Microeconomics An Intuitive Approach With Calculus 2nd Edition Thomas Nechyba - Solutions

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7. In the accompanying graph, is the slope of curve AA’ positive or negative? Does the slope increase or decrease as we move along the curve from A to A’? Answer the same two questions for curve BB’.50 40 30 20 10 0 2(2, 10)(26, 10)(12, 50) (16, 50)4 6 a c X XA C b ba cB
6. KEY APPENDIX QUESTION The accompanying graph shows curve XX’ and tangents at points A, B, and C. Calculate the slope of the curve at these three points.
3. KEY APPENDIX QUESTION The following table contains data on the relationship between saving and income. Rearrange these data into a meaningful order and graph them on the accompanying grid. What is the slope of the line? The vertical intercept? Interpret the meaning of both the slope and the
2. KEY APPENDIX QUESTION Indicate how each of the following might affect the data shown in Table A1-2 and Figure A1-2 of this appendix:a. IU’s athletic director schedules higherquality opponents.b. An NBA team locates in the city where IU also plays.c. IU contracts to have all its home games
1. Briefly explain the use of graphs as a way to represent economic relationships. What is an inverse relationship? How does it graph?What is a direct relationship? How does it graph? Graph and explain the relationships you would expect to find between (a) the number of centimetres of rainfall per
Visit their Web sites and compare and contrast their views on how to achieve economic goals. How much of the disagreement is based on positive statements and how much on normative statements? Give an example of loaded terminology from each site.
2. Normative Economics—Canadian Politics.Many economic policy statements made by the Liberal Party www.liberal.ca, the Reform Party www.reform.ca, the Progressive Conservative Party www.pcparty.ca, and the NDP www.ndp.ca can be considered normative rather than positive economic statements.
Three primary economic goals are economic growth (an increase in real GDP), full employment (less than 7 percent unemployment), and price-level stability (less than 2 percent as measured by the Consumer Price Index—CPI). Statistics Canada www.statcan.ca/english/Pgdb/Economy/econom.htm provides
1. Three Economic Goals—Are They Being Achieved?
Why do so many of them quit these jobs once they have graduated high school?
12. (Last Word) Use the economic perspective to explain the behaviour of the workers (rather than the customers) observed at a fast-food restaurant. Why are these workers there, rather than, say, cruising around in their cars? Why do they work so diligently?
11. Studies indicate that married men on average earn more income than unmarried men of the same age. Why must we be cautious in concluding that marriage is the cause and higher income is the effect?
10. Suppose studies show that students who study more hours receive higher grades.Does this relationship guarantee that any particular student who studies longer will get higher grades?
9. KEY QUESTION Explain and give an example of (a) the fallacy of composition, and (b) the “after this, therefore because of this” fallacy. Why are cause-and-effect relationships difficult to isolate in economics?
8. KEY QUESTION Identify each of the following as either a positive or a normative statement:a. The high temperature today was 30 degrees.b. It was too hot today.c. Other things equal, higher interest rates reduce the total amount of borrowing.d. Interest rates are too high.
7. KEY QUESTION Indicate whether each of the following statements applies to microeconomics or macroeconomics:a. The unemployment rate in Canada was 6.5 percent in January 2001.b. The Alpo dog food plant in Bowser, Alberta, laid off 15 workers last month.c. An unexpected freeze in central Florida
6. To what extent do you accept the eight economic goals stated and described in this chapter? What priorities do you assign to them?
5. KEY QUESTION Explain in detail the interrelationships between economic facts, theory, and policy. Critically evaluate this statement: “The trouble with economic theory is that it is not practical. It is detached from the real world.”
4. Explain the following statements:a. Good economic policy requires good economic theory.b. Generalization and abstraction are nearly synonymous.c. Facts serve to sort out good and bad hypotheses.d. The other things equal assumption helps isolate key economic relationships.
3. Why is it significant that economics is not a laboratory science? What problems may be involved in deriving and applying economic principles?
2. What is the scientific method and how does it relate to theoretical economics? What is the difference between a hypothesis and an economic law or principle?
1. KEY QUESTION Use the economic perspective to explain why someone who is normally a light eater at a standard restaurant may become a bit of a glutton at a buffetstyle restaurant that charges a single price for all you can eat.
If a government used the second-best consumption possibility frontier as if it were the appropriate utility possibility frontier, would it redistribute too much or too little relative to what it would do if it could measure utilities?
