Suppose that with a budget of $100, Deborah spends $60 on sushi and $40 on bagels when sushi costs $2 per piece and bagels cost $2 per bagel. But then, after the price of bagels falls to $1 per bagel, she spends $50 on sushi and $50 on bagels. How many pieces of sushi and how many bagels did Deborah consume before the price change? At the new prices, how much money would it have cost Deborah to buy those same quantities (the ones that she consumed before the price change)? Given that it used to take Deborah’s entire $100 to buy those quantities, how big is the income effect caused by the reduction in the price of bagels?
> “The problem with our democratic institutions is that they don’t correctly reflect the will of the people! If the people-rather than self-interested politicians or lobbyists-had control, we wouldn’t have to worry about government taking actions that don
> “Majority voting ensures that government will produce only those public goods for which benefits exceed costs.” Why?
> Suppose that annual output in year 1 in a 3-good economy is 3 quarts of ice cream, 1 bottle of shampoo, and 3 jars of peanut butter. In year 2, the output mix changes to 5 quarts of ice cream, 2 bottles of shampoo, and 2 jars of peanut butter. If the pri
> Explain how affirmative and negative majority votes can sometimes lead to inefficient allocations of resources to public goods. Is this problem likely to be greater under a benefits‐received or an ability‐to‐pay tax system? Use the information in Figures
> Draw a production possibilities curve with public goods on the vertical axis and private goods on the horizontal axis. Assuming the economy is initially operating on the curve, indicate how the production of public goods might be increased. How might the
> Draw a supply and demand graph and identify the areas of consumer surplus and producer surplus. Given the demand curve, what impact will an increase in supply have on the amount of consumer surplus shown in your diagram? Explain why.
> Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is -5.4. What can you conclude about how products A and B are related? Products C and D?
> In 2015, Paul Gauguin's painting When Will You Marry sold for $300 million. Portray this sale in a demand and supply diagram and comment on the elasticity of supply. Comedian George Carlin once mused, “If a painting can be forged well enough to fool some
> How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? a. Price falls and demand is inelastic. b. Price rises and demand is elastic. c. Price rises and supply is elastic. d.
> Calculate total-revenue data from the demand schedule in review question 1. Graph total revenue below your demand curve. Generalize about the relationship between price elasticity and total revenue.
> What are the major determinants of price elasticity of demand? Use those determinants and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic: (a) bottled water; (b) toothpaste; (c) Crest to
> Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $30 per basketball and $600 when the price is set at $20 per basketball. Without using the midpoint formula, identify whether demand is elastic, ine
> How do the concepts of pork-barrel politics and logrolling relate to the items listed in the Last Word?
> Suppose that the pen-making industry is perfectly competitive. Also suppose that each current firm and any potential firms that might enter the industry all have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of
> Critique: “Thank goodness we have so many government regulatory agencies. They keep Big Business in check.”
> ___________________ occur when politicians commit to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures. a. Budget deficits b. Debt Crises c. Loan guarantees d. Unfunded
> A few hundred U.S. sugar makers lobby the U.S. government each year to make sure that it keeps taxing imported sugar at a high rate. They do so because the policy drives up the domestic price of sugar and increases their profits. It is estimated that the
> Tammy Hall is the mayor of a large U.S. city. She has just established the Office of Window Safety. Because windows sometimes break and spray glass shards, every window in the city will now have to pass an annual safety inspection. Property owners must p
> To an economist, any government program is too big if an analysis of that program finds that MB _______ MC. a. Is greater than b. Is less than c. Is equal to d. Is less than twice as large as e. Is more than twice as large as
> Think back to the gold standard period. If the United States suffered a recession, to what degree could it engage in expansionary monetary policy?
> Suppose Zeeland pegs its currency, the zee, at 1 zee = 36 grains of gold while Aeeland pegs its currency, the aeellar, at 1 aellar = 10 grains of gold. a. What would the exchange rate be between the zee and the aellar? b. How many aellars could you get
> True or False: Computers and increased global competition have retarded economic growth in recent decades.
> Suppose that just by doubling the amount of output that it produces each year, a firm’s per-unit production costs fall by 30 percent. This is an example of: a. Economies of scale. b. Improved resource allocation. c. Technological advance. d. The demand
> Compare and contrast the market monetarist 5-percent target for nominal GDP growth with the older, simpler monetary rule advocated by Milton Friedman.
