Economics Problem Set - McGraw-Hill Education PDF

CHAPTER ONE ECONOMICS AND ECONOMIC REASONING PROBLEM SET 1. Briefly point out the faulty reasoning in each of the following situations: (LO2) a. You win a free, nontransferable ticket to a Taylor Swift concert. Since the ticket is free and it will therefore cost you nothing to go, y...

CHAPTER ONE ECONOMICS AND ECONOMIC REASONING PROBLEM SET 1. Briefly point out the faulty reasoning in each of the following situations: (LO2) a. You win a free, nontransferable ticket to a Taylor Swift concert. Since the ticket is free and it will therefore cost you nothing to go, you decide to go to the concert. b. You paid nonrefundable tuition of $3,000 to take a 15-week course. Therefore, the opportunity cost of attending class each week is $3,000 divided by 15, or $200. c. You like to avoid costs; every decision involves opportunity cost. So you don’t make decisions. d. You have purchased 5 premium apples for $1.99 a pound, but when you get home, you discover they are mushy. Since you paid top dollar for these apples, you decide you have to eat them. 2. Classify the following Wall Street Journal articles as involving macroeconomic or microeconomic issues based on their titles: (LO1) a. “Jerome Powell Affirms Fed’s Patient Approach to Future Interest Rate Charges” b. “How Drugs for Rare Diseases Became Lifeline for Companies” c. “Monetary Tightening Damps Brazil Investment” d. “Debut of Chicken Little Gives Disney Something to Crow Over” 1 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3. Identify the following statements as examples of positive economics, normative economics, or the art of economics: (LO5) a. The Federal government needs to raise the minimum wage to $8 per hour so that families will have sufficient income to meet their basic needs. b. A country’s overall income is more important than how that income is distributed. c. One in four workers today has no access to employment-based family health coverage. d. To reduce income inequality in the U.S., we could increase the earned-income tax credit. e. It is the federal government’s responsibility to assure health coverage for all families. 4. Briefly explain why the following statements are either TRUE or FALSE: (LO3) a. Even though school dormitory rooms are rationed by lottery, these rooms are still affected by economic forces. b. Because the U.S. postal service is a monopoly and Congress sets postal prices through legislation, market forces do not determine stamp prices. c. New York City government auctions taxi medallions that give the right to transport passengers by taxi. Because the government controls the number of medallions, market forces do not determine their price. 2 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Answers to the Problem Set 1. a. Going to the concert does have a cost to you. The cost is the benefit you would have received from another activity, or opportunity cost. b. Since the tuition is nonrefundable, it is a sunk cost and therefore no longer represents opportunity costs. The true opportunities costs of continuing to take the course are the benefit of doing something else during class time. c. Deciding not to make decisions is still a decision. The opportunity cost of not considering choices is the benefit you would have gained from making those choices. d. How much you paid for the apples is a sunk cost, and therefore is not relevant. 2. a. Macroeconomics b. Microeconomics c. Macroeconomics d. Microeconomics 3. a. Normative b. Normative c. Positive d. Art of economics e. Normative 4. a. True. Economic forces always operate. b. True. Political forces, not market forces determine stamp prices. c. False. Even though the government regulates this market, because the medallions are sold at an auction, market forces determine their prices. 3 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  CHAPTER TWO THE PRODUCTION POSSIBILITY MODEL, TRADE, AND GLOBALIZATION PROBLEM SET 1. Refer to Figure 2-2 in the textbook to answer the following: (LO1) a. What is the opportunity cost of increasing gun production from 7 to 9 guns? b. What is the opportunity cost of increasing gun production from 9 to 11 guns? c. What is happening to the opportunity cost of producing guns as more are produced? 2. Explain how a production possibility curve for agriculture goods and manufacturing goods would shift after each of the events described below: (LO1) a. A drought in the Midwest reduces agricultural yield per acre. b. Advances in computer technology lower the cost of producing manufactured goods but do not affect the cost of producing agricultural goods. c. Civil war disrupts the production of all goods equally in the United States. 3. On the graph, below, label one example of each of the following: (LO1, LO2) 10 a. Efficient production. Label it point A. 9 8 7 b. Inefficient production. Label it point B. Butter 6 5 4 3 c. Unattainable production. Label it point C. 2 1 0 0 1 2 3 4 5 6 7 8 9 10 d. Why is point B inefficient? Guns 4. A clothing accessory company produces scarves and earrings. Below are the production possibility combinations it can produce with the resources that it has. (LO1, LO2) 1 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  Scarves Earrings a. Draw the production possibility curve in the space below. 10 0 9 50 8 90 7 120 6 145 5 165 4 185 3 200 2 215 1 225 0 230 b. Suppose technological advances increase production of both earrings and scarves by 10% without increasing costs. Demonstrate the effect of this innovation on the production possibility curve you drew above. 5. Briefly explain why the following statements are either TRUE or FALSE: (LO3, LO4) a. One way for the United States to regain a comparative advantage in the production of goods is for the U.S. exchange rate to decline. b. Trade restrictions facilitate the impact of the law of one price on wages and prices internationally. c. Wages in China are lower than in the United States. Therefore, China has a comparative advantage in the production of all goods. 