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microeconomics principles

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

1.5. Antibiotics are often given to people with colds (even though they are not useful for that purpose), but they are also used to treat life-threatening infections. If there was a price control on antibiotics, what do you think would happen to the allocation of antibiotics across these two uses?
1.4. Let's measure consumer surplus if the govern ment imposes price controls and goods ended up being randomly allocated among those consumers willing to pay the controlled price. If the demand and supply curves are as in the figure below, then:Controlled price 1000 4000 Quantitya. What is
1.3. Suppose that the market for coats can be described as follows:Quantity Demanded Quantity Supplied Price$120$100$80$60(millions)16 18 20 22(millions)20 18 16 14 158 • PART 2 • The Price Systema. What are the equilibrium price and quantity of coats?b. Suppose the government sets a price
1.2. In New York City, some apartments are under strict rent control, while others are not. This is a theme in many novels and movies about New York, including Bonfire of the Vanities and When Harry Met Sally. One predictable side effect of rent control is the creation of a black market.Let's think
1.1. If a government decided to impose price controls on gasoline, what could it do to avoid the time wasted waiting in lines? There is urely more than one solution to this problem.
1.17. We noted that in the 1970s price floors on airline tickets caused wasteful increases in the quality of airline trips. Does the minimum wage cause wasteful increases in the quality of workers? If so, how? In other words, how are minimum-wage workers like airplane trips?
1.16. In the market depicted below there is either a price ceiling or a price floor- surprisingly, it doesn't matter which one it is: Whether it's an$80 price floor or a $30 price ceiling, the chart looks the same.100 200 Quantity In the chart, there's a rectangle and a triangle.One represents the
1.15. Suppose you're doing some history research on shoe production in ancient Rome, during the reign of the famous Emperor Diocletian.Your records tell you how many shoes were produced each year in the Roman Empire, but it doesn't tell you the price of shoes.You find a document that says that in
1.14. President Jimmy Carter didn't just deregulate airline prices. He also deregulated much of the trucking industry, as well. Trucks carry almost all of the consumer goods that you purchase, so almost every time you purchase something, you're paying money to a trucking company.a. Based on what
1.13. In the 1970s, AirCal and Pacific Southwest Airlines flew only within California. As we mentioned, the federal price floors didn't apply to flights within just one state. A major route for these airlines was flying from San Francisco to Los Angeles, a distance of 350 miles. This is about the
1.12. Rent control creates a shortage of housing, which makes it hard to find a place to live.In a price-controlled market, people have to waste a lot of time trying to find these scarce, artificially cheap products. Yet Congressman Charles B. Rangel, the chairman of the powerful House Ways and
1.11. Consider Figure 8. 9. Your classmate looks at that chart and says, "Apartment construction slowed down years before rent control was passed, and after rent control was passed, more apartments were built. Rent control didn't cut the number of new apartments, it raised it. This proves that rent
1.10. In the late 1990s, the town of Santa Monica, California, made it illegal for banks to charge people ATM fees. As you probably know, it's almost always free to use your own bank's ATMs, but there's usually a fee charged when you use another bank's ATM. (Source: The war on ATM fees, Time,
1.9. In the town of Freedonia, the government declares that all street parking must be free:There can be no parking meters. In an almost identical town of Meterville, parking costs, 5 per hour (or $1 .25 per 15 minutes).a. Where will it be easier to find parking: in Freedonia or Meterville?156 •
1.8.a. As we noted, Assar Lindbeck once said that short of aerial bombardment, rent control is the best way to destroy a city. What do you think Lindbeck might mean by this?b. How does paying "key money" to a landlord reduce the severity of Lindbeck's''bombardment''?
1.7. So, knowing what you know now about price controls, are you in favor of setting a $2 per gallon price ceiling on gasoline? Create a pro-price control and an anti-price control answer.
