Questions and Answers of Modern Principles Of Economics

Table 4.6 shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and
Imagine that to preserve the traditional way of life in small fishing villages, a government decides to impose a price floor that will guarantee all fishermen a certain price for their catch.a. Using
What happens to the price and the quantity bought and sold in the cocoa market if countries producing cocoa experience a drought and a new study is released demonstrating the health benefits of
The equation for a supply curve is 4P = Q. What is the elasticity of supply as price rises from 3 to 4? What is the elasticity of supply as the price rises from 7 to 8? Would you expect these answers
The equation for a supply curve is P = 3Q – 8. What is the elasticity in moving from a price of 4 to a price of 7?
The supply of paintings by Leonardo Da Vinci, who painted the Mona Lisa and The Last Supper and died in 1519, is highly inelastic. Sketch a supply and demand diagram, paying attention to the
Say that a certain stadium for professional football has 70,000 seats. What is the shape of the supply curve for tickets to football games at that stadium? Explain.
When someone’s kidneys fail, the person needs to have medical treatment with a dialysis machine (unless or until they receive a kidney transplant) or they will die. Sketch a supply and demand
Assume that the supply of low-skilled workers is fairly elastic, but the employers’ demand for such workers is fairly inelastic. If the policy goal is to expand employment for low-skilled workers,
If demand is inelastic, will shifts in supply have a larger effect on equilibrium price or on quantity?
If supply is elastic, will shifts in demand have a larger effect on equilibrium quantity or on price?
If supply is inelastic, will shifts in demand have a larger effect on equilibrium price or on quantity?
Would you usually expect elasticity of demand or supply to be higher in the short run or in the long run? Why?
Under which circumstances does the tax burden fall entirely on consumers?
What is the formula for the income elasticity of demand?
What is the formula for the cross-price elasticity of demand?
What is the formula for the wage elasticity of labor supply?
What is the formula for elasticity of savings with respect to interest rates?
Transatlantic air travel in business class has an estimated elasticity of demand of 0.62, while transatlantic air travel in economy class has an estimated price elasticity of 0.12. Why do you think
What is the relationship between price elasticity and position on the demand curve? For example, as you move up the demand curve to higher prices and lower quantities, what happens to the measured
Can you think of an industry (or product) with near infinite elasticity of supply in the short term? That is, what is an industry that could increase Qs almost without limit in response to an
Would you expect supply to play a more significant role in determining the price of a basic necessity like food or a luxury like perfume? Explain.
A city has built a bridge over a river and it decides to charge a toll to everyone who crosses. For one year, the city charges a variety of different tolls and records information on how many drivers
In a market where the supply curve is perfectly inelastic, how does an excise tax affect the price paid by consumers and the quantity bought and sold?
Economists define normal goods as having a positive income elasticity. We can divide normal goods into two types: Those whose income elasticity is less than one and those whose income elasticity is
Suppose you could buy shoes one at a time, rather than in pairs. What do you predict the cross-price elasticity for left shoes and right shoes would be?
The equation for a demand curve is P = 48 – 3Q. What is the elasticity in moving from a quantity of 5 to a quantity of 6?
The equation for a demand curve is P = 2/Q. What is the elasticity of demand as price falls from 5 to 4? What is the elasticity of demand as the price falls from 9 to 8? Would you expect these
Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a
Take Jeremy’s total utility information in Exercise 6.1, and use the marginal utility approach to confirm the choice of phone minutes and round trips that maximize Jeremy’s utility.Exercise
Explain all the reasons why a decrease in a product's price would lead to an increase in purchases.
As a college student you work at a part-time job, but your parents also send you a monthly “allowance.” Suppose one month your parents forgot to send the check. Show graphically how your budget
Who determines how much utility an individual will receive from consuming a good?
Would you expect total utility to rise or fall with additional consumption of a good? Why?
Would you expect marginal utility to rise or fall with additional consumption of a good? Why?
Is it possible for total utility to increase while marginal utility diminishes? Explain.
If people do not have a complete mental picture of total utility for every level of consumption, how can they find their utility-maximizing consumption choice?
What is the rule relating the ratio of marginal utility to prices of two goods at the optimal choice? Explain why, if this rule does not hold, the choice cannot be utility-maximizing.
As a general rule, is it safe to assume that a change in the price of a good will always have its most significant impact on the quantity demanded of that good, rather than on the quantity demanded
Why does a change in income cause a parallel shift in the budget constraint?
Think back to a purchase that you made recently. How would you describe your thinking before you made that purchase?
The rules of politics are not always the same as the rules of economics. In discussions of setting budgets for government agencies, there is a strategy called “closing the Washington Monument.”
Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true
Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first poem, 27 units of marginal utility from
If a 10% decrease in the price of one product that you buy causes an 8% increase in quantity demanded of that product, will another 10% decrease in the price cause another 8% increase (no more and no
A firm had sales revenue of $1 million last year. It spent $600,000 on labor, $150,000 on capital and $200,000 on materials. What was the firm’s accounting profit?