> Refer to Figure 26.1b and assume that price is fixed at $37,000 and that Buzzer Auto needs 5 workers for every 1 automobile produced. If demand is DM and Buzzer wants to perfectly match its output and sales, how many cars will Buzzer produce and how many
> Explain: “Politicians would make more rational economic decisions if they weren’t running for reelection every few years.”
> You have just been elected president of the United States, and the present chairperson of the Federal Reserve Board has resigned. You need to appoint a new person to this position, as well as a person to chair your Council of Economic Advisers. Using Tab
> Explain the difference between “active” discretionary fiscal policy advocated by mainstream economists and “passive” fiscal policy advocated by new classical economists. Explain: “The problem with a balanced-budget amendment is that it would, in a sense,
> Use the equation of exchange to explain the rationale for a monetary rule. Why will such a rule run into trouble if V unexpectedly falls because of, say, a drop in investment spending by businesses?
> State and explain the basic equation of monetarism. What is the major cause of macroeconomic instability, as viewed by monetarists?
> Craig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time Kris moved to his right to avoid Craig. They bumped into each other. What concept does this example illustrate?
> Briefly describe the difference between a so-called real business cycle and a more traditional “spending” business cycle.
> How might relationships between so-called insiders and outsiders contribute to downward wage inflexibility?
> What is an efficiency wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at least for a time, when aggregate demand declines?
> According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability? How might adverse aggregate supply factors cause instability, according to mainstream ec
> Real GDP equals _________ times _________. LO4 a. Average hours of work; quantity of capital. b. Average hours of work; allocative efficiency. c. Labor input; labor productivity. d. Natural resources; improvements in technology.
> Assume that a national restaurant firm called BBQ builds 10 new restaurants at a cost of $1 million per restaurant. It outfits each restaurant with an additional $200,000 of equipment and furnishings. To help partially defray the cost of this expansion,
> Suppose that the equation for the SLM is Y = 0.05 + 0.04X, where Y is the average expected rate of return, 0.05 is the vertical intercept, 0.04 is the slope, and X is the risk level as measured by beta. What is the risk-free interest rate for this SML? W
> Suppose initially that two assets, A and B, will each make a single guaranteed payment of $100 in 1 year. But asset A has a current price of $80 while asset B has a current price of $90. a. What are the rates of return of assets A and B at their current
> Consider an asset that costs $120 today. You are going to hold it for 1 year and then sell it. Suppose that there is a 25 percent chance that it will be worth $100 in a year, a 25 percent chance that it will be worth $115 in a year, and a 50 percent chan
> Suppose that a risk-free investment will make three future payments of $100 in one year, $100 in two years, and $100 in three years. If the Federal Reserve has set the risk-free interest rate at 8 percent, what is the proper current price of this investm
> Suppose that you desire to get a lump sum payment of $100,000 two years from now. Rounded to full dollars, how many current dollars will you have to invest today at a 10 percent interest to accomplish your goal?
> Suppose that you invest $100 today in a risk-free investment and let the 4 percent annual interest rate compound. Rounded to full dollars, what will be the value of your investment 4 years from now?
> Identify each of the following situations as something that either promotes growth or retards growth. a. Increasing corruption allows government officials to steal people’s homes. b. A nation introduces patent laws for the first time. c. A court order s
> True or False: Countries that currently have low real GDPs per capita are destined to always have lower living standards than countries that currently have high real GDPs per capita.
> In 1820 living standards in various places around the globe were _________ they are today. a. More widely varying than. b. Just as widely varying as. c. Less widely varying than.
> If real GDP grows at 7 percent per year, then real GDP will double in approximately _________ years. a. 70. b. 14. c. 10. d. 7.
> A mathematical approximation called the rule of 70 tells us that the number of years that it will take something that is growing to double in size is approximately equal to the number 70 divided by its percentage rate of growth. Thus, if Mexico’s real GD
> True or false. The law of diminishing marginal utility predicts the consumption behavior of addicts quite well.
