, "Am I getting my money's worth when I pay your high fees?"b. According to Figure 22.1, is your broker'answer likely to be right most of the time?
1.5. Let's see how fee can hurt your investment strategy. Let's assume that your mutual fund grows at an average rate of 7% per year-before subtracting off the fees. Using the rule of70:a. How many years will it take for your money to double if fee are 0.5% per year?b. How many years will it take
1.4. In the United States, high-level corporate officials have to publicly state when they buy or sell a large number of shares in their own company. They have to make these statement a few days after their purchase or sale. What do you think probably happens (choo e a,b, c or d below) when
1.3. Consider the supply and demand for oranges.Orange crops can be destroyed by below-freezing temperatures.a. If a weather report states that oranges are likely to freeze in a storm later this week, what probably happens to the demand for oranges today, before the storm comes?b. According to a
1.2. Let's do something boring just to drive home a point: Count up the number of years in Figure 22.1 in which more than half of the mutual funds managed to beat the S&P 500 index. (Recall that the Standard and Poor's 500 is just a list of 500 large U .S. corporations-it's a list that overlaps a
1.1. Before we plunge into the world of finance, let's review the rule of 70. Suppose your rich aunt hands you a $3,000 check at the end of the school year. She tells you it's for your education. But what should you really do with that extra money? Let's see how much it would be worth if you saved
1.5. In most big cities, taxicab fares are fairly standardized, and they are regulated by local governments. For the sake of simplicity, assume that a cab driver works for a licensed taxicab company, and he or she pays a fixed daily fee for the use of the taxi; all fares and tips go to the
1.4.a. Many HMOs pay their doctors based, in part, on how many patients the doctor sees in a day. What problems does this incentive system create?b. IfHMOs pay their doctors a fixed salary, what problems does this incentive system create?c. Ideally, we would like to pay doctors based on how long
1.3. In his path-breaking book Managerial Dilemmas, political scientist Gary Miller says that a good corporate culture is one that gets workers to work together even when they face prisoner's dilemmas (we discussed the prisoner's dilemma in detail in Chapter 15). In a healthy corporate culture, you
1.2. What type of systems in the United States help overcome the incentives of physicians to order medically unnecessary tests?
1.1. Let's tie together this chapter's story on incentives with Chapter 15's story about cartels.Suppose your economics professor grades on a curve: The average score on each test becomes a B- . If all of the students in your class form a conspiracy to cut back on studying, point out how this
1.10. In early 2004, Donald Trump took the idea of using a tournament for hiring executives to a whole new level with the premiere of the TV how The Apprentice. On the show, a group of contestants compete for a position running one ofTrump's many companies for a starting annual salary of $250,000.
1.9. Waiters and waitresses are generally paid very low hourly wages and receive most of their compensation from customer tips.a. As the owner of a restaurant, what do you want from your wait staff?b. Which element of a waiter's or waitres 'compensation-the hourly wage or the tips-represents a
1.8.a. Why do so many charitable activities like marathons, walks, and SK runs give the participants "free" t-shirts, wristbands, hats, bumper stickers, and so forth?b. Charitable organizations could prob ably make a lot of money for their cau e by selling these items on their W eb sites, but you
1.7. When an accused defendant is brought before a judge to schedule a trial, the judge may release the defendant on his or her "own recognizance"or the judge may demand that the defendant post bail, an amount of cash that the defendant must give to the court and that will be forfeited if the
1.6. Let's return to the question we posed in the chapter: Suppose that the big environment risk is not bad professors but rather hard material.Imagine, for example, that some classes are more difficult than other classes (quantum physics 101 vs. handball101). Ifyou really wanted to learn a little
1.5. In the movie business, character actors are typically paid a fixed fee, while movie "stars"are typically paid a share of the box office revenues. Why the difference? Try to give two explanations based on the ideas in this chapter.
1.4. In the short, readable classic Congress: The Electoral Connection, David Mayhew uses the basic ideas of incentives and information as a pair of lenses through which to view members of Congress. What he saw was quite simple:The urge for reelection drives everything. Thus, members are driven by
1.3. Who do you think is in favor of forbidding baseball player contracts from including bonuses based on playing skill? Owners or players? Why?
