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microeconomics principles
Microeconomics Principles, Problems and Policies 20th edition Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn - Solutions
Angela puts $1,000 in a savings account that pays 3 percent per year. What is the future value of her money one year from now?a. $970.b. $1,000.c. $1,003.d. $1,030.
As shown in Table 16.2, $1,000 invested at 10 percent compound interest will grow into $1,331 after three years. What is the present value of $2,662 in three years if it is discounted back to the present at a 10 percent compound interest rate?
Entrepreneurs are the residual claimants at their respective firms. This means that they:a. Only get paid if there is any money left over after all the other factors of production have been paid.b. Must bear the financial risks of running their firms.c. Receive whatever accounting profits or losses
True or false. As a capitalist economy, the vast majority of U.S. national income flows to the owners of capital.
Suppose that you own a 10‐acre plot of land that you would like to rent out to wheat farmers. For them, bringing in a harvest involves $30 per acre for seed, $80 per acre for fertilizer, and $70 per acre for equipment rentals and labor. With these inputs, the land will yield 40 bushels of wheat
To fund its wars against Napoleon, the British government sold consol bonds. They were referred to as “perpetuities” because they would pay £3 every year in perpetuity (forever). If a citizen could purchase a consol for £25, what would its annual interest rate be? What if the price were £50?
You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You will not switch unless you earn an accounting profit that is on average at least as great as your current salary. You look into opening a small grocery store. Suppose that the store has annual
The long-run downward trend in commodity prices is consistent with the idea that:a. We are quickly running out of resources.b. Resource demands have been increasing faster than resource supplies.c. Birthrates will soon increase due to the falling cost of living.d. Resource supplies have increased
It would cost the town of Irondale $50 million to build a gas-powered generator that could produce a maximum of 5 megawatts of electricity at 15 cents per hour. Another alternative would be for Irondale to build a $100 million coal-fired generator that could produce a maximum of 15 megawatts of
After mining 9,273 tons of coal, Blue Sky Mining’s managers note that the marginal cost of mining the next ton of coal would be $40 per ton. They also calculate that the user cost of mining that next ton of coal would be $35. If the market price of coal is $72, should Blue Sky mine an additional
Good methods for helping to protect natural resources include:a. Establishing property rights and giving them to local users.b. Encouraging first-come-first-served property rights.c. Teaching people to consider user cost.d. Having the government set up and enforce ITQs.
Ingvar and Olaf are the only two fishermen in their area. Each has been assigned an ITQ that allows him to catch 20 tons of salmon. Ingvar’s MC of catching salmon is $6 per ton while Olaf’s MC of catching salmon is $7 per ton. If the price of salmon is $10 per ton, then to maximize efficiency,
A coal‐fired power plant can produce electricity at a variable cost of 4 cents per kilowatt hour when running at its full capacity of 30 megawatts per hour, 16 cents per kilowatt hour when running at 20 megawatts per hour, and 24 cents per kilowatt hour when running at 10 megawatts per hour. A
Suppose that Sea Shell oil company (SS) is pumping oil at a field off the coast of Nigeria. At this site, it has an extraction cost of $30 per barrel for the first 10 million barrels it pumps each year and then $60 per barrel for all subsequent barrels that it pumps each year, up to the site’s
Eric and Kyle are fishermen with different equipment and, as a result, different costs for catching fish. Eric’s costs for catching fish are $1,000 per ton for the first five tons and then $2,500 per ton for any additional tons. Kyle can harvest fish at a cost of $3,000 for the first 15 tons and
What are the main categories of government spending? What are the main categories of government revenue?
For state and local governments, what are the three most important sources of revenue and types of expenditure?
How do the top two categories of federal employment differ from the top two categories of local and state employment?
Given the inelasticity of cigarette demand, discuss an excise tax on cigarettes in terms of efficiency loss and tax incidence.
Is it possible for a country with a regressive tax system to have a tax ‐ spending system that transfers resources from the rich to the poor?