1.6. A "black market" is a place where people make illegal trades in goods and services. For instance, during the Soviet era, it was common for American tourists to take a few extra pairs of Levi's jeans when visiting the Soviet Union:They would sell the extra pairs at high prices on the illegal
1.5. During a crisis such as Hurricane Katrina, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis.a. If a person has a flashlight that she values at$5, but
1.4. Let's count the value oflost gains from trade in a regulated market. The government decides it wants to make basic bicycles more affordable, so it passes a law requiring that all one-speed bicycles sell for $30, well below the market price. Use the data below to calculate the lost gains from
1.3. OnJanuary 31, 1990, the first McDonald's opened in Moscow, capital of the then Soviet Union. Economists often described the Soviet Union as a "permanent shortage economy,"where the government kept prices permanently low in order to appear "fair.""An American journalist on the scene reported
1.2. When the United States had price controls on oil and gasoline, some parts of the United States had a lot of heating oil, while other states had long lines. As in the chapter, let's assume that winter oil demand is higher in New Jersey than in California. If there had been no price controls,
1.1. In rich countries, governments almost always set the fares for taxi rides. The prices for taxi rides are the same in safe neighborhoods and in dangerous neighborhoods. Where is it easier to find a cab?Why? If these taxi price controls were ended, what would probably happen to the price and
1.14. The basic idea of deadweight loss is a willing buyer and a willing seller can't find a way to make an exchange. In the case of the minimum wage law, the reason they can't make an exchange is because it's illegal for the buyer (the firm) to hire the seller (the worker)at any wage below the
1.13. How do U.S. business owners change their behavior when the minimum wage rises?How does this impact teenagers?
1.12. A review of the jargon: Is the minimum wage a"price ceiling" or a "price floor"? What about rent control?
1.11.a. If the government forced all bread manufac turers to sell their products at a "fair price"that was half the current, free-market price, what would happen to the quantity supplied of bread?b. To keep it simple, assume that people must wait in line to get bread at the controlled price. Would
1.10. Business leaders often say that there is a"shortage" of skilled workers, and so they argue that immigrants need to be brought in to do these jobs. For example, a recent AP article was entitled "New York farmers fear a shortage of skilled workers," and went on to point out that a special U.S.
1.9.a. Consider Figure 8.8. In a price-controlled market like this one, when will consumer surplus be larger: in the short run or in the long run?b. In this market, supply is more elastic, more flexible, in the long run. In other words, in the longer term, landlords and homebuilders can find
1.8. In the chapter, we discussed how price ceilings can put goods in the wrong place, as when too little heating oil wound up in New Jersey during a harsh winter in the 1970s. Price controls can also put goods in the wrong time as well. If there are price controls on gasoline, can you think of
1.7. Price controls distribute resources in many unintended ways. In the following cases, who will probably spend more time waiting in line to get scarce, price-controlled goods? Choose one from each pair:a. Working people or retired people?b. Lawyers who charge $800 per hour or fas tfood employees
1.6. Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the United States rose from about $1.50 per gallon to more than$4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why?
1.5. The Canadian government has wage controls for medical doctors. To keep things simple, let's assume that they set one wage for all doctors: $100,000 per year. It takes about 6 years to become a general practitioner or a pediatrician, but it takes about 8 or 9 years to become a specialist like a
1.4. If a government decides to make health insurance affordable by requiring all health insurance companies to cut their prices by 30%, what will probably happen to the number of people covered by health insurance?
1.3. Suppose that the quantity demanded and quantity supplied in the market for milk is as follows:Price per Gallon$5$4$3$2$1 Quantity Demanded 1000 2000 3500 4100 6000 Quantity Supplied 5000 4500 3500 2000 1000a. What is the equilibrium price and quantity of milk?b. If the government places a
1.2. When a price ceiling is in place keeping the price below the market price, what's larger:quantity demanded or quantity supplied? How does this explain the long lines and wasteful searches we see in price-controlled markets?
1.1. How does a free market eliminate a shortage?
1.5. What is the opportunity cost of the economics profession?
1.4. Are you in favor of "price gouging" during natural disasters? Why or why not?
1.3. This chapter emphasized the ability of an orderly system to emerge without someone explicitly designing the entire sy tern. How does the evolution oflanguage illu trate a type of spontaneous order?
