Macro HW II

2-3 Outline how economies function as production systems s. (Shape ofthe PPDSuppose a production possibilities frontier

includes the following combinations:

Cars

0

100

200

Washing Machines

1,000

600

0

a. Graph the PPF, assuming that it has no curved segments.

b. What is the cost of producing an additional car when 50 cars

are being produced?

c. What is the cost of producing an additional car when 150 cars

are being produced?

d. What is the cost of producing an additional washing machine

when 50 cars are being produced?When 150 cars are being

produced?

e. What do your answers tell you about oppoftunity costs?

a. (Production Possibilities)Suppose an economy uses two resources (labor and capital) to produce two goods (wheat and cloth). Capital

is relatively more useful in producing cloth, and labor is relatively

more useful in producing wheat. lf the supply of capital falls by

1 0 percent and the supply of labor increases by 1 0 percent, how

will the PPF for wheat and cloth change?

t. (Production Possibilities)Ihere's no reason why a production possibilities frontier could not be used to represent the situation

facing an individual. lmagine your own PPF. Right now-today- you have certain resources-your time, your skills, perhaps some

capital. And you can produce various outputs, Suppose you can

produce combinations of two outputs, call them studying and

partying.

a. Draw your PPF for studying and partying. Be sure to label the axes

of the diagram appropriately, Label the points where the PPF inter-

sects the axes, as well as several other points along the frontier,

b. Explain what it would mean for you to move upward and t0 the

left along your personal PPF. What kinds of adjustments would

you have to make in your life to make such a movement along

the frontier?

c. Under what circumstances would your personal PPF shift

outward? Do you think the shift would be a "parallel" one? Why,

or why not?

a. (Shifting Production Possibilities) Determine whether each of the following would cause the national economy's PPF to shift inward,

outward, or not at all:

a. An increase in average length of annual vacations

b. An increase in immigration

c. A decrease in the average retirement age

d. The migration of skilled workers to other countries

2-4 Describe different economic systems and the decision-making rules that define them

s. (Econ1mic Systems)Ihe United States is best described as having a mixed economy, What are some elements of command in the

U.S. economy? What are some market elements? What are some

traditional elements?

326 PROBLEMS APPENDIX

GHAPTER 3 3-l Describe *re major sources of income and expenditures for households

1. (Evllutiln of the Household) Determine whether each of the following would increase or decrease the opportunity costs for

mothers.-who choose not to work outside the home. Explain your

answers.

a. Higher levels of education for women

b. Higher unemployment rates for women

c. Higher average pay levels for women

d. Lower demand for labor in industries that traditionally employ

large numbers of women

z. (Household Production) Many households supplemeni their food budget by cultivating small vegetable gardens. Explain how each

of the following might influence this kind of household production:

a. Both husband and wife are professionals who earn high salaries.

b. The household is located in a city rather than in a rural area.

c, The household is located in a region where there is a high sales

tax on food purchases.

d, The household is located in a region that has a high property

tax rate.

3. (Household Production)Whalfactors does a householder consider when deciding whether to produce a good or service at home

versus buy it in the marketplace?

4. ()bjectives of the Economic Decision Makers)ln economic analysis, what are the assumed obiectives of households, firms, and the

government?

3-2 Outline the evolution of production over the centuries from the household to the modern corporation

5. (Clrplratilns) How did the institution of the firm get a boost from the advent of the lndustrial Revolution? What type of business

organization existed before this?

a, (Sole Proprietorships)What are the disadvantages of the sole proprietorship form of business?

t. (Cooperatives) How do cooperatives differ from typical businesses? 8. (Evllutiln 0fthe Hrm)Explain how production afterthe lndustrial

Revolution differed from production under the cottage industry system.

3-3 Summarize the seven roles of govemment in an economy 9. (Governmenf) Complete each of the following sentences:

a. When the private operation of a market leads to overproduction or

underproduction of some good, this is known as a(n)

-.

b. Goods that are nonrival and nonexcludable are known as

c. _ are cash or in-kind benefits given to individuals as outright grants from the government.

d. A(n)

-

confers an external benefit on third parties

that are not directly involved in the market transaction.

e, _ refers to the government's pursuit of full employ- ment and price stability through variations in taxes and govern-

ment spending.