Does a progressive tax system by itself guarantee that resources will be redistributed from the rich to the poor? Explain. Is the tax system in the United States progressive, regressive, or proportional? Does the tax-spending system in the United States redistribute resources from higher income
The city of Joslyn has three sources of revenue: borrowing, proprietary income from running the local electric power utility, and taxes. If it received $10 million from running the electric power utility and borrowed $40 million, how much did it collect in taxes if total revenue was $14?a. $140
Suppose George made $20,000 last year and that he lives in the country of Harmony. The way Harmony levies income taxes, each citizen must pay 10% in taxes on their first $10,000 in earnings and then 50% in taxes on anything else they might earn. So given that George earned $20,000 last year, his
The nation of Upstandia uses kroner for money and its tax code is such that a person making 100,000 kroner per year pays 40,000 kroner per year in income taxes; a person making 200,000 kroner per year pays 70,000 kroner per year in income taxes; and a person making 300,000 kroner per year pays
Identify each of the following taxes as being either progressive or regressive.a. Personal income taxb. Sales taxesc. Payroll taxesd. Property taxes
The efficiency loss of imposing an excise tax is due to: a. Paying a higher price per unit.b. Producing and consuming fewer units.
True or false. The incidence of property taxes that are levied on rented houses and apartments is high—meaning that they are paid almost entirely by the landlords, who are billed by the government for those taxes.
Suppose a tax is such that an individual with an income of $10,000 pays $2,000 of tax, a person with an income of $20,000 pays $3,000 of tax, a person with an income of $30,000 pays $4000 of tax. What is each person’s average tax rate? Is this tax regressive, proportional, or progressive?
For tax purposes, “gross income” is all the money a person receives in a given year from any source. But income taxes are levied on “taxable income” rather than gross income. The difference between the two is the result of many exemptions and deductions. To see how they work, suppose you
True or false. Under the “rule of reason” that was established by the Supreme Court in the U.S. Steel case, a monopoly seller should be found guilty of violating antitrust laws even if it is charging low prices to consumers and acting the same way a competitive firm would act.
When confronted with a natural monopoly that restricts output and charges monopoly prices, the two methods that governments have for promoting better outcomes are:a. Public ownership and public regulation.b. Sole proprietorships and public goods.c. Antitrust law and horizontal mergers.d. Creative
Which of the following is the correct name for the idea that certain firms prefer government regulation because regulation shields them from the pressures of competition and, in effect, guarantees them a regulated profit?a. The public interest theory of regulation.b. The Structuralists’ theory of
True or false. Economists believe that social regulation is an exception to the MB = MC rule because social regulation should in every case extend as far as possible in order to ensure safe products, less pollution, and improved working conditions.
Carrot Computers and its competitors purchase touch screens for their handheld computers from several suppliers. The six makers of touch screens have market shares of, respectively, 19 percent, 18 percent, 14 percent, 16 percent, 20 percent, and 13 percent.a. What is the Herfindahl index for the
Suppose that the demand for olive oil is highly inelastic. Also suppose that the supply of olive oil is fixed for the year. If the demand for olive oil suddenly increases because of a shortage of corn oil, you would expect a in the price of olive oil.a. Large increase.b. Small
Suppose that the government has been supporting the price of corn. Its free market price is $2.50 per bushel, but the government has been setting a support price of $3.50 per bushel. Which of the following are ways that the government might try to reduce the size of the corn surplus?Select one or
The majority of farm subsidies flow toward ____________.a. Poor, small-scale farmers.b. Rich, large-scale farmers.c. Government employees.d. Grain wholesalers.
Ralph will consume any health care service just as long as its MB exceeds the money he must pay out of pocket. His insurance policy has a zero deductible and a10 percent copay, so Ralph only has to pay 10 percent of the price charged for any medical procedure. Which of the following procedures will
Males under the age of 25 must pay far higher auto insurance premiums than females in this age group. How does this fact relate to statistical discrimination? Statistical discrimination implies that discrimination can persist indefinitely, while the taste‐for‐discrimination model suggests that
Which of the following are elements of current U.S. farm policy?a. Farmers are free to choose how much to plant of any particular crop.b. Direct payments.c. Price supports.d. Countercyclical payments.
