Questions and Answers of Principles Of Economics

You learned that when the minimum efficient scale in a market is smaller, there is likely more competition in the market. How might this observation inform whether higher fixed costs are associated
In deriving the short-run industry supply curve (the sum of firms’ marginal cost curves), we assumed that input prices are constant because competitive firms are pricetakers.This same assumption
Consider an industry that exhibits external economies of scale. Suppose that over the next decade, the demand for that industry’s product increases rapidly. Describe the adjustments likely to
A representative firm producing watermelons is earning a normal profit at a price of $35 per hundred pounds. Draw a supply and demand diagram showing equilibrium at this price. Assuming that the
Evaluate the following statement. If a firm is facing internal diseconomies of scale, it must be in an industry which is experiencing external diseconomies.
Assume demand is decreasing in a contracting industry. Draw three supply and demand diagrams that reflect this, with the first representing an increasing-cost industry, the second representing a
According to the United Kingdom’s Office for National Statistics, the median gross pay for an aircraft pilot was £86,915 per annum in 2016, up from £71,555 per annum in 2011. All else equal, such
The following table shows production of barrels of wine in Andora, a wine region in Vinovita.If a ton of wine sells for €120 per barrel and workers earn €300 per week, how many workers should be
Consider the following information for a fish farm that has an infinite demand for fish produced at €5 per kg.a. Fill in all the blanks in the table.b. Verify that MRPL for the fish farm can be
In September 2015, several acres of sugar crop was damaged due to a faltering monsoon in India, the world’s second-biggest producer of sugar. Farmers in certain states were forced to use damaged
Suppose that all employers in the software industry allow programmers and web designers to work from home. This appeals to working parents and those with other responsibilities as their other tasks
In 2018, Cristiano Ronaldo signed a four-year contract with Juventus, moving from Real Madrid, for €100 million. How would you explain paying €100 million for one football player given that the
A mining company’s land concession in Angola incorporates five major mines that extract copper. The productivity of each mine is as follows:The company must decide how many mines to operate.Assume
In anticipation of Disney unveiling its theme park in Shanghai, China, the value of land surrounding the theme park’s construction site sky rocketed in the first half of 2016. How do you explain
Assume that a firm that manufactures gizmos can produce them with one of three processes used alone or in combination. The following table indicates the amounts of capital and labor required by each
The mayor of Sydney plans to provide housing subsidies to primary school teachers in an attempt to address the shortage of teachers. The subsidies are expected to reduce the cost of living in the
There has been considerable debate on the impact of high public debt on economic growth. The authors of This Time is Different, economists Carmen Reinhart and Ken Rogoff claim that there exists a
Define saving and investment. Data for the simple economy of Newt show that in 2018, saving exceeded investment and the government is running a balanced budget. What is likely to happen? What would
Improved transportation and storage technologies has made it easier for people in the United States to source their fresh fruit from abroad, and the majority of fruit is now imported, with much it
Which of these arguments or counterarguments do you find most persuasive when considering trade restraints concerning:a. Face masks and other medical necessitiesb. Breakfast cerealsc. Semiconductors
a. In 2018, the United States imposed tariffs of 20% to 50% on imported home washing machines. Explain how these tariffs affect the price that Whirlpool (a U.S. manufacturer) charges for washing
Refer to the graph in Study Problem 4 that shows the market for cigarettes. Suppose the government wants to eliminate inefficiency in this market by imposing a tax on each pack of cigarettes sold.a.
Go to eBay, Craigslist, Amazon, or any other site where you can buy used products and find something you might want to purchase. Does the seller have private information about the quality of the
For each of the following, explain how it may serve as a possible solution to the private information problem in the used-home market.a. A home warranty contract.b. Hiring a home inspector who takes
Jack is considering selling his elliptical machine, which he never really used, is high quality, and has been taking up space in his spare bedroom. He lists it on Facebook Marketplace for “$1,200
Carfax is a service that supplies vehicle history reports on used cars, including their ownership history, mileage, and past accidents. The existence of Carfax as a third-party verifier in the
Sophia operates her own accounting practice and is looking to hire two entrylevel accountants. A high-productivity worker will generate $90,000 in revenue per year and a low-productivity worker will
Consider the market for health insurance.a. Describe the concept of adverse selection as it relates to this market and explain why it may result in a “death spiral” in private markets.b. What are
For each of the following scenarios, identify how it will likely reduce or increase the problems associated with adverse selection of buyers.a. Advances in technology make it less expensive for
Talia owns a small public relations firm and wants to contract with her insurance provider to offer her employees the option to purchase short-term disability insurance. The insurance will pay out
Veronica manages a team of medical transcribers, who all work from home and are paid hourly. What potential problems might she have getting her remote team members to work as productively as she
When you rent an apartment or house, most landlords will require that you pay a refundable security deposit. Why do you think landlords do this? Relate their actions to possible problems caused by
You are working at a marketing firm in ad sales. Your manager announces that the company is starting a new incentive program to increase the number of potential customers, or leads, for salespeople
For each of the following scenarios, identify whether it is an example of adverse selection of sellers, adverse selection of buyers, or moral hazard. Come up with a possible solution to each
You are thinking about funding a Kickstarter campaign for a hybrid mechanical/digital calendar for which you’re willing to pay $125. To receive a calendar, the company required that you pledge
You are considering investing $2,000 in the stock market. If you invest, there is a 30% probability that your investment will be worth $3,000 and a 70% probability that your investment will be worth
You are analyzing two possible stock market investment strategies. For each of the following, identify whether or not it would be classified as a fair bet. Would a risk-averse person make either of
When Devon experiences an increase in wealth, her total utility increases as depicted in the accompanying table.a. Graph Devon’s utility function. Does it exhibit diminishing marginal utility?b.