10. (Tu Rates)Suppose taxes are related to income as follows:

lncome Taxes $1,000 $200 $2,000 $350 $3,000 $450 a. What percentage of income is paid in taxes at each level?

b. ls the tax rate progressive, proportional, or regressive?

c. What is the marginal tax rate on the first $1 ,000 of income? The second $1,000? The third $1,000?

11. (Government Revenue)WhaIare the sources of government rev- enue in the United States? Which types of taxes are most impoftant

at each level of governmenP Which two taxes provlde the most

revenue to the federal government?

12. (Externalities)Suppose there is an external cost, or negative exter- nality, associated with production of a certain 900d. What's wrong

with letting the market determine how much of this good will be

produced?

3-4 Explain why countries trade with each other and why they sometimes act to restrict that trade 13. (nternational Tradel Why does international trade occur? What does

it mean t0 run a deficit in the merchandise trade balance?

1{. (lnternational Iradel Distinguish between a tariff and a quota. Who benefits from and who is harmed by such restrictions on imports?

GHAPTER 4 4-I Explain why a demand curue slopes downward 1. (Shifting Demand)Using demand and supply curves, show the

effect of each of the following on the market for cigarettes:

a. A cure for lung cancer is found.

b. The price of cigars increases.

c. Wages increase substantially in states that grow tobacco. d. A fertilizer that increases the yield per acre of tobacco is

discovered.

e, There is a sharp increase in the price of matches, lighters, and

lighter fluid.

f. More states pass laws restricting smoking in restaurants and public places.

2. (Substitutes and Complementsl For each of the following pair of g00ds, determine whether the goods are substitutes, complements,

or unrelated:

a. Peanut butter and jelly

b. Private and public transportation

c. Coke and Pepsi d, Alarm clocks and automobiles

e, Golf clubs and golf balls

a-2ldenfify five things which could shift a demand curue to the right or left 3. (Demand Shifters) List five things that are held constant along a

market demand curve, and identify the change in each that would

shift that demand curve to the right-that is, that would increase demand.

4-3 Explain why a supply curye usually slopes uPward t. (Supply)Why is a firm willing and able to increase the quantity sup-

plied as the product price increases?

s. (Supply)What is the law of supply? Give an example of how you have observed the law of supply at work. What is the relationship

tetween the law of supply and the supply curve?

a-a ldentify frve things which could shift a supply curye to the right or left 6. (Supply Shifters) List the five things that are held constant along a

market supply curve, and identify the change in each that would shift

that supply curve to the right-that is, that would increase supply. t. (Demand and Supply)How do you think each of the following af-

fected the world price of pi2 (Use demand and supply analysis.) a. Tax credits were offered for expenditures on home insulation.

b. The Alaskan oil pipeline was completed.

c. The ceiling on the price of oil was removed.

d. Oil was discovered in the North Sea.

e, Sport utility vehicles and minivans became popular.

f. The use of nuclear power declined. a. (Demand and Supply)WhaI happens to the equilibrium price and

quantity of ice cream in response to each of the following? Explain

y0ur answers.

a. The price of dairy cow fodder increases.

b, The price of beef decreases.

c. Concerns arise about the fat content of ice cream. Simultane- ously, the price of sugar (used to produce ice cream) increases.

4-5 Explain why surpluses push prices down while shortages drive prices up 9. (Market Surplus)Why would firms accept a lower price if there is a

market surplus?

10, (Market Shlrtage)Why would firms raise the price if there is a market shortage, and why would some consumers pay that higher price. At what point would firms stop raising the price?

4-6 Predict the impact of a change in demand or supply on the equilibrium price and quantity 11. (Equilibrium)"lf a price is not an equilibrium price, there is a ten-

dency for it t0 move to its equilibrium level. Regardless of whether

the price is too high or too fow to begin with, the adjustment process will increase the quantity of the good purchased." Explain,

using a demand and supply diagram.

12. (Equilibrium) Assume the market for corn is depicted as in the table that appears below.

a. Complete the table below.

b. What market pressure occurs when quantity demanded exceeds quantity supplied? Explain.

c. What market pressure occurs when quantity supplied exceeds quantity demanded? Explain,

d. What is the equilibrium price?

e. What could change the equilibrium price?

f, At each price in the first column of the table below, how much is sold?