Suppose that corn currently costs $4 per bushel and that wheat currently costs $3 per bushel. Also assume that the price elasticity of corn is .10 while the price elasticity of wheat is .15. For the following questions about elasticities, simply use the percentage changes that are provided rather
Suppose that both wheat and corn have an income elasticity of .1.a. If the average income in the economy increases by 2 percent each year, by how many percentage points does the quantity demanded of wheat increase each year, holding all other factors constant? Holding all other factors
Suppose that 10 workers were required in 2010 to produce 40,000 bushels of wheat on a 1,000‐acre farm.a. What is the average output per acre? Per worker?b. If in 2020 only 8 workers produce 44,000 bushels of wheat on that same 1,000‐ acre farm, what will be the average output per
Consider a specific example of the special-interest effect and the collective-action problem. In 2009, it was estimated that the total value of all corn‐production subsidies in the United States totaled about $4 billion. The population of the United States was approximately 300 million
Explain: “The United States can make certain toys with greater productive efficiency than can China. Yet we import these toys from China.” Relate your answer to the ideas of Adam Smith and David Ricardo.
What is an export supply curve? What is an import demand curve? How do such curves relate to the determination of the equilibrium world price of a tradable good?
Why is a quota more detrimental to an economy than a tariff that results in the same level of imports as the quota? What is the net outcome of either tariffs or quota for the world economy?
The potentially valid arguments for tariff protection—military self-sufficiency, infant industry protection, and diversification for stability—are also the most easily abused. Why are these arguments susceptible to abuse?
Evaluate the effectiveness of artificial trade barriers, such as tariffs and import quotas, as a way to achieve and maintain full employment throughout the U.S. economy. How might such policies reduce unemployment in one U.S. industry but increase it in another U.S. industry?
In 2012, manufacturing workers in the United States earned average compensation of $35.67 per hour. That same year, manufacturing workers in Mexico earned average compensation of $6.36 per hour. How can U.S. manufacturers possibly compete? Why isn’t all manufacturing done in Mexico and other
How might protective tariffs reduce both the imports and the exports of the nation that levies tariffs? In what way do foreign firms that “dump” their products onto the U.S. market in effect provide bargains to American consumers? How might the import competition lead to quality improvements
In Country A, a worker can make 5 bicycles per hour. In Country B, a worker can make 7 bicycles per hour. Which country has an absolute advantage in making bicycles? a. Country A.b. Country B.
In Country A, the production of 1 bicycle requires using resources that could otherwise be used to produce 11 lamps. In Country B, the production of 1 bicycle requires using resources that could otherwise be used to produce 15 lamps. Which country has a comparative advantage in making
True or False: If Country B has an absolute advantage over Country A in producing bicycles, it will also have a comparative advantage over Country A in producing bicycles.
Suppose that the opportunity-cost ratio for sugar and almonds is 4S ≡ 1A in Hawaii but 1S ≡ 2A in California. Which state has the comparative advantage in producing almonds? a. Hawaii.b. California.c. Neither.
We see quite a bit of international trade in the real world. And trade is driven by specialization. So why don’t we see full specialization—for instance, all cars in the world being made in South Korea, or all the mobile phones in the world being made in China? Choose the best answer from among
Which of the following are benefits of international trade? Choose one or more answers from the choices shown.a. A more efficient allocation of resources.b. A higher level of material well-being.c. Gains from specialization.d. Promoting competition.e. Deterring
Suppose that the current international price of wheat is $6 per bushel and that the United States is currently exporting 30 million bushels per year. If the United States suddenly became a closed economy with respect to wheat, would the domestic price of wheat in the United States end up higher or
Suppose that if Iceland and Japan were both closed economies, the domestic price of fish would be $100 per ton in Iceland and $90 per ton in Japan. If the two countries decided to open up to international trade with each other, which of the following could be the equilibrium international price of
American apparel makers complain to Congress about competition from China. Congress decides to impose either a tariff or a quota on apparel imports from China. Which policy would Chinese apparel manufacturers prefer? a. Tariff. b. Quota.