> Let MUA = z = 10 - x and MUB = z = 21 - 2y, where z is marginal utility per dollar measured in utils, x is the amount spent on product A, and y is the amount spent on product B. Assume that the consumer has $10 to spend on A and B—that is, x + y = 10. Ho
> You are choosing between two goods, X and Y, and your marginal utility from each is as shown in the table below. If your income is $9 and the prices of X and Y are $2 and $1, respectively, what quantities of each will you purchase to maximize utility? Wh
> Columns 1 through 4 in the table below show the marginal utility, measured in utils, that Ricardo would get by purchasing various amounts of products A, B, C, and D. Column 5 shows the marginal utility Ricardo gets from saving. Assume that the prices of
> Suppose that Omar’s marginal utility for cups of coffee is constant at 1.5 utils per cup, no matter how many cups he drinks. On the other hand, his marginal utility per doughnut is 10 for the first doughnut he eats, 9 for the second he eats, 8 for the th
> John likes Coca-Cola. After consuming one Coke, John has a total utility of 10 utils. After two Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50 utils. Does John show diminishing marginal utility for Coke or does
> Mylie’s total utility from singing the same song over and over is 50 utils after one repetition, 90 utils after two repetitions, 70 utils after three repetitions, 20 utils after four repetitions, -50 utils after five repetitions, and -200 utils after six
> In what way is criminal behavior similar to consumer behavior? Why do most people obtain goods via legal behavior as opposed to illegal behavior? What are society's main options for reducing illegal behavior?
> Rank each of the following three gift possibilities in terms of how much utility they are likely to bring and explain your reasoning.  A store-specific gift card worth $15, a $15 item from that specific store, and $15 of cash that can be spent anywh
> Suppose that Glitter Gulch, a gold mining firm, increased its sales revenues on newly mined gold from $100 million to $200 million between one year and the next. Assuming that the price of gold increased by 100 percent over the same period, by what numer
> A “mathematically fair bet” is one in which the amount won will on average equal the amount bet, for example when a gambler bets, say, $100 for a 10 percent chance to win $1,000 ($100 = .10 x $1,000). Assuming diminishing marginal utility of dollars, exp
> Answer the following questions, which relate to the aggregate expenditures model: LO8 a. If C is $100, Ig is $50, Xn is –$10, and G is $30, what is the economy’s equilibrium GDP? b. If real GDP in an economy is currently $200, C is $100, Ig is $50, Xn is
> Refer to the accompanying table in answering the questions that follow: a. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By
> Assume that the consumption schedule for a private open economy is such that consumption C = 50 + 0.8Y. Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 30 and Xn = 10. Recall also
> Refer to columns 1 and 6 in the table for problem 5. Incorporate government into the table by assuming that it plans to tax and spend $20 billion at each possible level of GDP. Also assume that the tax is a personal tax and that government spending does
> Assume that, without taxes, the consumption schedule of an economy is as follows: a. Graph this consumption schedule and determine the MPC. b. Assume now that a lump-sum tax is imposed such that the government collects $10 billion in taxes at all level
> The data in columns 1 and 2 in the accompanying table are for a private closed economy: a. Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy. b. Now open up this economy to international trade by including the export an
> Suppose that a certain country has an MPC of .9 and a real GDP of $400 billion. If its investment spending decreases by $4 billion, what will be its new level of real GDP?
> By how much will GDP change if firms increase their investment by $8 billion and the MPC is .80? If the MPC is .67?
> Using the consumption and saving data in problem 1 and assuming investment is $16 billion, what are saving and planned investment at the $380 billion level of domestic output? What are saving and actual investment at that level? What are saving and plann
> Suppose that the annual rates of growth of real GDP of Econoland over a five-year period were sequentially as follows: 3 percent, 1 percent, -2 percent, 4 percent, and 5 percent. What was the average of these growth rates in Econoland over these 5 years?
> Assuming the level of investment is $16 billion and independent of the level of total output, complete the accompanying table and determine the equilibrium levels of output and employment in this private closed economy. What are the sizes of the MPC and
> Using the utility-maximization rule as your point of reference, explain the income and substitution effects of an increase in the price of product B, with no change in the price of product A.
> Many apartment-complex owners are installing water meters for each apartment and billing the occupants according to the amount of water they use. This is in contrast to the former procedure of having a central meter for the entire complex and dividing up
> In the last decade or so there has been a dramatic expansion of small retail convenience stores (such as 7 Eleven, Kwik Shop, and Circle K), although their prices are generally much higher than prices in large supermarkets. What explains the success of t
> Economists agree that inflation reduces real output. a. Cost-push. b. Demand-pull.
> True or False: Lenders are helped by unanticipated inflation.