Continuing from Exercise 7.1, the firm’s factory sits on land owned by the firm that it could rent for $30,000 per year. What was the firm’s economic profit last year?Exercise 7.1A firm had sales
If two painters can paint 200 square feet of wall in an hour, and three painters can paint 275 square feet, what is the marginal product of the third painter?
The WipeOut Ski Company manufactures skis for beginners. Fixed costs are $30. Fill in Table 7.16 for total cost, average variable cost, average total cost, and marginal cost.Table 7.16
Suppose the cost of machines increases to $55, while the cost of labor stays at $40. How would that affect the total cost of the three methods? Which method should the firm choose now?
Automobile manufacturing is an industry subject to significant economies of scale. Suppose there are four domestic auto manufacturers, but the demand for domestic autos is no more than 2.5 times the
What are explicit and implicit costs?
Would you consider an interest payment on a loan to a firm an explicit or implicit cost?
What is the difference between accounting and economic profit?
What is the difference between a fixed input and a variable input?
How do we calculate marginal product?
What shapes would you generally expect a total product curve and a marginal product curve to have?
What are the factor payments for land, labor, and capital?
How do we calculate each of the following: marginal cost, average total cost, and average variable cost?
Return to the problem explained in Table 7.13 and Table 7.14. If the cost of labor remains at $40, but the cost of a machine decreases to $50, what would be the total cost of each method of
What are the three ways that societies can organize themselves economically?
What is globalization? How do you think it might have affected the economy over the past decade?
What is scarcity? Can you think of two causes of scarcity?
Residents of the town of Smithfield like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount of ham the
A consultant works for $200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop
A computer systems engineer could paint his house, but it makes more sense for him to hire a painter to do it. Explain why.
What would be another example of a “system” in the real world that could serve as a metaphor for micro and macroeconomics?
Suppose we extend the circular flow model to add imports and exports. Copy the circular flow diagram onto a sheet of paper and then add a foreign country as a third agent. Draw a rough sketch of the
What is an example of a problem in the world today, not mentioned in the chapter, that has an economic dimension?
The chapter defines private enterprise as a characteristic of market-oriented economies. What would public enterprise be?
Why might Belgium, France, Italy, and Sweden have a higher export to GDP ratio than the United States?
Give the three reasons that explain why the division of labor increases an economy’s level of production.
What are three reasons to study economics?
What are examples of individual economic agents?
What are the three main goals of macroeconomics?
How did John Maynard Keynes define economics?
Are households primarily buyers or sellers in the goods and services market? In the labor market?
Are firms primarily buyers or sellers in the goods and services market? In the labor market?
Suppose you have a team of two workers: one is a baker and one is a chef. Explain why the kitchen can produce more meals in a given period of time if each worker specializes in what they do best than
Why would division of labor without trade not work?
Can you think of any examples of free goods, that is, goods or services that are not scarce?
A balanced federal budget and a balance of trade are secondary goals of macroeconomics, while growth in the standard of living (for example) is a primary goal. Why do you think that is so?
Macroeconomics is an aggregate of what happens at the microeconomic level. Would it be possible for what happens at the macro level to differ from how economic agents would react to some stimulus at
Why is it unfair or meaningless to criticize a theory as “unrealistic?”
Suppose, as an economist, you are asked to analyze an issue unlike anything you have ever done before. Also, suppose you do not have a specific model for analyzing that issue. What should you do?
Why do you think that most modern countries’ economies are a mix of command and market types?
Can you think of ways that globalization has helped you economically? Can you think of ways that it has not?
Suppose Alphonso’s town raised the price of bus tickets to $1 per trip (while the price of burgers stayed at $2 and his budget remained $10 per week.) Draw Alphonso’s new budget constraint. What
Return to the example in Figure 2.4. Suppose there is an improvement in medical technology that enables more healthcare with the same amount of resources. How would this affect the production
Could a nation be producing in a way that is allocatively efficient, but productively inefficient?
What are the similarities between a consumer’s budget constraint and society’s production possibilities frontier, not just graphically but analytically?
Individuals may not act in the rational, calculating way described by the economic model of decision making, measuring utility and costs at the margin, but can you make a case that they behave
Would an op-ed piece in a newspaper urging the adoption of a particular economic policy be a positive or normative statement?
Would a research study on the effects of soft drink consumption on children’s cognitive development be a positive or normative statement?
Explain why scarcity leads to tradeoffs.
Explain why individuals make choices that are directly on the budget constraint, rather than inside the budget constraint or outside it.
What does a production possibilities frontier illustrate?
Why is a production possibilities frontier typically drawn as a curve, rather than a straight line?
Explain why societies cannot make a choice above their production possibilities frontier and should not make a choice below it.
What are diminishing marginal returns?

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