How does your conclusion illustrate our conclusion from earlier chapters that deadweight loss from labor taxes cannot be derived by simply looking at uncompensated labor supply curves?
Might a government that derives the first- and second-best consumption possibilities frontiers from exercise 29B.13 mistakenly think that there is no efficiency loss from redistribution?
We have implicitly assumed that we can measure individual utilities in order to construct first-and second-best utility possibility frontiers. Suppose instead that we can only measure consumption. What would the first- and second-best consumption possibilities frontiers look like for our example?
We concluded that the Benthamite, Rawlsian, and Cobb–Douglas social welfare function with a 5 0.5 all agree that the first-best utility allocation u1 5 u2 5 0.5 is optimal, but we also found that they quite dramatically disagree on what the second-best utility allocation is. Explain why.
Can you draw the first- and second-best utility possibility frontiers and indicate how you would graphically arrive at the same results?
Verify that this is in fact a positive monotone transformation.
How is what we have just done a positive monotone transformation?
B. The average U.S. growth rate over the past few decades has been in the range of 2.3%, with recessions happening about once every decade. Suppose, then, that we currently have a growth rate of 2.9% during nonrecession years and a negative growth rate of 23.3% during recession years (which
A. There is little debate about the relative magnitude of welfare gains from softening recessions versus increasing long-run growth rates. Still, governments expend substantial resources on fighting recessions, often by taking on debt and introducing incentive distortions into the economy, which
29.14 Policy Application: Smoothing the Business Cycle versus Fostering Economic Growth: Psychology Meets Normative Macroeconomics: It is sometimes argued that there is a policy trade-off between softening the impact of economic recessions and fostering long-run economic growth. Suppose such a
c. The underlying rule was simple: In order to comply with the rule, it simply had to be an ascending sequence. Very few subjects correctly identified this rule, instead very confidently concluding that the rule was much more complex. The experimenters concluded that people consistently derived an
b. What sequence of numbers might you propose to test your assumption if you did not have confirmation bias and were open to your assumption being incorrect?
B. The following experiment, first conducted in the early 1960s, is an illustration of confirmation bias.Suppose that you are given the following sequence of numbers: 2-4-6. You are told that this sequence conforms with a particular rule that was used to generate the sequence and are asked to
f. In the final hours before an exam, students often “study” intensely by scanning their notes and focusing on key terms that they have highlighted. Some students find that this dramatically increases their sense of being prepared for the exam, and then find that they do not do nearly as well
e. Empirical social scientists often do econometric regression analysis on real-world data to ascertain the direction and magnitude of people’s responses to different policies. As computational analysis has become less costly, such researchers are now able to run literally tens of thousands of
d. Some have observed an increase in the number of people who believe in a variety of “conspiracy theories,” theories such as that the 9/11 attack was orchestrated by the government or that a politician secretly adheres to a religious view that differs from his or her stated view. How might
c. Until the mid-1980s, the Federal Communication Commission in the United States enforced a rule known as the “Fairness Doctrine.” This rule required news outlets, particularly on radio and TV, to present opposing viewpoints. It was argued at the time that some media markets only had one or
b. In the past, opinion polls often suggested that public disapproval of a U.S. president was in the single digits, but more recently, a president is considered as doing well if his disapproval ratings are in the 20% to 30% range. Can confirmation bias in the more recent news environment explain
a. Many observers of public discourse have suggested that the assumptions individuals bring to policy discussions are now often more diametrically opposed than in the past, with different camps often no longer able to hold civil dialogue because they so fundamentally disagree about the underlying
A. Over the past few decades, there has been a vast increase in the number of sources that individuals can use to inform themselves about what is going on in the world. For instance, most individuals used to rely on their local newspaper (which often drew its material primarily from a handful of
29.13 Policy Application: Confirmation Bias, Politics, Research, and Last-Minute Studying: Individuals have lots of assumptions about the way the world works, assumptions that help frame how they make decisions. These assumptions are often challenged or confirmed by empirical evidence. However,
f. How much consumption does each of the two individuals undertake under the first-best outcome? How about under the second-best outcome?
e. Consider next the second-best case and suppose k 5 0.0025. For the same two income levels as in (d), what is the government’s “second-best” income tax rate given that the tax system gives rise to the deadweight losses modeled in (c)?
d. Suppose I1 5 $200,000 and I2 5 $10,000. What is the government’s “first-best” income tax rate when it can tax individual 1’s income without any deadweight loss?
c. Suppose next that the income tax used by the government is not a lump sum tax. For a tax rate t , 1, it is able to transfer the amount 1tI1 2 1ktI1 22 2 to individual 2. If the government wants to maximize the amount of transfer it can make, what tax rate will it choose?
b. Suppose that the government uses an income tax t charged to the rich and then transfers the revenues to the poor. Suppose first that this income tax is a lump sum tax; that is, it raises revenues without deadweight loss. What tax rate t would the government choose?
a. Give an example of a utility function u1c2 that would make this equivalent to a social welfare function that chooses utility allocations. What has to be true about the marginal utility of consumption?