1.2. One reason it's difficult for a manager to set up good incentives is because it's easy for employees to lie about how they'll respond to incentives. For example, Simple Books pays Mary Sue to proofread chapters of new book .After an author writes a draft of a book, Simple sends chapters out to
1.1. In 1975, economist Sam Peltzman publi hed a study of the effects of recent safety regulations for automobiles. His re ults were surprising:Increased safety standards for automobiles had no measurable effect on passenger fatalities.Pedestrian fatalities in automobile accidents, however,
1.8. The typical corporate executive's incentive package offers higher pay when the company's stock does well. One proposal for such executive merit pay is to instead pay executives based on whether their firm's stock price does better or worse than the stock price of the average firm in their own
1.7. Unlike in the previous question, sometimes, piece rates don't work so well. Why might the following incentive mechanisms turn out to be more trouble than they're worth?a. An industrial materials company pays welders by the number of welds per hour. Of course, the company only pays for
1.6. Why are salespeople so much more likely than other kinds of workers to be paid on a "piece rate" (i.e., on commission)? What is it about the kind of work they do that makes the high commission + low-base-salary combination the equilibrium outcome?
1.5. Let's return to Big Idea Four (thinking on the margin) back in Chapter 1. Why are calls to give harsher penalties to drug dealers and kidnappers often met with warnings by economists?
1.4. The basketball player Tim Hardaway was once promised a big bonus if he made a lot of assists.Can you think of any problems that such an incentive scheme might cause? Many professional athletes get a bonus if they win a championship.Is this kind of incentive better or worse than a basketball
1.3. Punishments can be an incentive, not just rewards. Consider an assembly line. Why wouldn't you necessarily want to reward the fastest worker on the assembly line? What other incentive system might work?
1.2. An American church sends 10 missionaries to Panama for three years to find new converts.Every six months, the missionary with the most new converts gets to be the supervising missionary for the next six months. This basically means that he or she gets to drive a car, while the other 9 have to
1.1. This chapter had three big lessons. Each of the following situations illustrates one and (we think) only one of those lessons. Which one?a. Militaries throughout the world give medals, citations, and other public honors to members of the military who excel in their duties.b. People tip for
1.8. Let's say that Tom, who is 25 years old, wants to smoke a cigarette. Consider the following two situation .a. Tom is moking. Suddenly, the government comes along and tells Tom that he cannot do this. The government claims that Tom is inflicting an "external cost" on other human beings. Is this
1.7. Sometimes poor countries have a lot of people;India has more than 1 billion re ident . Indian are relatively poor, and we know that as families become wealthy, they tend to limit their number of children. So, a much wealthier India, over time, would probably have much fewer than 1 billion
1.6. Some people feel inequality is ju tified if the people with unequal outcomes accepted risks voluntarily; it was simply the case that orne won and some lost. Imagine two people, each spending $10,000 on lottery tickets, but only one of them wins. We end up with one poor person and one
1.5. You would probably sacrifice yourself to save all ofhumanity, but you probably wouldn't sacrifice yourself to save the life of one random stranger. What number is your cutoff: How many lives would you have to save for you to voluntarily face sure death?
1.4. If the rich countries were able to send individual cash payments to people in poor countries, bypassing possibly corrupt governments, would you let rich countries pay people in poor countries to take their high-polluting factories?If so, how high would the annual payment have to be per family?
1.3. Philosopher Alastair Norcross poses the following question. Suppose that 1 billion people are suffering from a moderately severe headache that will last a few hours. The only way to alleviate their headache is for one person to die a horrible death. Can the death of thi one person ever be
1.2.a. In your view, when should governments enforce a "live and let live" rule: on issues that matter most to people (e.g., matters oflife and death, matters of how much income to give to the government, matters of religion, matters of sexuality) or on the issues that matter least to people (e.g.,
1.1. Should responsible adults be allowed to sell a kidney? Why or why not? If so, what restrictions would you place on such sales, if any?
1.8. Compare a Rawlsian view with a utilitarian view on the question of whether it should be legal to copy movies and music freely.
1.7. Based on the tools from this chapter, how could a person reasonably justify a ban on gambling?
1.6. What do you think best describes the reason that trade in recreational drugs is illegal: fear of exploitation, meddlesome preferences, notions of fairness, paternalism, concerns about equality, or some other factor?
