Questions and Answers of Modern Principles Of Economics

Is the economic model of decision-making intended as a literal description of how individuals, firms, and the governments actually make decisions?
What are four responses to the claim that people should not behave in the way described in this chapter?
Suppose Alphonso’s town raises the price of bus tickets from $0.50 to $1 and the price of burgers rises from $2 to $4. Why is the opportunity cost of bus tickets unchanged? Suppose Alphonso’s
During the Second World War, Germany’s factories were decimated. It also suffered many human casualties, both soldiers and civilians. How did the war affect Germany’s production possibilities
It is clear that productive inefficiency is a waste since resources are used in a way that produces less goods and services than a nation is capable of. Why is allocative inefficiency also wasteful?
What assumptions about the economy must be true for the invisible hand to work? To what extent are those assumptions valid in the real world?
Do economists have any particular expertise at making normative arguments? In other words, they have expertise at making positive statements (i.e., what will happen) about some economic policy, for
If the price of a magazine is $4 each, what is the maximum number of magazines she could buy in a week?
Draw Marie’s budget constraint with pies on the horizontal axis and magazines on the vertical axis. What is the slope of the budget constraint?
What is Marie’s opportunity cost of purchasing a pie?
Review Figure 3.4. Suppose the price of gasoline is $1.60 per gallon. Is the quantity demanded higher or lower than at the equilibrium price of $1.40 per gallon? What about the quantity supplied? Is
Why do economists use the ceteris paribus assumption?
In an analysis of the market for paint, an economist discovers the facts listed below. State whether each of these changes will affect supply or demand, and in what direction.a. There have recently
Let’s think about the market for air travel. From August 2014 to January 2015, the price of jet fuel increased roughly 47%. Using the four-step analysis, how do you think this fuel price increase
A tariff is a tax on imported goods. Suppose the U.S. government cuts the tariff on imported flat screen televisions. Using the four-step analysis, how do you think the tariff reduction will affect
What is the effect of a price ceiling on the quantity demanded of the product? What is the effect of a price ceiling on the quantity supplied? Why exactly does a price ceiling cause a shortage?
Does a price ceiling increase or decrease the number of transactions in a market? Why? What about a price floor?
If a price floor benefits producers, why does a price floor reduce social surplus?
What determines the level of prices in a market?
What does a downward-sloping demand curve mean about how buyers in a market will react to a higher price?
Will demand curves have the same exact shape in all markets? If not, how will they differ?
Will supply curves have the same shape in all markets? If not, how will they differ?
What is the relationship between quantity demanded and quantity supplied at equilibrium? What is the relationship when there is a shortage? What is the relationship when there is a surplus?
How can you locate the equilibrium point on a demand and supply graph?
If the price is above the equilibrium level, would you predict a surplus or a shortage? If the price is below the equilibrium level, would you predict a surplus or a shortage? Why?
When the price is above the equilibrium, explain how market forces move the market price to equilibrium. Do the same when the price is below the equilibrium.
What is the difference between the demand and the quantity demanded of a product, say milk? Explain in words and show the difference on a graph with a demand curve for milk.
What is the difference between the supply and the quantity supplied of a product, say milk? Explain in words and show the difference on a graph with the supply curve for milk.
When analyzing a market, how do economists deal with the problem that many factors that affect the market are changing at the same time?
Name some factors that can cause a shift in the demand curve in markets for goods and services.
Name some factors that can cause a shift in the supply curve in markets for goods and services.
How does one analyze a market where both demand and supply shift?
What causes a movement along the demand curve? What causes a movement along the supply curve?
Does a price ceiling attempt to make a price higher or lower?
How does a price ceiling set below the equilibrium level affect quantity demanded and quantity supplied?
Does a price floor attempt to make a price higher or lower?
How does a price floor set above the equilibrium level affect quantity demanded and quantity supplied?
What is consumer surplus? How is it illustrated on a demand and supply diagram?
What is producer surplus? How is it illustrated on a demand and supply diagram?
What is total surplus? How is it illustrated on a demand and supply diagram?
What is the relationship between total surplus and economic efficiency?
Review Figure 3.4. Suppose the government decided that, since gasoline is a necessity, its price should be legally capped at $1.30 per gallon. What do you anticipate would be the outcome in the
We know that a change in the price of a product causes a movement along the demand curve. Suppose consumers believe that prices will be rising in the future. How will that affect demand for the
Review Figure 3.4 again. Suppose the price of gasoline is $1.00. Will the quantity demanded be lower or higher than at the equilibrium price of $1.40 per gallon? Will the quantity supplied be lower
Table 3.8 shows information on the demand and supply for bicycles, where the quantities of bicycles are measured in thousands.Table 3.8a. What is the quantity demanded and the quantity supplied at a
The computer market in recent years has seen many more computers sell at much lower prices. What shift in demand or supply is most likely to explain this outcome? Sketch a demand and supply diagram
Table 3.9 illustrates the market's demand and supply for cheddar cheese. Graph the data and find the equilibrium. Next, create a table showing the change in quantity demanded or quantity supplied,
Table 3.10 shows the supply and demand for movie tickets in a city. Graph demand and supply and identify the equilibrium. Then calculate in a table and graph the effect of the following two
A low-income country decides to set a price ceiling on bread so it can make sure that bread is affordable to the poor. Table 3.11 provides the conditions of demand and supply. What are the
In the labor market, what causes a movement along the demand curve? What causes a shift in the demand curve?
In the labor market, what causes a movement along the supply curve? What causes a shift in the supply curve?
Why is a living wage considered a price floor? Does imposing a living wage have the same outcome as a minimum wage?