The following graph illustrates the utility functions for both Rashawn and Juliana, who both have the same amount of wealth:a. Based on the graph, who is more risk averse, Rashawn or Juliana?b. Both
You currently have $10,000 in total wealth and rate your current utility at 4.25. You are deciding if you should invest your money in your friend’s automotive restoration business. There is a 50%
You are preparing to declare your major (if you already have, this will still be a good reflection exercise to make sure you’re making a good decision!). Apply the five strategies to reducing risk
There were about 126 million households and 383,974 residential fires in the United States in 2017. Therefore, households faced a 0.30% chance of a fire in a year. You are looking at purchasing
You are considering opening your own photography studio specializing in weddings and other events. You think that there is a 40% probability of your business being successful, at which point you will
Alexandria currently has $80,000 in wealth saved up from her private speech therapy practice. Alexandria plans on working for 15 more years and is afraid there’s a 5% chance that she will face a
You have $500 to invest in the stock market and are considering buying shares in Walmart and Target, both of which are trading at $50 per share. Analysts believe there’s a 50% chance of the economy
You’re a project manager overseeing five teams that are developing a new app. Each team must complete their work by July 1 in order to release the app by the end of the year. Based on your work
For each of the following scenarios, identify whether it is best explained as an example of overconfidence, availability bias, anchoring bias, representativeness bias, focusing illusion, or loss
You have decided to open a salad shop. Use the interdependence principle to describe how this impacts the economy by drawing a circular flow diagram. Make sure you draw and explain the flows of
You bought an old car a couple years ago for $1,000 and put about $5,000 of parts and labor into improving it. You sold it yesterday for $3,000. How does this sale affect GDP? Explain.
For each of the following transactions, determine if it takes place in the market for outputs or the market for inputs. Then, determine the direction of the flow of goods and services and the flow of
In 2020, GDP in Switzerland was $752 billion and GDP in the United States was $21 trillion. Does this indicate that the standard of living in Switzerland must be well below that of the United States?
After reading a report that says that around 70% of U.S. GDP is consumption, your friend Alex states, “Spending 70% of GDP on consumption is a lot. All people care about is buying stuff, consuming
Think of a good or service you’ve purchased in the last month. Explain how your purchase changed GDP by using each of the three ways to measure GDP: adding up every dollar spent, adding up every
Explain how total spending and total income for an economy must be equal.
From your own experiences, provide an example of each: consumption, investment, government purchases, and net exports.Problem 7Explain how total spending and total income for an economy must be equal.
Determine whether each of the following transactions contributes to the calculation of GDP as total spending. If it does contribute to GDP, then identify the relevant component of GDP (C, I, G, or
Use the data to calculate nominal U.S. GDP using the spending approach in 2020 and 2021. Consumption Investment Exports Imports Government spending 2020 (billions of dollars) $14,000 $3,600 $2,100
Consider an economy which produces and sells, among a host of other things, 100 million T-shirts a year. The average T-shirt begins life when a farmer plants seeds she put away last year, waters
Explain why total spending on T-shirts in the previous question is also equal to the total incomes earned in the economy. there are two sides to every transaction.Data from in previous
Jeremiah expressed his disdain for the economic reports he heard on the news. “All economists care about is increasing GDP,” he said. “I wish economists cared about living conditions and
In 2010, 4.9 million barrels of oil spilled into the Gulf of Mexico due to an explosion on an oil rig. Describe both the negative and positive impact this disaster had on GDP. Explain how this
Between 2000 and 2021, real GDP per person grew, on average, 1.1% per year in the United States. Did this GDP growth benefit all Americans? What does this tell us about the limitations of GDP as a
Vinny and Sandra have just had their first baby and need to make a decision about how to handle work and child care responsibilities. Explain how each of the options below will affect measured GDP,
The following graph plots GDP per person and life expectancy of countries around the world. Identify possible reasons for the relationship shown by the graph. Higher GDP is associated with longer
Identify the limitation of GDP relevant to each scenario.a. The U.S. Department of Commerce reports that a “dead zone” of low oxygen that can kill fish and marine life in the Gulf of Mexico has
You read two articles online. The first says GDP grew by 5% last quarter, but the second states that the economy grew by 3.4% over the same time period. What do you think explains the difference in
If nominal GDP rose, does that mean that production had to increase as well? Why or why not? What about if real GDP increased? Why is it important to use real GDP when comparing changes over time?