What do the plus signs and negative signs signify in the U.S. balance of payments statement? Which of the following items appear in the current account and which appear in the capital and financial account? U.S. purchases of assets abroad; U.S. services imports; foreign purchases of assets in the
What are official reserves? How do net sales of official reserves to foreigners and net purchases of official reserves from foreigners relate to U.S. balance-of-payment deficits and surpluses? Explain why these deficits and surpluses are not actual deficits and surpluses in the overall balance of
Generally speaking, how is the dollar price of euros determined? Cite a factor that might increase the dollar price of euros. Cite a different factor that might decrease the dollar price of euros.Explain: “A rise in the dollar price of euros necessarily means a fall in the euro price of
“Exports pay for imports. Yet in 2012 the nations of the world exported about $540 billion more of goods and services to the United States than they imported from the United States.” Resolve the apparent inconsistency of these two statements.
An American company wants to buy a television from a Chinese company. The Chinese company sells its TVs for 1,200 yuan each. The current exchange rate between the U.S. dollar and the Chinese yuan is $1 = 6 yuan. How many dollars will the American company have to convert into yuan to pay for the
The exchange rate between the U.S. dollar and the British pound starts at $1 = £0.5. It then changes to $1 = £0.75. Given this change, we would say that the U.S. dollar has_________ while the British pound has _____________. a. Depreciated; appreciated.b. Depreciated;
A meal at a McDonald’s restaurant in New York costs $8. The identical meal at a McDonald’s restaurant in London costs £4. According to the purchasing-power-parity theory of exchange rates, the exchange rate between U.S. dollars and British pounds should tend to move toward: a. $2 =
Suppose that a country has a flexible exchange rate. Also suppose that at the current exchange rate, the country is experiencing a balance-of-payments deficit. Then would it be true or false that a sufficiently large depreciation of the local currency could eliminate the balance-of-payments deficit.
Suppose that the government of China is currently fixing the exchange rate between the U.S. dollar and the Chinese yuan at a rate of $1 = 6 yuan. Also suppose that at this exchange rate, the people who want to convert dollars to yuan are asking to convert $10 billion per day of dollars into yuan,
Suppose that a country follows a managed-float policy but that its exchange rate is currently floating freely. In addition, suppose that it has a massive current account deficit. Does it also necessarily have a balance-of -payments deficit? If it decides to engage in a currency intervention to
Compare a hypothetical DVC with a hypothetical IAC. In the DVC, average per capita income is $500 per year. In the IAC, average per capita income is $40,000 per year. If both countries have a savings rate of 10 percent per year, the amount of savings per capita in the DVC will be
Which of the following is not one of the four major economic flows linking the U.S. economy with that of other nations? a. Trade flows. b. Resource flows.c. Financial flows. d. Foreign aid flows.
What measures do governments use to promote exports and restrict imports? Who benefits and who loses from protectionist policies? What is the net outcome for society?
Which of the following policies would economists consider to be actions that a DVC government might take that would improve growth prospects? Select one or more of the following: a. Helping to extend the banking system to the rural poor.b. Passing high tariffs against foreign products. c.
True or False: Economists are unanimous that foreign aid greatly helps DVCs.
True or False: Some economists argue that the single best thing that IACs could do for DVCs in terms of economic growth would be to eliminate trade barriers between IACs and DVCs.
Assume a DVC and an IAC presently have real per capita outputs of $500 and $5000, respectively. If both nations have a 3 percent increase in their real per capita outputs, by how much will the per capita output gap change?