In the financial market, what causes a movement along the demand curve? What causes a shift in the demand curve?
In the financial market, what causes a movement along the supply curve? What causes a shift in the supply curve?
If a usury law limits interest rates to no more than 35%, what would the likely impact be on the amount of loans made and interest rates paid?
Which of the following changes in the financial market will lead to a decline in interest rates:a. A rise in demandb. A fall in demandc. A rise in supplyd. A fall in supply
Which of the following changes in the financial market will lead to an increase in the quantity of loans made and received:a. A rise in demandb. A fall in demandc. A rise in supplyd. A fall in supply
Explain why the following statement is false: “In the goods market, no buyer would be willing to pay more than the equilibrium price.”
Explain why the following statement is false: “In the goods market, no seller would be willing to sell for less than the equilibrium price.”
Consider the demand for hamburgers. If the price of a substitute good (for example, hot dogs) increases and the price of a complement good (for example, hamburger buns) increases, can you tell for
How do you suppose the demographics of an aging population of “Baby Boomers” in the United States will affect the demand for milk? Justify your answer.
Suppose there is a soda tax to curb obesity. What should a reduction in the soda tax do to the supply of sodas and to the equilibrium price and quantity? Can you show this graphically?
Use the four-step process to analyze the impact of the advent of the iPod (or other portable digital music players) on the equilibrium price and quantity of the Sony Walkman (or other portable audio
Use the four-step process to analyze the impact of a reduction in tariffs on imports of iPods on the equilibrium price and quantity of Sony Walkman-type products.
Suppose both of these events took place at the same time. Combine your analyses of the impacts of the iPod and the tariff reduction to determine the likely impact on the equilibrium price and
Most government policy decisions have winners and losers. What are the effects of raising the minimum wage? It is more complex than simply producers lose and workers gain. Who are the winners and who
Agricultural price supports result in governments holding large inventories of agricultural products. Why do you think the government cannot simply give the products away to poor people?
Can you propose a policy that would induce the market to supply more rental housing units?
What term would an economist use to describe what happens when a shopper gets a “good deal” on a product?
Explain why voluntary transactions improve social welfare.
Why would a free market never operate at a quantity greater than the equilibrium quantity?
Between January 2012 and January 2019, U.S. employment increased by 17.3 million workers, but the number of unemployed workers declined by only 6.3 million. How are these numbers consistent with each
In the year 2023, the economy produces 100 loaves of bread that sell for $2 each. In the year 2024, the economy produces 200 loaves of bread that sell for $3 each. Calculate nominal GDP, real GDP,
Revised estimates of U.S. GDP are usually released by the government near the end of each month. Find a news article that reports on the most recent release, or read the news release yourself at
A small nation idolizes the TV show The Voice. All they produce and consume are karaoke machines and voice lessons, in the following amounts:?a. Using a method similar to the CPI, compute the
The residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2023, they spend a total of $200 for 100 heads of cauliflower, $75 for 50 bunches of broccoli, and $50 for
Does an increase in the price of imported French wine affect the CPI or the GDP deflator more? Why?
A dozen eggs cost $0.88 in January 1980 and $1.47 in January 2021. The average hourly wage for production and nonsupervisory workers was $6.57 in January 1980 and $25.86 in January 2021. a. By
In April 2020, at the trough of the Covid-19 recession, the Bureau of Labor Statistics announced that of all adult Americans, 133,320,000 were employed, 23,038,000 were unemployed, and 103,538,000
Is unemployment typically short-term or long-term? Explain
Why don’t banks hold 100-percent reserves? How is the amount of reserves banks hold related to the amount of money that exists in the economy?
In an open-market operation, the Fed buys $10 million of government bonds from individual investors. If the required reserve ratio is 10 percent, what are the largest and smallest possible increases
Consider the effects of inflation in an economy composed of only two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal amounts of rice and beans. In 2022,
Explain why the long-run aggregate-supply curve is vertical.
Draw the long-run trade-off between inflation and unemployment. Explain how the short-run and longrun trade-offs are related.
Explain the difference between experimental and observational data.
Why don’t economists always use experimental data?
What two problems arise in the analysis of observational data?
What does the standard error of a parameter estimate measure?
Explain the problem of confounding variables, and describe two methods for solving the problem.
What are the pros and cons of in-kind (rather than cash) transfers to low-income households?
Hari has income of $6,000. Wine costs $6 per glass, and cheese costs $12 per pound. Draw Hari’s budget constraint with wine on the vertical axis. What is the slope of this budget constraint?
Hari has typical indifference curves for wine and cheese. Draw them and explain their four properties.
Can an increase in the price of cheese possibly induce Hari to buy more cheese? Explain.
What components of GDP (if any) would each of the following transactions affect? Explain. a. Uncle Fester buys a new refrigerator from a domestic manufacturer. b. Aunt Dolly hires a local
Taylor Swift has just finished recording her latest album. Her recording company determines that the demand for the CD is as follows: The company can produce the CD with no fixed cost and a
Leah’s lawn-mowing service is a profit-maximizing competitive firm. Leah mows lawns for $27 each. Her total cost each day is $280, of which $30 is a fixed cost. She mows 10 lawns a day. What can
Draw the demand, marginal-revenue, average-total-cost, and marginal-cost curves for a monopolist. Show the profit-maximizing output, the profit-maximizing price, and the amount of profit.
What gives the government the power to regulate mergers between firms? From the perspective of society’s welfare, give one reason that a merger might be good and one reason that a merger might be
How might advertising with no apparent informational content still inform consumers?

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