2 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Answers to the Problem Set The following are the correct answers to the problem set along with the learning objective(s) associated with each question. 1. a. Decreasing butter production by 3 from 12 to 9 pounds. b. Decreasing butter production by 4 from 9 to 5 pounds. c. Opportunity costs of producing guns increase as more guns are produced. This is called the principle of increasing marginal opportunity cost. 2. a. It would shift in along the axis labeled “agricultural goods.” b. It would shift out along the axis labeled “manufacturing goods.” c. It would shift in along both axes. 3. a. See graph. b. See graph. c. See graph. d. Point B is inefficient because it is inside the production possibility curve. One could increase the number of guns while still produce the same amount of butter, or vice versa. 10 9 8 A C 7 Butter 6 5 B 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 Guns 4. Parts a & b together: 3 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  260 240 220 200 180 160 Earrings 140 120 100 80 60 40 20 0 0 1 2 3 4 5 6 7 8 9 10 11 Scarves 5. a. True. If the U.S. exchange rate falls, the dollar value of foreign wages will rise. That is, the relative wages of U.S. workers will decline, which will help the U.S. regain its comparative advantage. b. False. Because trade restrictions restrict the flow of goods and services, they keep the law of one price from equalizing wages and prices internationally. c. False. A country that has a comparative advantage in producing one set of goods means that the other country has to have a comparative advantage in the other set of goods. 4 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  CHAPTER THREE ECONOMIC INSTITUTIONS PROBLEM SET 1. The diagram below is a representation of a market economy. (LO2) a. What is the meaning of flow A? b. What is the meaning of flow B? c. Which flow captures the flow of individual income taxes? d. Which flow captures the flow of labor to produce goods? 2. Indicate whether each of the following statements best describes a corporation, a sole proprietorship, or a partnership: (LO2) a. Liability is limited to the amount invested. b. Unlimited liability for oneself and one’s partner’s actions. c. Ability to share work and risks of ownership without issuing shares. d. Direct control by the owner. e. Most difficult to organize. f. Greater ability to secure funds from outside investors. g. Accounts for largest sales receipts in the United States. h. The most common form of business. 1 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3. Indicate whether the following descriptions best characterize capitalism or socialism. (LO1) a. It is an economic system based on individual’s goodwill toward others. b. Ownership of the means of production resides with a small group of individuals. c. Society decides what, how, and for whom to produce. d. Society relies on the self-interested individuals to decide what, how, and for whom to produce. 6. For each of the following examples of government policy, determine to which specific role of government it relates. (LO3) a. Local governments produce fire and police protection, rather than relying on markets. b. The government taxes the production and sale of goods that create pollution. c. The government makes laws that protect consumers and then uses its judicial branch to enforce those laws. d. A state government requires that physicians be licensed to practice medicine, but does not require licensure for newspaper deliverers. e. The government redistributes income from the wealthy to the poor through Social Security. f. The government passes a ‘stimulus bill’ to try to end a recession. Answers to the Problem Set 1. a. Goods sold by firms. b. Expenditures by households. c. C d. H 2. a. Corporation b. Partnership c. Partnership d. Sole proprietorship 2 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  e. Corporation f. Corporation g. Corporation h. Sole proprietorship 3. a. Socialism b. Capitalism c. Socialism d. Capitalism 4. a. Intergovernmental (other governments) b. Education 5. a. Individual income taxes b. Income security 6. a. Providing public goods b. Correcting for externalities c. Providing a stable set of institutions and rules d. Promoting effective and workable competition e. Adjusting for undesirable market results f. Ensuring economic stability and growth 3 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  CHAPTER FOUR SUPPLY AND DEMAND PROBLEM SET 1. Draw a demand curve from the following demand table on the axes below. Label it D1. Then suppose the demander gets an increase in income and decides to buy 2 more bars at every price level. Draw this change on your demand curve. Label it D2. (LO1) Price per Candy bars candy bar purchased each week $0.50 10 0.75 8 1.00 6 1.25 4 1.50 2 2. Indicate whether each of the following statements describes an increase in demand, decrease in demand, change in quantity demanded, increase in supply, decrease in supply, or change in quantity supplied in the given market. (LO1, LO2) a. Store-brand soup prices are cut, reducing sales of Campbell’s soup. Market: Campbell’s soup. b. Coffee bean prices hit an 18-month low following a bountiful harvest. Market: coffee beans. c. A summer heat wave leads to higher prices for bottled water. Market: bottled water. d. Holiday clothing discounts boost clothing sales. Market: clothing. e. Apple introduces a new and more powerful iPad model. Market: older iPad models. f. The cost of pesticides increases, leading to a rise in the price of soy beans. Market: soy beans. 