1.5.a. The "trolley problem" is a famous ethical puzzle created by Philippa Foot: You are the conductor of a trolley (or subway or streetcar or train) that is heading out of control down a track. Five innocent people are tied to the track ahead of you: If you run over them, they will surely die. If
1.4. Let's see how a utilitarian dictator would arrange things for Adam, Eve, and Lilith.One heroic assumption that utilitarians make is that you can actually compare happiness and misery across different people: In reality, brain scans are making this easier to do but it's still a lot of
1.3. The line between "having a meddlesome preference" and "recognizing an externality"is not always clear. Both are way of saying,"What you're doing bother me." A we used it in this chapter, a "meddlesome preference"is something that reasonable people should just not worry about so much. By
1.2. Some people say that the right to equal treatment ha no price. But it seems that most people don't really believe that: Those are just polite words that we tell one another. Consider the following cases:a. What if it costs $10 million per kneeling bus?b. What if it costs $10,000 to hire
1.1. To a Rawl ian, would the world be better off without the Harry Potter novels and one additional billionaire?
1.6. Would a "global utilitarian" (someone who values the utility of everyone in the world equally, without giving more weight to people in their own country) who lives in America want more immigrants from poor countries or more immigrants from rich countries? Why?
1.5. Rawlsians upport government income redistribution to the worst-off members of" ociety." If "society" means the whole world, how much redistribution might be involved?In other words, what fraction of people in the rich countries might have to give most of their income to people in the poorest
1.4.a. Just thinking about yourself, if you did not know in advance whether you were a Red, Blue, or Green person, would you rather live in ociety A, B, C, or D that are discussed in the Rawl's section of the chapter? Why?b. Which society would you like least? Why?
1.3. One ofNozick's arguments against utilitarianism was the "utility monster":a person who always gets enormous happiness from every extra dollar, more happiness than anyone else in society. If such a person exi ted, the utilitarian solution would be to give all the wealth in society to Nozick's
1.2. Of the three ethical theories we discuss(Rawlsian, utilitarian, and Nozickian), which two are most different from the third? In what way are the two different from the third?
1.1.a. In this chapter, we never actually defined"exploitation." What is one dictionary definition of the word?b. Decide whether the six cases of alleged ex ploitation we discussed earlier in the chapter fit your dictionary's definition. Yes, this will Economics, Ethics, and Public Policy •
1.6. In the 1998 Minnesota gubernatorial election, there were three main candidates: Norm Coleman (the Republican), Jesse "The Body"Ventura (an Independent), and Hubert Humphrey (the Democrat). Although we can't know for certain, the voters probably ranked the candidates in a way similar to that
1.5. In the previous question, you showed that sometimes there may be no policy that beats every other policy in a majority rule election and, as a result, the agenda can determine the outcome. In the previous question, all of the policy choices on the agenda were as good as any other, but this is
1.4. We mentioned that the median voter theorem doesn't always work, and sometimes a winning policy doesn't exist. This fact has driven economists and political scientists to write thousands of papers and books, both proving that fact and trying to find good workarounds.The most famous theoretical
1.3. Political scientist Jeffrey Friedman and law professor Ilya Somin say that since voters are largely ignorant, that is an argument for keeping government simple. Government, they say, should stick to a few basic tasks. That way, rationally ignorant voters can keep track of their government by
1.2.a. When a drought hits a country, and a famine is possible, what probably falls more: the demand for food or the demand for haircuts? Why?b. Who probably suffers more from a deep drought: people who own farms or people who own barbershops? (Note: The answer is on page 164 of Sen's summary ofhis
1.1.Is rational ignorance the whole explanation for why voters allow programs like the sugar quota to persist? Perhaps not. In the early 1900s, the government of New York City was controlled by a Democratic Party organization known as Tammany Hall. In a delightful essay entitled "Honest Graft and
1.8. Let's rewrite a sentence from the chapter concerning the Roman Empire: "As the American Empire grew, courting politicians Political Economy and Public Choice • CHAPTER 19 • 381 in Washington became a more secure path to riches than starting a new business." Does this seem true today? If it
1.7. The following figure shows the political leanings of 101 voters. Voters will vote for the candidate who is closest to them on the spectrum, as in the typical median voter story. Again as usual, politicians compete against each other, entering the "political market" just as freely as firms
1.6. Driving along America's interstates, you'll notice that few rest areas have commercial businesses.Vending machines are the only reliable source of food or drink, much to the annoyance of the weary traveler looking for a hot meal. Thank the National Association ofTruck Stop Operators (NATSO),
1.5. In the television show Scrubs, the main character J. D. is a competent and knowledgeable doctor.He also has very little information outside of the field of medicine, admitting he doesn't know the difference between a senator and a representative and believes New Zealand is near "Old