1.2. One que tion that economics students often ask is "In a market with a lot of buyers and sellers, who sets the price of the good?" There are two possible correct answers to this question:"Everyone" and "No one." Choose one of the two as your answer, and explain in one or two sentences why you
1.1. In The Fatal Conceit, economist Friedrich A.Hayek, arguing against central planning, wrote:"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can de ign." In other words, people generally assume that they can plan out the best
1.9. A classic essay about how markets link to each other is entitled "I, Pencil," written by Leonard E.Read (his real name). It is available for free online at the Library if Economics and Liberty. As you might suspect, it is written from the point of view of a pencil. One line is particularly
1.8. Robin is planning to ask Peggy to the Homecoming dance. Before he asks her, he wants to know what the chances are that he'll say "yes." Robin is a scientist so he consider two paths to estimate the probability that Peggy will say yes.Ask 10 of his friends, "Do you think she'll really say
1.7. Let's build on this chapter's example of asphalt.Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing: Perhaps a new device about the size of a washing machine can bleach, reweave, and redye cotton fabric to closely imitate any cotton item you
1.6. The "law of one price" states that if it's easy to move a good from one place to another, the price of identical goods will be the same because traders will buy low in one region and sell high in another. How is our story about the effect of speculators similar to the lesson about the "law of
1.5. In this chapter, we explored how prices tie all goods together. To illustrate this idea, suppose new farming techniques drastically increased the productivity of growing wheat.a. Given this change, how would the price of wheat change?b. Given your answer in parta, how would the price of
1.4. In 1980, University of Maryland economist Julian Simon bet Stanford entomologist Paul Ehrlich that the price of any five metals ofEhrlich's choosing would fall over 10 years.Ehrlich believed that resources would become scarcer over time as the population grew, while Simon believed that people
1.3. Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece (tin being necessary for its production). It is around this time that blacksmiths developed iron- and steel-making techniques (as
1.2. Two major-party presidential candidates are running against each other in the 2016 election.The Democratic Party candidate promises more money for corn-based ethanol research, and the Republican Party candidate promises more money for defense contractors. In the weeks before the election,
1.1. Andy enters into a futures contract, allowing him to sell 5, 000 troy ounces of gold at $1,000 per ounce in 36 months. After that time passes, the market price of gold is $950 per troy ounce.How much does Andy make or lose?
1.9. Let's see if the force of the market can be as efficient as a benevolent dictator. Since laptop computers are increa ingly easy to build and since they allow people to use their computers wherever they like, an all-wise benevolent dictator would probably decree that most people buy laptops
1.8. Take a look at Figure 7.3. If investors in the Hollywood Stock Exchange were too optimistic on average, would the dots tend to cluster above the red diagonal line or below it? How can you tell?
1.7. You manage a department store in Florida, and one winter day you read in the newspaper that orange juice futures have fallen dramatically in price. Should your store stock up on more weaters than usual, or should your store stock up on more Bermuda shorts?
1.6. Sometimes speculators get it wrong. In the months before the Persian GulfWar, speculators drove up the price of oil: The average price in October 1990 was $36 per barrel, more than double its price in 1988. Oil speculators, like many people around the world, expected the GulfWar to last for
1.5. Suppose you are bidding on a used car and someone else bids above the highest amount that you are willing to pay. What can you say for sure about that person's monetary value of the good compared to yours?The Price System: Signals, Speculation, and Prediction • CHAPTER 7 • 127
1.4. For you, personally, what is your opportunity cost of doing this homework?
1.3. In this chapter, we noted that successful economies are more likely to have many failing firms. If a nation's government instead made it impossible for inefficient firm to fail by giving them loans, cash grants, and other bailouts to stay in business, why is that nation likely to be poor?
1.2. The supply and demand for copper change constantly. New sources are discovered, mines collapse, workers go on strike, products that use it wane in and out of popularity, weather affects shipping conditions, and so on.a. Suppose you learned that growing political instability in Chile (the
1.1.a. Suppose you'd like to do five different things, each of which requires exactly one orange. Complete the following table, ranking your highest-valued orange-related activity (1) to your lowest-valued activity (5) .Activity Give a friend the orange.Throw the orange at a person you don't
1.5. In the chapter, most of the taxes we discussed were equal to a certain dollar amount per unit.In this case, a tax on sellers results in a parallel upward shift of the supply curve; a tax on buyers results in a parallel downward shift of the demand curve. In reality, however, many taxes are
1.4. As you learned in the chapter, the elasticities of demand and supply are crucial in determining how the burden of a tax (or the benefit of a sub idy) is divided between buyers and sellers.Under what conditions for supply or demand would a seller actually be able to avoid bearing any of the
1.3. Let's get some practice with the "wedge trick,"and use it to learn about the relationship between subsidies and lobbying. The U.S.government has many subsidies for alternative energy development: Some are just called subsidies, some are called tax breaks instead.Either way, they work just like
1.2.a. In the opening scene of the classic Eddie Murphy comedy Beverly Hills Cop) Axel Foley, a Detroit police officer, is stopping a cigarette smuggling ring. Of course, smugglers don't pay the tax when the cigarettes crossed state lines. Which way do you suspect the smugglers were moving the
1.1. Let's apply the economic of taxation to romantic relationships.a. What does it mean to have an inelastic demand for your boyfriend or girlfriend?How about an ela tic demand?b. Sometimes relationships have taxes. Suppose that you and your boyfriend or girlfriend live one hour apart. Using the
1.6. As we learned in Chapter 4, the competitive market equilibrium maximizes gains from trade.Taxes and subsidies, by altering the market outcome, reduce the gains from trade. Does this happen primarily because of the impact of taxes and subsidie on prices, or the impact of taxes and subsidie on
1.5. Consider the supply and demand diagram below. In this market, the government subsidizes the production of this good, and the subsidy wedge is indicated.Price 23 45 67 89 10 Quantitya. Consider the progressive nature of the U.S.federal income tax ystem: It' de igned so that higher income are
1.4. When governments are trying to raise tax revenue, they sometime attempt to target higher-income people, since they are in a better position to bear the burden of a tax. However, it can be very difficult to earn tax revenue from wealthy people.