PROBLEMS APPENDIX 327

Surplus/ WillPrice Shortage Rise or Fall?

t3. (Market Equilibrium)Determine whether each of he following state- ments is true, false, or uncertain. Then briefly explain each answer.

a. ln equilibrium, all sellers can find buyers.

b. ln equilibrium, there is n0 pressure 0n the market to produce or

consume more than is being sold.

c. At prices above equilibrium, the quantity exchanged exceeds the

quantity demanded.

d. At prices below equilibrium, the quantity exchanged is equal to

the quantity suPPlied

14. (Changes in Equitibrium)Whalare the effects on the equilibrium price and quantity of steel if the wages of steelworkers rise and,

simultaneously, the price of aluminum rises?

4-7 Describe the result of a govemment-set price floor or Price ceiling on a market

15. (Price Ftoor)There is considerable interest in whether the minimum wage rate contributes t0 teenage unemployment. Draw a demand

and supply diagram for the unskilled labor market, and discuss the

effects of a minimum wage. Who is helped and who is hurt by the

minimum wage laW?

CHAPTER 5 5-1 Explain what's special about a national economy comPared to regional, state, or local economies

t. (The Nationat Economy)Why do economists pay more attention to national economies (for example, the U.S. or Canadian econo-

mies) than t0 state or provincial economies (such as California or

0ntario)?

5-2 Describe the phases of the business cycle

z. (Economic Fluctuations) Describe the various components of fluc- tuations in economic activity over time. Because economic activity

fluctuates, how is longterm growth possible?

5-3 Explain the shapes of the aggregate demand curue and the aggregate supply curue, and how they interact to determine real GDP and the price level for a nation

3. (Aggregate Demand and Supply) Review the information on demand and supply curves in Chapter 4. How do the aggregate

demand and aggregate supply curves presented in this chapter

differ from the market curves of Chapter 4?

0uantity

Price Demanded per (millions

Bushel ol bushels)

$1.80 320 2.00 300 2.20 270 2.40 230 2.60 200 2.80 180

0uantitY Supplied (millions

of bushels)

200

230

270

300

330

350

3,28 PROBLEMS APPENDIX

4. (Aggregate Demand and Supply) Determine whether each of the following would cause a shift of the aggregate demand curve, a

shift of the aggregate supply curve, neither, or both. Which curve

shifts, and in which direction? What happens t0 aggregate output

and the price level in each case?

a. The price level changes.

b. Coqsumer confidence declines.

c. The supply of resources increases.

d. The wage rate increases.

5-4 ldentify the ftve eras of the U.S. economy, and describe brieflY what went on during each

5. (Five Eras of u.S. Economy)ldentify the five eras of the U.S' economy beginning with the Great Depression and before.

t. (Suppty-Side Economics)0ne dirpply-side measure introduced by the Reagan administration was a cut in income tax rates. Use an

aggregate demand/aggregate supply diagram to show what effect

was intended. What might happen if such a tax cut also shifted the

aggregate demand curve?

CHAPTER 6 5-1 Describe the turo ways of computing GDP and explain why they are equivalent

t. (lncomeApprlach t0 GDP)How does the income approach to measuring GDP differ from the expenditure approach? Explain the

meaning of value added and its importance in the income ap-

proach. Consider the following data for the selling price at each

stage in the production of a S-pound bag of flour sold by your local

grocer. Calculate the final market value of the flour.

Stageof Sale Production Price Farmer $0.30 lViller 0.50 Wholesaler '1 .00 Grocer 1.50

z. (Expenditure Approach to GDP)Giuen the following annual informa- tion about a hypothetical country, answer questions a through d.

Personal consumption expenditures

Personal taxes

Exports

Depreciation

Go\/ernment purchases

Gross private domestic investment

lmports

Government transfer payments

a. What is the value of GDP?

b. What is the value of net domestic producfl

c. What is the value of net investment?

d. What is the value of net exports?

Billions

of Dollars

$200

50

30

10

50

40

40 ,n