1.4. In his book The Myth if the Rational Voter, our GMU colleague Bryan Caplan argues that not only can voters be rationally ignorant, they can even be rationally irrational. People in general seem to enjoy believing in some types of false ideas.If this is true, then they won't challenge their own
1.3. We mentioned that voters are myopic, mostly paying attention to how the economy is doing in the few months before a presidential election.If they want to be rational, what should they do instead? In particular, hould they pay attention to all four years of the economy, just the first year, ju
1.2. An initiative on Arizona's 2006 ballot would have handed out a $1 million lottery prize every election: The only way to enter the lottery would be to vote in a primary or general election. How do you think a lottery like this would influence voter ignorance?
1.1. David Mayhew's classic book Congress:The Electoral Connection argued that members of Congress face strong incentives to put most of their efforts into highly visible activities like foreign travel and ribbon-cutting ceremonies, instead of actually running the government.How does the rational
1.8. Perhaps it was in elementary school that you first realized that if everyone in the world gave you a penny, you'd become fantastically rich. This insight is at the core of modern politics. Sort the following government policies into "concentrated benefits" and"diffuse benefits."a. Social
1.7. Let's walk through the median voter theorem in a little more detail. Consider a town with three voters, Enrique, Nandini, and Torsten. The big issue in the upcoming election is how high the sales tax rate should be. As you'll learn in macroeconomics (and in real life), on average, a government
1.6. The "median voter theorem" is sometimes called the "pivotal voter theorem." This is actually a fairly good way to think of the theorem. Why?
1.5. True or false?a. During Bangladesh's worst famine, average food per person was much lower than usual.b. Democracies are less likely to kill their own citizens than other kinds of governments.c. Surprisingly, newspapers aren't that important for informing voters about hungry citizens.d.
1.4. If a particular government policy-like a decision to go to war or to raise taxes-only works when citizens are informed, is that an argument for that policy or against that policy?
1.3. Around 130 million voters participated in the 2008 U.S. presidential election. Imagine that you are deciding whether to vote in the next presidential election. What do you think is the probability that your vote will determine the outcome of the election? Is it greater than 1%, between 1% and
1.2.a. How many famines have occurred in functioning democracies?b. What percentage of famines occurred in countries without functioning democracies?
1.1. Which of the following is the smallest fraction of the U.S. federal budget? Which are the two largest categories of federal spending?Welfare Interest on the federal debt Defense Foreign aid Social Security Health care
1.The experience that was had in this common course and condition, tried sundry years and that amongst godly and sober men, may well evince the vanity of that conceit ofPlato's and other ancients applauded by some of later times; that the taking away of property and bringing in community into a
1.5. It's one of the ironies of American history that when the pilgrims first arrived at Plymouth Rock, they promptly set about creating a communal society in which all shared equally in the produce of their land. As a result, the pilgrims were soon starving to death.Fortunately, "after much debate
1.4. Canada's Labrador Peninsula (which includes modern-day Newfoundland and most of modern-day Quebec) was once home to an indigenous group, the Montagnes, who, in contrast to their counterparts in the American Southwest, established property right over land.This institutional change was a direct
1.A typical "public goods game" is quite simple:Everyone in the experiment is given, say, $5 each, theirs to take home if they like. They're told that if they donate money to the common pool, all the money in the pool will then be doubled. The money in the pool will then be divided equally among
1.3. The economic theory of public goods makes a very clear prediction: If the benefits of some action go to strangers, not to yourself, then you won't do that action. Economists have run dozens of experiments testing out this prediction. Nobel laureate Elinor Ostrom sums up the results in a 2000
1.2. Some media companies (especially in music and movie industries) run ads claiming that downloading or copying media is the same thing as stealing a CD or DVD from a store.Let's see if this is the case.a. Is a DVD a nonrival good? Why or why not?b. Suppose someone stole a DVD from a retail
1.1.a. Two girls are sharing a cold chocolate milk, as in the picture below. How long do you think it will take them to drink all the milk?How long would it take if each girl had her own glass and half the milk? Can you see a problem when the girls drink from a common glass?b. What is going on in
1.7. Economists typically remind people to weigh the costs of an action against the benefits of that action. Let's invent some examples where it'just too expensive or too risky to solve the very real problems discussed in this chapter.a. It's possible that it would just cost too much to defend the
1.6. The massive stone faces that pepper Easter Island puzzled people for centuries. What happened to the civilization that erected these faces? A clue is that the island currently has no trees. Trees would have been necessary to roll the stones and to make boats to bring the stones to the island.