1.3. Using the following diagram, use the wedge shortcut to answer these questions:a. If a tax of $2 were imposed, what price would buyers pay and what price would sup pliers receive? How much revenue would be raised by the tax? How much deadweight loss would be created by the tax?b. If a subsidy
1.2. Let's see if we can formulate any real laws about the economics of taxation. Which of the following must be true, as long as supply and demand curves have their normal shape(i.e., they aren't perfectly vertical or horizontal, and demand curves have a negative slope while supply curves have a
1.1. Some people with diabetes absolutely need to take insulin on a regular basis to survive.Pharmaceutical companies that make insulin could find a lot of other ways to make some money.a. If the U.S. government imposes a tax on insulin producers of$10 per cubic centimeter of insulin, payable every
1.6. Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut.a. What possible prices for the haircut would be beneficial to both Maria and Juan? How much total surplus (that is, the sum of consumer and producer surplus) would
1.5.a. Once again: Why does the text say that elaticity = escape? (This is worth remembering: Elasticity is one of the toughest ideas for most economics students.)b. Which two groups of workers did we say have a relatively high elasticity oflabor sup ply? Keep this in mind as politicians debate
1.4. In Figure 6.5, what is the total revenue raised by the tax, in dollars? What is the deadweight loss from the tax, in dollars? (Note: You've seen the formula for the latter before. W e'lllet you look around a little for this one.)
1.3. A we saw in the chapter, a lot turns on elasticity. Decades ago, W ashington, DC, a fairly small city, wanted to raise more revenue by increasing the gas tax. W ashington, DC, shares borders with Maryland and Virginia, and it's very easy to cross the borders between these states without even
1.2. Junk food has recently been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food.a. What needs to be true for the tax to actually deter people from eating junk food: Should junk food
1.1. As we saw in Chapter 4, economists' idea of"equilibrium" borrow a lot from physics. Let'push the physics metaphors a bit further. Here, we focus just on the supply side. For each set of words in brackets, circle the correct choice:a. When the government subsidizes an activity, resources such
1.3. Using the data from the ANWR example, what will be the percentage increase in quantity supplied if ANWR raises supply by 1 %? No, this isn't a trick question, and the formula is already there in the chapter. Why isn't this number just 1 %?
1.2. We saw that a gun buyback program was unlikely to work in Washington, D.C. If the entire United States ran a gun buyback program, would that be better at eliminating guns or worse? Why? What about if the gun buyback was also accompanied by a law making(at least some) guns illegal?
1.Austan Goolsbee found an interesting example of this when he looked at the elasticity of income of highly paid executives with respect to taxes. In 1993, then President Clinton passed a law raising income taxes. This tax hike was fully expected: He campaigned on it in 1992.a. What do you expect
1.1. In this chapter, we've emphasized that the elasticity of supply is higher in the long run than in the short run. In a lot of cases, this is surely true: If you see that jobs pay more in the next state over, you won't move there the next week but you might move there next year. But sometimes
1.9. Let's practice the midpoint formula. Calculate the elasticity of demand for each of the following goods or services.Beginning Quantity 50,000 1,000 10,000 40,000 Ending Price$10$1 .50$1 ,000$9,000 Ending Quantity 40,000 800 9,000 39,000 Elasticity
1.8. In the world of fashion, the power to imitate a trendy look is the power to make money.Stores such as H&M and Forever 21 focus on imitating fashions wherever possible: As soon as they see that a new look is corning along, something people are willing to pay a high price for, they start
1.7. Immigration is a fact of life in the United States. This will lead to a big boost in the labor supply. What field would you rather be in:a field where the demand for your kind of labor is elastic or a field where the demand for your kind of labor is inelastic?
