Question: Use the concepts of economies and diseconomies

> 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

> Why do behavioral economists consider it helpful to base a theory of economic behavior on the actual mental processes that people use to make decisions? Why do neoclassical economists not care about whether a theory incorporates those actual mental proc

> Which of the following are included or excluded in this year’s GDP? Explain your answer in each case. a. Interest received on an AT&T corporate bond. b. Social Security payments received by a retired factory worker. c. Unpaid services of a family member

> True or False: In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation from political pressure and (2) speed and flexibility.

> True or False: A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending.

> If the Federal Reserve wants to increase the federal funds rate using open-market operations, it should _____________bonds. a. Buy. b. Sell.

> Which of the following Fed actions will increase bank lending? Select one or more answers from the choices shown. a. The Fed raises the discount rate from 5 percent to 6 percent. b. The Fed raises the reserve ratio from 10 percent to 11 percent. c. The

> A bank borrows $100,000 from the Fed, leaving a $100,000 Treasury bond on deposit with the Fed to serve as collateral for the loan. The discount rate that applies to the loan is 4 percent and the Fed is currently mandating a reserve ratio of 10 percent.

> A bank currently has $100,000 in checkable deposits and $15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ___________ in money-creating potential. If the reserve ratio is 14 percent, the bank has ___________ in money-creating p

> Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the effect of each of the following transactions on commercial bank reserves: a. Federal Reserve Banks purchase securities from banks. b. Commercial banks borrow from Federal Res

> A commercial bank sells a Treasury bond to the Federal Reserve for $100,000. The money supply: a. Increases by $100,000. b. Decreases by $100,000. c. Is unaffected by the transaction.

> When bond prices go up, interest rates go_______ . a. Up. b. Down. c. Nowhere.

> Why is it so hard for actively managed funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively managed fund to increase its average expected rate of return?

> Contrast the ideas of nominal GDP and real GDP. Why is one more reliable than the other for comparing changes in the standard of living over a series of years? What is the GDP price index and what is its role in differentiating nominal GDP and real GDP

> Consider another situation involving the SML. Suppose that the risk-free interest rate stays the same, but that investors’ dislike of risk grows more intense. Given this change, will average expected rates of return rise or fall? Next, compare what will

> Suppose that the Federal Reserve thinks that a stock market bubble is occurring and wants to reduce stock prices. What should it do to interest rates?

> What determines the vertical intercept of the Security Market Line (SML)? What determines its slope? And what will happen to an asset’s price if it initially plots onto a point above the SML?

> In this chapter we discussed short-term U.S. government bonds. But the U.S. government also issues longer-term bonds with horizons of up to 30 years. Why do 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued

> If we compare the betas of various investment opportunities, why do the assets that have higher betas also have higher average expected rates of return?

> Why is it reasonable to ignore diversifiable risk and care only about nondiversifiable risk? What about investors who put all their money into only a single risky stock? Can they properly ignore diversifiable risk?

> Corporations often distribute profits to their shareholders in the form of dividends, which are simply checks mailed out to shareholders. Suppose that you have the chance to buy a share in a fashion company called Rogue Designs for $35 and that the compa

> What are mutual funds? What different types of mutual funds are there? And why do you think they are so popular with investors?

> How do stocks and bonds differ in terms of the future payments that they are expected to make? Which type of investment (stocks or bonds) is considered to be more risky? Given what you know, which investment (stocks or bonds) do you think commonly goes b

> What is compound interest? How does it relate to the formula: X dollars today = (1 + i ) tX dollars in t years? What is present value? How does it relate to the formula: X/(1 + i)t dollars today = X dollars in t years?

> Define net exports. Explain how U.S. exports and imports each affects domestic production. How are net exports determined? Explain how net exports might be a negative amount.

> Suppose that the city of New York issues bonds to raise money to pay for a new tunnel linking New Jersey and Manhattan. An investor named Susan buys one of the bonds on the same day that the city of New York pays a contractor for completing the first sta

> Suppose that Joe enjoys and repeatedly does stupid things like getting heavily into debt and insulting police officers. Do these actions constitute systematic errors? If he gets what he wants each time, are his stupid actions even considered to be erro

> What information is embodied in a budget line? What shifts occur in the budget line when money income (a) increases and (b) decreases? What shifts occur in the budget line when the price of the product shown on the vertical axis (c) increases and (d

> Ted has always had difficulty saving money. So on June 1st, Ted enrolls in a Christmas savings program at his local bank and deposits $750. That money is totally locked away until December 1st so that Ted can be certain that he will still have it once

> In the algebraic version of prospect theory, the variable x represents gains and losses. A positive value for x is a gain, a negative value for x is a loss, and a zero value for x represents remaining at the status quo. The so-called value function, v(

> Angela owes $500 on a credit card and $2,000 on a student loan. The credit card has a 15 percent annual interest rate and the student loan has a 7 percent annual interest rate. Her sense of loss aversion makes her more anxious about the larger loan. A