B. Suppose again that there are two individuals: one who makes an income I1 and the other who makes only I2, where I1 . I2. Assume that the government would like to redistribute income but does not have information on individual utilities. Thus, instead of applying a social welfare function to
f. Suppose instead that the marginal utility of consumption diminishes as consumption increases.Would the application of the Rawlsian goal to consumption distributions now lead to a tax rate that is too high or too low?
e. Suppose that income differences arise in part from “compensating differentials” in the labor market; that is, suppose that higher income people make more money in part because they undertake unpleasant activities such as traveling a lot for their job and working long hours. If the
c. Now illustrate how the consumption possibilities frontier changes if the government uses an inefficient tax system. Suppose the inefficiency takes the following form: As the tax rate on the rich increases, consumption of the rich decreases as if the tax system were efficient, but the deadweight
b. What consumption allocation on this possibilities frontier would a Rawlsian government choose?
A. Consider in this exercise a government with Rawlsian goals; that is, the goal of making the least well off individual the most well off. If the government does not have access to information about people’s utilities, it may choose instead to treat people’s consumption levels as if these
29.12 Policy Application: First- and Second-Best Rawlsian Income Redistribution: Most governments raise tax revenues from higher income individuals and distribute them to lower income individuals in an attempt to achieve a more equal distribution of consumption. Such governments face a trade-off
f. Over the past few decades, there has been a substantial decrease in national savings in the United States. How might a behavioral economist use the idea of procrastination to explain this?
e. Suppose individual 1 also has reference-based preferences subject to endowment or status quo effects. If the company gets to choose the initial investment strategy but allows individuals to opt into a different strategy if they want to, which investment strategy would the company choose for its
d. Suppose that, instead of just having inherited money, the two individuals have just accepted a job in which their company contributes to a 401k retirement plan. The individuals now must choose between two investments for their retirement account: Investment A consists of a mix of stocks and
c. If individual 1 is aware of his time-inconsistency problem, will he accept the financial planner’s advice? Would he have any reason not to accept it if he is unaware of his self-control problem?
29.11 Business and Policy Application: Increased Liquidity, Procrastination, and National Savings: Over the past few decades, increasingly sophisticated financial investment possibilities have enabled individuals to place their savings into assets that can be sold instantly if need be as opposed
g. If all investors were like this young investor, could our prospect theory still explain the equity premium puzzle?
f. Suppose you are a young investor who is investing for retirement in 30 years. For all practical purposes, you can in this case be almost certain that an investment in stocks will result in an average rate of return equal to the expected rate of return. Recalculate the average annual utility
e. If this is a typical investor, is the equity premium explained by our version of prospect theory?
d. What utility will she get from investing $1,000 in stocks?
c. What utility will this investor get from investing $1,000 in bonds?
b. What is the expected return on investing $1,000 in stocks? What is the equity premium?
a. We discussed four features of prospect theory in the text: (1) reference-dependence, (2) lossaversion, (3) diminishing sensitivity, and (4) probability weighting. Which of these are we modeling here, and which are we not?
B. * Consider prospect theory (which you implicitly used in part A) a little more closely. Suppose that an investor bases her decision on a one-year investment horizon and evaluates risky gambles relative to a reference point that is equal to the amount she invests. Suppose she invests $1,000,
d. * In your explanation in (c), you almost certainly thought of the investor as having a one-year horizon. Suppose investors are in it “for the long run,” facing a 10% chance of a loss on their stocks each year. Do you think your behavioral economics explanation that relies on referencebased
c. Can you use the concept of “loss aversion” to explain how behavioral economics might have an explanation for the equity premium puzzle?
b. Suppose you thought that investors had reference-based preferences. What do you think their reference point might be when comparing the two investments?
a. What is the expected rate of return from a stock investment. What does this imply is the equity premium?