The table contains price and quantity information for two vehicle models produced by Ford Motor Company, the F-series trucks and Escape SUVs.a. Calculate the amount contributed by Ford to U.S. GDP
In Iceland, nominal GDP grew by 10.4% in 2021, while real GDP grew by 4.3%. Approximately what was the percentage change in average prices?
In 2018, the White House proposed a 33% cut in the United States Agency for International Development (USAID) budget for the upcoming fiscal year, which would have reduced USAID spending in 2019 to
In 2020, India was the world’s third largest economy, with a $9 trillion GDP (as measured in U.S. dollars). India was also one of the world’s fastest-growing economies, and over the previous
Since the Industrial Revolution, economic growth has increased tremendously. Discuss some of the outcomes of that economic growth.
Consider the history of the world from 1 million b.c. until now. Although limited data exists from early history, we still have some information about how people lived and how much they consumed.a.
All U.S. states require children to attend school. Mandatory school attendance ends at ages 16–18, depending on the state. The adult literacy rate in North America was 100% in 2020. Discuss how
An example of U.K. foreign investment is the aerospace manufacturing plant in Austin, Texas, that is owned by the U.K.-owned BAE Systems. Describe how this investment affects the three inputs into
Discuss an example of technological progress not mentioned in the chapter and how it impacted economic growth.
For each of the following, identify which inputs into the production function changed and their effects on economic growth.a. The government passes a new program that encourages more employers to
The U.S. savings rate fell from an annual rate of around 13% in the mid-1970s to 6% at the end of 2018. What are the consequences of a declining savings rate for economic growth?
Your friend Owen is a bit of a pessimist. “The world already has 8 billion people,” he says. “The population is growing too fast. Soon, there will be a food shortage—especially for people in
One analyst predicts that self-driving cars will ultimately reduce the number of cars that are produced. She argues that because self-driving cars can drive other people rather than sitting in
What can you tell about an aggregate production function if real GDP per worker increases by 10% in response to all of the inputs increasing by 10%? What would you expect to happen if you doubled all
In the movie Avengers: Infinity War, antagonist Thanos believes that he can limit suffering and starvation by erasing half the population from existence. You’ve just watched the film with your
Technological advancements in the restaurant industry are increasing the output that can be produced by chefs and their equipment. For example, Spyce is a Boston restaurant with robotic chefs that
In Uganda, GDP per person is $2,280 per year, and in Japan it is $42,338. What do you think is likely to happen to each country’s GDP per person if they both increase their physical capital per
In the debate over the Tax Cuts and Jobs Act of 2017, Republicans argued that businesses needed an incentive to invest more in physical capital in order for the United States to see much faster
The International Monetary Fund (IMF) publishes World Economic Outlook Updates biannually. According to the July 2018 Update, the expected annual growth rate of advanced countries was 2.2% for 2019.
In 2019, Venezuelan real GDP was only a third of what it had been in 2013. This erased more than four decades of economic growth. During the same time period, charges of bribery and corruption were
You’ve started developing an app that examines students’ personalities and other characteristics, and sorts them into highly effective study groups. Using the cost-benefit principle, compare your
For each of the following institutions, provide a real-world example and explain how it promotes economic growth.a. Enforceable property rightsb. Predictable and stable governmentc. Efficient
For years, Invisalign faced no direct competitors and was an industry leader within its niche in the orthodontics appliances market, earning $231 million in profit in 2017. Invisalign pioneered the
Think of three people from your own life (or even from popular TV shows and films) who are or were unemployed, employed, and not in the labor force. What events and choices led to their employment
Describe three economic or social changes that have contributed to the trends in labor force participation rates for men and women since the 1950s. How have these changes impacted the trade-offs
Sarah, Alicia, and Philip all lost their jobs when the medical billing firm they worked for was acquired by another company. After a few weeks of searching for another full-time job, Sarah decided to
Using the following data from the U.S. Bureau of Labor Statistics, calculate the size of the labor force, the unemployment rate, and the labor force participation rate for 2009 and 2018. Type of
From the perspective of workers and employers, discuss the benefits and the costs of a dynamic labor market.
Explain why it is possible to find many job openings in shrinking industries such as newspaper publishing or brick-and-mortar retail.
Should the official unemployment rate include people who have searched for work in the last year but are not currently searching? Would such a measure be better or worse than the official measure of
Determine the labor market status of each of the following people. If they are unemployed, can they be considered long-term unemployed?a. Demetrius is a voice-over actor. He has a gig this week, but
Use the table below from the U.S. Bureau of Labor Statistics to answer the following questions.a. What was the unemployment rate in May 2022?b. If we were to count marginally attached workers as
Consider the following scenarios and explain for each what the effect is on the official unemployment rate.a. Unemployed people become discouraged and stop searching for work.b. Previously unemployed

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