1 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3. Given the following data for individuals, draw the market demand curve and market supply curve for pizzas. Assume that these are the only individuals in the entire market. Price is per pizza. (LO3) Price $8.00 $8.50 $9.00 $9.50 $10.00 $10.50 Quantity demanded in units per week Mark 3 3 1 0 0 0 Lynn 8 7 6 3 2 1 Jason 6 5 4 3 0 0 Erin 10 9 7 6 4 2 Quantity supplied in units per week Jeff 0 1 2 3 4 6 Beth 2 3 3 4 6 7 Chris 0 1 2 3 5 6 Abby 1 1 2 2 3 5 a. What would be the equilibrium price and quantity in this market? b. Which would there be—excess demand or excess supply—at a price of $8.00? How much? What about at a price of $10.00? c. If the price of a pizza was initially set at $9.00 but the price was allowed to adjust, would the price rise or fall? Explain your answer. 4. State the effect of the following events on equilibrium price and quantity of the market given. (LO3) a. Beetle infestation decimates tobacco crop. Market: cigars. b. The Organization for Petroleum Export Countries raises oil export quotas. Market: gasoline. 2 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  c. Digital image albums become the rage among households while improved technology reduces the cost of producing digital cameras. Market: digital cameras. d. Hurricanes in the Gulf coast cause gasoline supply disruptions while the summer travel season ends. Market: gasoline. 5. What is the fallacy of composition and how is it related to supply and demand analysis? (LO4) Answers to the Problem Set 1. The completed diagram should look like the one below. 2. a. Decrease in demand b. Increase in supply c. Increase in demand d. Change in quantity demanded e. Decrease in demand f. Decrease in supply 3. The completed diagram should look like the one below. 3 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  a. Equilibrium price is $9.50 and equilibrium quantity is 12 pizzas. b. At a price of $8.00, there would be excess demand of 24 pizzas; at a price of $10.00, there would be excess supply of 12 pizzas. c. If the price were $9.00, there would be pressure on the price to rise because of the excess demand. 4. a. Equilibrium price rises, and equilibrium quantity declines. b. Equilibrium price declines, and equilibrium quantity rises. c. Equilibrium quantity rises. The effect on equilibrium price is unknown. d. Equilibrium quantity declines. The effect on equilibrium price is unknown. 5. The fallacy of composition is the false assumption that what is true for a part will also be true for the whole. Supply and demand analysis assumes that other things remain constant. The fallacy of composition reminds us that the larger the market under consideration, the more likely it is that other things will change when this market changes, so that actual observed changes in the market will differ from what the simple supply and demand analysis would suggest. 4 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  CHAPTER FIVE USING SUPPLY AND DEMAND PROBLEM SET 1. Match the graph that best illustrates the event described. (LO1) S1 Supply Price Price S1 Price S0 S0 P1 P1 P1 P0 P0 Demand D1 P0 D1 D0 D0 Q1 Q0 Q0 Q1 Q0 Q1 (1) Quantity (2) Quantity (3) Quantity a. The price for a gallon of milk is projected to hit $6 in the United States because fewer dairy cows are available from Canada due to illness and there is greater foreign demand for dairy products. Market: milk. b. Hurricanes and heavy rains lead to a huge increase in tomato prices. Market: tomatoes. c. Low interest rates and a booming economy lead to a boom in housing construction. As a result, plywood prices rise 24%. Market: plywood. 2. For each of the statements below, determine which, if any, government interventions it properly describes. Your choices are: a price ceiling, a price floor, an excise tax, or a quantity restriction. More than one may apply. (LO2, LO3, LO4) a. The price that buyers pay will rise. b. The price that buyers pay will fall. c. The number of units bought and sold will rise. d. The number of units bought and sold will fall. e. The market will clear—that is, quantity demanded will be equal to quantity supplied. 1 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3. The graph below shows supply and demand curves for annual medical office visits. Using this graph, answer the questions below. (LO5) a. If the market were free from government regulation, what would be the equilibrium price and quantity? b. Calculate total expenditures on office visits with this equilibrium price and quantity. c. If the government subsidized office visits and required that all consumers were to pay $30 per visit no matter what the actual cost, how many visits would consumers demand? d. What payment per visit would doctors require in order to supply that quantity of visits? e. Calculate total expenditures on office visits under the condition of this $30 co-payment. f. How do total expenditures with a co-payment of $30 compare to total expenditures without government involvement? Provide a numerical answer. 2 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Answers to the Problem Set 1. a. Graph 3 b. Graph 1 c. Graph 2 2. a. Price floor, excise tax, quantity restriction b. Price ceiling c. None of these d. Price floor, price ceiling, excise tax, quantity restrictions e. Excise tax 3. a. Equilibrium price would be $90; equilibrium quantity would be 20 visits per year. b. Total expenditures would be $90 × 20 = $1,800. c. At a price of $30, consumers would demand 28 visits per year. d. In order to supply 28 visits per year, doctors would require $120 per visit. e. Total expenditures would be $120 × 28 = $3,360. f. With the co-payment, total expenditures are $3,360 – $1,800 = $1,560 higher. 3 © 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.