1.5. As we've already mentioned, the line between"public good" and "private good" is genuinely blurry. Electronic tolls on roadways are making excludability a little bit easier every year. In your view, should we continue to think of roads as public goods? (To be more accurate, we really should
1.4. We mentioned that the tragedy of the commons is a form of prisoner's dilemma, something we saw back in Chapter 15. As is so often the case in economics, the same model can apply to many different settings. Let's recycle Facts and Tools question Sb from Chapter 16 just to emphasize the
1.3.a. Has the rise of the Internet and file sharing turned media such as movies and music into public goods? Why?b. Taking your answer in part a into account, would government taxation and funding of music improve social welfare? In your answer, at least mention some of the practical difficulties
1.2.a. "A public good is just a good that provides large external benefits." Discuss.b. "A tragedy of the commons occurs when using a good causes massive external costs."Discuss. In parts a andb, compare the defi nitions from Chapter 10 with those from this chapter.
1.1. In 2008, Jean Nouvel won the Pritzker Architecture Prize (the highest prize in architecture). One ofhis most notable works is the Torre Agbar (pictured), a breakthrough skyscraper that lights up each night thanks to more than 4,000 LED devices-a pricey but purely cosmetic feature.a. Many
1.8.a. Why did the fish catch increase in New Zealand after the amount that each fi sherman could catch was limited by a quota?b. Given your answer to parta, would an individual fisherman in New Zealand want to catch more fish than he's allowed, ifhe knew no one would ever catch him?c. So given
1.7. This chapter noted that chickens and the"chicken of the sea" (tuna) are fundamentally different in terms of population though they are both food. Indeed, chickens are eaten far more than tuna, and chickens are abundant compared with their ocean-living cousins.a. What difference between these
1.6.a. The nation of Alphaville has been hunting its deer population to extinction. The government decrees strict limits on the number of hunters, and on the number of rounds of ammunition that each hunter can take into the hunt. Hunters, like fishermen, are a creative lot: What will "capital
1.5.a. American bison onced freely roamed the Great Plains. In the 1820s, there were some 30 million bison in the United State but a survey in 1889 counted just 1 ,091. Why were the bison driven to near extinction?How were the bison like tuna?b. At some restaurants and grocery stores, you can buy
1.4. Emeril says, "In my economics class, I learned that the only way to fund public goods was to have the government tax citizens to pay for those goods. Is that what you learned?"Rachel responds, "Actually, in my class, we used Modern Principles} and we learned that there are other ways to fund
1.3.a. Is education-a college course, for instance-excludable?b. Is education a rival good? That is, if your class has more students, do you get a worse education on average? Do students (and parents) typically prefer smaller class sizes?Do professors typically prefer smaller classes?Does it
1.2. Which of the following are free riders, which are forced riders, and which are just people paying for public goods?a. In Britain, Alistair pays a tax to support the British Broadcasting Corporation. He doesn't own a radio or TV.Public Goods and the Tragedy of the Commons • CHAPTER 1 8 •
1.1. Take a look at the following list of goods and services:Apples Open-heart surgery Cable television Farm-raised salmon Yosemite National Park Central Park, New York City The Chinese language The idea of calculusa. Is each item on the list excludable or non excludable? Sometimes the border is a

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