Assume that a very tiny and very poor DVC has income per capita of $300 and total national income of $3 million. How large is its population? If its population grows by 2 percent next year while its total income grows by 3 percent, what will be its new income per capita rounded to full dollars? If
How important is international trade to the U.S. economy? In terms of volume of exports and imports, what country is the United States’ most important trading partner? Was the United States the world’s leading export country in 2012? If not, which country was? Place the following four countries
What role do domestic opportunity costs play in determining a nation’s area of comparative advantage and therefore specialization relative to that of a trading partner? Provide a numerical example (no need for a table) to support your answer. How does specialization and trade reduce a nation’s
The United States usually runs a __________in its international trade in goods and a __________ in its international trade in services.a. Deficit, deficit.b. Deficit, surplus.c. Surplus, deficit.d. Surplus, surplus.
A country that has an absolute advantage over another country in producing a product __________ a comparative advantage as well.a. Will have.b. May have.
True or False: Consider the exchange rate between the U.S. dollar and the Japanese yen. If the exchange rate changes from $1 = ¥80 to $1 = ¥105, then the dollar has “appreciated” in value against the yen.
Tariffs and quotas __________ domestic producers but __________ domestic consumers.a. Help, help.b. Help, harm.c. Harm, help.d. Harm, harm.
Initially assume that it costs $1.36 to purchase 1 euro. How many euros are needed to buy $1? How many dollars are needed to purchase an item priced at 84 euros? Next, assume that the exchange rate changes to $1.30 per 1 euro. Will it take more euros or fewer euros to buy the American item priced
Suppose a country’s total output is growing 10 percent per year but its population is growing 11 percent per year. What will happen to living standards?a. Remain the same.b. Fall.c. Rise.
True or False: A DVC that has little in the way of natural resources is destined to remain poor.
True or False: The term developing country (DVC) is applied to rich nations like the United States and Germany because their economies are always growing quickly by developing new technologies.
List and discuss five policies that DVC governments might undertake to promote economic development and expansion of income per capita in their countries?
As it relates to the vicious circle of poverty, what is meant by the saying “Some DVCs stay poor because they are poor”? Change the box labels as necessary in Figure 25W.3 to explain rapid economic growth in countries such as South Korea and Chile. What factors other than those contained in the
What is the demographic transition? Contrast the demographic transition view of population growth with the traditional view that slower population growth is a prerequisite for rising living standards in the DVCs.
Explain how each of the following can be obstacles to the growth of income per capita in the DVCs: lack of natural resources, large populations, low labor productivity, poor infrastructure, and capital flight.
Explain how the absolute per capita income gap between rich and poor nations might increase, even though per capita income (or output) is growing faster in DVCs than in IACs.
What are the four categories used by the World Bank to classify nations on the basis of national income per capita? Identify two nations for each of the four categories.
Return to Problem 3 and assume the exchange rate is fixed against the dollar at the equilibrium exchange rate that occurs in year 1. Also suppose that Japan and the United States are the only two countries in the world. In year 2, what quantity of yen would the Japanese government have to buy or
Suppose that the current Canadian dollar (CAD) to U.S. dollar exchange rate is $.85 CAD = $1 US and that the U.S. dollar price of an Apple iPhone is $300. What is the Canadian dollar price of an iPhone? Next, suppose that the CAD to US dollar exchange rate moves to $.96 CAD = $1 US. What is the
Refer to following table, in whichQd is the quantity of yen demanded,P is the dollar price of yen,Qs is the quantity of yen supplied in year 1, andQs' is the quantity of yen supplied in year 2. All quantities are in billions and the dollar-yen exchange rate is fully
China had a $214 billion overall current account surplus in 2012. Assuming that China’s net debt forgiveness was zero in 2012 (its capital account balance was zero), by how much did Chinese purchases of financial and real assets abroad exceed foreign purchases of Chinese financial and real assets
Alpha€™s balance-of-payments data for 2012 are shown below. All figures are in billions of dollars. What are the (a) Balance on goods, (b) Balance on goods and services, (c) Balance on current account, (d) Balance on capital and financial account? Suppose Alpha sold
Other things equal, if the United States continually runs trade deficits, foreigners will own________ U.S. assets. a. More and more.b. Less and less.c. The same amount of.
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