A. Consider the equity premium puzzle through the lens of reference-based preferences. In particular, suppose you are investing $1,000 and you know you can get a 2% return on this over 1 year by investing your money in bonds. Alternatively, you can invest the $1,000 in a stock and expect to lose
29.10 Business Application: The Equity Premium Puzzle: Investments in equities (like stocks) yield substantially higher returns than investment in bonds. By itself, this is no surprise because stocks are riskier than bonds. What is a surprise when viewed through the usual model of risk is the size
f. What is the probability that the home will sell for the price you calculated in (b) and (c), and how does it compare to the probability that the home will sell at the price you calculated in (e)? Can you reconcile this with the empirical fact stated in A(c)?
e. Next, set up the optimization problem again, but this time use y instead of u. What is the optimal asking price you now get? Is this the true optimal asking price for this homeowner?Explain.
d. If the homeowner has reference-based preferences as specified by u and y, is the price you calculated in (c) the true optimal asking price?
c. Next, suppose (from here on out) that a 5 1 and b 5 2.25. Repeat the optimization exercise assuming that the homeowner uses the function u (and not y). What would be the optimal asking price?
b. Set up the optimization problem for the homeowner under the assumptions in (a) and solve for the optimal asking price.
a. What values do a and b take in a model without reference-based preferences?
B. Consider the optimization problem faced by a homeowner who is moving and is determining an asking price for his home. Such a homeowner faces the following trade-off: A higher asking price p means a lower probability of selling the home, but it also means greater utility for the homeowner if the
c. Housing economists have uncovered the following empirical fact: During times when housing demand is falling (putting downward pressure on home prices), houses that are for sale typically take longer to sell, resulting in an increase in the number of houses on the market.Can you explain this
b. Next, consider the problem faced by a homeowner who needs to move during a “down” market. Suppose the homeowner originally purchased her home at price p0, and suppose that this price has become a “reference point” with the homeowner interpreting a sales price above p0 as a “gain”
A. Revisit the logic behind this conclusion before proceeding.a. One reason that homeowners do not constantly switch homes when housing prices fluctuate arises from the fact that there are moving costs that make switching homes not worthwhile for small price fluctuations. Now consider another
29.9 Everyday and Business Application: Endowment Effects and Housing Markets: In end-of-chapter exercises 6.9 and 7.6, we derived the curious prediction that homeowners are made better off by housing price fluctuations regardless of whether housing prices go up or down. This was because, assuming
e. True or False: Our present-biased student will have greater credit card debt than the impatient student who borrows the same in the junior year, but the impatient student will accurately predict his credit card debt when he graduates while the present-biased student predicts he will end up with
d. Next, compare the impatient student’s level of credit card debt to the level of debt the presentbiased student plans for when he is a sophomore. Is it greater or less? What about the levels of credit card debt the present-biased student plans for when he is in his junior year?
b. For such an impatient but nonpresent-biased student, what will consumption levels in periods 1 and 2 be? How much credit card debt will he have when he graduates?c. Compare your answer to the levels of credit card debt our “patient” present-biased student(with d 5 0.95 and b 5 0.5) will have.
a. In B(d) of exercise 29.7, you should have concluded that c0 5 $43,262 for the present-biased student when I 5 100,000, r 5 0.2, d 5 0.95, and b 5 0.5. What level of d would be required for the nonpresent-biased student to be sufficiently impatient for him to choose the same c0?
B. Consider the same set-up as in part B of exercise 29.7. (You should do exercise 29.7 prior to moving on.)
c. In what sense is government regulation to limit student credit card debt more paternalistic when it is motivated by combating student impatience than it is when it is motivated by combating present-bias?
b. When the two students are juniors, which plans to accumulate more debt by graduation?
a. When the two student are sophomores, which of the two plans on accumulating more credit card debt by the time he graduates?
29.8 Everyday and Policy Application: Impatient versus Present-Biased Students: In exercise 29.7, we considered how low “teaser” interest rates impact borrowing when college students are present-biased.We now consider the difference in borrowing responses to such teaser rates by impatient
h. True or False: Regulations that limit the amount of credit card debt that students can take on can improve the welfare of present-biased sophomores.
g. Now consider the student with b 5 0.5 as a sophomore looking ahead to being a junior. He is fully supported by his parents in his sophomore year, but he knows they will no longer support him in his junior year when he is able to get credit. (Assume that credit card companies do not offer cards
f. How much credit card debt will the student from part (c) actually have when he graduates?What about the student from part (d)?

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Microeconomics An Intuitive Approach With Calculus 2nd Edition Thomas Nechyba - Solutions

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