> Kaitlin has $10,000 of savings that she may deposit with her local bank. Kaitlin wants to earn a real rate of return of at least 4 percent and she is expecting inflation to be exactly 3 percent. What is the lowest nominal interest rate that Kaitlin would
> Jimmer’s nominal income will go up by 10 percent next year. Inflation is expected to be -2 percent next year. By approximately how much will Jimmer’s real income change next year? a. -2 percent. b. 8 percent. c. 10 percent. d. 12 percent.
> Cost-push inflation occurs when there is __________________________. LO3 a. Excess inventory. b. A trade deficit. c. Rising per-unit production costs. d. Excess demand for goods and services.
> A country’s current unemployment rate is 11 percent. Economists estimate that its natural rate of unemployment is 6 percent. About how large is this economy’s negative GDP gap? a. 1 percent. b. 3 percent. c. 6 percent. d. 10 percent.
> What government agency compiles the U.S. NIPA tables? In what U.S. department is it located? Of the several specific sources of information, name one source for each of the four components of GDP: consumption, investment, government purchases, and net ex
> The unemployment rate that is consistent with full employment is known as _________________________. a. The natural rate of unemployment. b. The unnatural rate of unemployment. c. The status quo rate of unemployment. d. Cyclical unemployment. e. Okun’s
> Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. a. Tim just graduated and is looking for a job. b. A recession causes a local factory to lay off 30 workers. c. Thousands of bus
> Suppose that an economy has 9 million people working full time. It also has 1 million people who are actively seeking work but currently unemployed as well as 2 million discouraged workers who have given up looking for work and are currently unemployed.
> Most economists agree that the immediate cause of the large majority of cyclical changes in the levels of real output and employment is unexpected changes in ___________________. a. The level of total spending. b. The level of the stock market. c. The
> Place the phases of the business cycle in order. a. Recession b. Trough c. Peak d. Expansion
> Explain: a. Before economic growth, there were too few goods; after growth, there is too little time. b. It is irrational for an individual to take the time to be completely rational in economic decision making. c. Telling your spouse where you would li
> How can time be incorporated into the theory of consumer behavior? Explain the following comment: “Want to make millions of dollars? Devise a product that saves Americans lots of time.”
> Mrs. Simpson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70
> Complete the following table and answer the questions below: a. At which rate is total utility increasing: a constant rate, a decreasing rate, or an increasing rate? How do you know? b. “A rational consumer will purchase only 1 unit of
> What information is contained in an indifference curve? Why are such curves (a) downsloping and (b) convex to the origin? Why does total utility increase as the consumer moves to indifference curves farther from the origin? Why can’t indifference curv
> Why does gross output do a better job than GDP of measuring overall economic activity? How could you construct a new statistic that focused only on non-final economic activity? Given what you know about the behavior of GO and GDP during the Great Recessi
> What do you think of the ethics of using unconscious nudges to alter people’s behavior? Before you answer, consider the following argument made by economists Richard Thaler and Cass Sunstein, who favor the use of nudges. They argue that in most situation
> Evaluate the following statement. “We shouldn’t generalize from what people do in the ultimatum game because $10 is a trivial amount of money. When larger amounts of money are on the line, people will act differently.”
> Do people playing the dictator game show only self-interested behavior? How much divergence is there in the splits given by dictators to the other player?
> What does behavioral economics have to say about each of the following statements? a. “Nobody is truly charitable-they just give money to show off.” b. “America has a ruthless capitalist system. Considerations of fairness are totally ignored.” c. “Self
> In the early 1990’s, New Jersey and Pennsylvania both reformed their automobile insurance systems so that citizens could opt for either a less-expensive policy that did not allow people to sue if they got into accidents or a more-expensive policy that di
> You just accepted a campus job helping to raise money for your school’s athletic program. You are told to draft a fund-raising letter. The bottom of the letter asks recipients to write down a donation amount. If you want to raise as much money as possibl
> Suppose that Ike is loss averse. In the morning, Ike’s stockbroker calls to tell him that he has gained $1,000 on his stock portfolio. In the evening, his accountant calls to tell him that he owes an extra $1,000 in taxes. At the end of the day, does Ike
> “There’s no such thing as bad publicity.” Evaluate this statement in terms of the recognition heuristic.
> Economist Gerd Gigerenzer characterizes heuristics as “fast and frugal” ways of reaching decisions. Are there any costs to heuristics being “fast and frugal”? Explain and give an example of how a fast and frugal method for doing something in everyday l