1.6. In the short run, the price elasticity of the demand and supply of electricity can be very low.a. How might revenue for the electricity in dustry change if one power plant were shut down for maintenance, reducing supply?b. If one power company owned many power plants, would it have a
1.5. How might elasticities help to explain why people on vacation tend to spend more for food and necessities than the local population?
1.4. In Chapter 10, you'll see that we recently purchased permits to pollute the air with sulfur dioxide (S02 ). We didn't use the permits:Instead, we threw them out. In other words, we bought pennits for the same reason the government buys guns in gun buyback programs-to prevent what we bought
1.3. Henry Ford famously rna s-produced cars at the beginning of the twentieth century, starting Ford Motor Company. He made millions because mass production made cars cheap to make, and he passed some of the savings to the consumer in the form of a low price.Cars became a common ight in the United
1.2. Suppose that drug addicts pay for their addiction by stealing: So the higher the total revenue of the illegal drug industry, the higher the amount of theft. If a government crackdown on drug suppliers leads to a higher price of drugs, what will happen to the amount of stealing if the demand
1.1. During the Middle Ages, the African city of Taghaza quarried salt in 200-pound blocks to be sent to the salt market in Timbuktu, in present day Mali. Travelers report that Taghazans used salt instead of wood to construct buildings.Compared with other towns without big salt mines, was the
1.11. A lot of American action movies are quests to eliminate a villain. If in real life villains are elastically supplied (like guns for buyback programs), should we care whether the hero captures a particular villain? Why or why not?
1.10. Figure 5.3 and Table 5.2 both set out some important but tedious rules. Let's practice them, since they are quite likely to be on an exam.For each of the cases below, state whether the demand curve is relatively steep or flat, and whether a fall in price will raise total revenue or lower it.
1.9. As we noted in the chapter, many economists have estimated the short-run and long-run elasticities of oil demand. Let's see if a rise in the price of oil hurts oil revenues in the long run.Cooper, the author cited in this chapter, found that in the United States, the long-run elasticity of oil
1.8. On average, old cars pollute more than newer cars. Therefore, every few years, a politician proposes a "cash for clunkers" program:The government offers to buy up and destroy old, high-polluting cars. If a "cash for clunkers"program buys 1,000 old, high-polluting cars, is this the same as
1.This is clearly a situation where you'd want to know the elasticity of fruit and vegetable demand: If people respond a lot to mall changes in price, then government-funded fruit and vegetable coupons could make poorer Americans a lot healthier, which might save taxpayers money if they don't have
1.7. The U.S. Department of Agriculture (USDA)has been concerned that Americans aren't eating enough fruits and vegetables, and they've considered coupons and other subsidies to encourage people-especially lower-income people-to eat these healthier foods. Of course, if people's demand for fruits
1.6. It's an important tradition in the Santos family that they eat the same meal at their favorite restaurant every Sunday. By contrast, the Chen family spends exactly $50 for their Sunday meal at whatever restaurant sounds best.a. Which family has a more elastic demand for restaurant food?b.
1.5. Let's work out a few examples to get a sense of what elasticity of demand means in practice.Remember that in all of these cases, we're moving along a fixed demand curve-so think of supply increasing or decreasing, while the demand curve is staying in the same place.a. If the elasticity of
1.4. For each of the following, indicate if the supply for the good would become more elastic or less elastic as a result of each change and briefl justify your answer (once again, in each case the supply curve will also shift, but we are interested in changes in the elasticity).a. The supply curve
1.3. Indicate whether the demand for the good would become more elastic or less elastic after each of the following changes. (Note that in each of these cases, the demand curve may also shift inward or outward, but in this question we are interested in whether the demand becomes more or less
1.2. For each of the following pairs, which of the two goods is more likely to be elastically supplied? Table 5.3 should help:a. Supply of apples over the next growing sea son vs. supply of apples over the next decadeb. Supply of construction workers in Binghamton, NY, vs. supply of construction

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