> The coffee shop near the local college normally sells 10 ounces of roasted coffee beans for $10. But the shop sometimes puts the beans on sale. During some sales, it offer “33 percent more for free”. Other weeks, it takes “33 percent off” the normal p

> Anne is a bargain-minded shopper. Normally, her favorite toothpaste costs the same at both of her local supermarkets, but the stores are having competing sales this week. At one store, there is a bonus offer: buy 2, get 1 free. At the other store, to

> One type of systematic error arises because people tend to think of benefits in percentage terms rather than in absolute dollar amounts. As an example, Samir is willing to drive 20 minutes out of his way to save $4 on a grocery item that costs $10 at a

> Bill spends his money on flowers and cookies so as to maximize his total utility. Both flowers and cookies start off costing $2 each. At that price, Bill buys three flowers and two cookies. When the price of flowers is lowered to $1, Bill buys eight flow

> Use the concepts of gross investment and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. Explain: “Though net investment can be positive, negative, or zero, it is impossible

> Discuss the political incentives that helped motivate federal politicians to approve budget deficits in all but five years between 1960 and 2015.

> Many proposers in the ultimatum game offer half to the responder with whom they are paired. This behavior could be motivated by (select as many as might apply): a. Fear that an unequal split might be rejected by a fair-minded responder. b. A desire to

> Erik wants to save more, but whenever a paycheck arrives, he ends up spending everything. One way to help him overcome this tendency would be to: LO4 a. Teach him about time inconsistency. b. Tell him that self-control problems are common. c. Have him e

> Label each of the following behaviors with the correct bias or heuristic. a. Your uncle says that he knew all along that the stock market was going to crash in 2008. b. When Fred does well at work, he credits his intelligence. When anything goes wrong,

> Identify each statement as being associated with neoclassical economics or behavioral economics. a. People are eager and accurate calculators. b. People are often selfless and generous. c. People have no trouble resisting temptation. d. People place ins

> Which of the following are systematic errors? a. A colorblind person who repeatedly runs red lights. b. An accountant whose occasional math errors are sometimes on the high side and sometimes on the low side. c. The tendency many people have to see face

> Consider two bundles of coffee and chocolate and how Ted feels about them. The first bundle consists of two cups of coffee and two chocolate bars. The second bundle consists of one cup of coffee and three chocolate bars. If the first bundle gives Ted a t

> Does additive manufacturing rely on economies of scale to deliver low costs? What are two ways in which additive manufacturing lowers costs? Besides what's written in the book, might there be another reason to expect 3-D blueprints to be inexpensive? (H

> List several fixed and variable costs associated with owning and operating an automobile. Suppose you are considering whether to drive your car or fly 1,000 miles to Florida for spring break. Which costs—fixed, variable, or both—would you take into accou

> Why can the distinction between fixed costs and variable costs be made in the short run? Classify the following as fixed or variable costs: advertising expenditures, fuel, interest on company-issued bonds, shipping charges, payments for raw materials, re

> What is the difference between gross private domestic investment and net private domestic investment? If you were to determine net domestic product (NDP) through the expenditures approach, which of these two measures of investment spending would be appro

> Complete the table directly below by calculating marginal product and average product. Plot the total, marginal, and average products and explain in detail the relationship between each pair of curves. Explain why marginal product first rises, then dec

> Suppose that firms were expecting inflation to be 3 percent, but then it actually turned out to be 7 percent. Other things equal, firm profits will be: a. Smaller than expected. b. Larger than expected.

> Suppose that firms are expecting 6 percent inflation while workers are expecting 9 percent inflation. How much of a pay raise will workers demand if their goal is to maintain the purchasing power of their incomes? a. 3 percent. b. 6 percent. c. 9 percen

> Aggregate supply shocks can cause ________ rates of inflation that are accompanied by ________ rates of unemployment. a. Higher; higher. b. Higher; lower. c. Lower; higher. d. Lower; lower.

> Assume there is a particular short-run aggregate supply curve for an economy and the curve is relevant for -several years. Use the AD-AS analysis to show graphically why higher rates of inflation over this period would be associated with lower rates of u

> Between 1990 and 2009, the U.S. price level rose by about 64 percent while real output increased by about 62 percent. Use the aggregate demand–aggregate supply model to illustrate these outcomes graphically.

> Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are even

> Identify the two descriptions below as being the result of either cost-push inflation or demand-pull inflation. a. Real GDP is below the full-employment level and prices have risen recently. b. Real GDP is above the full-employment level and prices have

> Suppose that an economy begins in long-run equilibrium before the price level and real GDP both decline simultaneously. If those changes were caused by only one curve shifting, then those changes are best explained as the result of: a. The AD curve shif

> Suppose that AD and AS intersect at an output level that is higher than the full-employment output level. After the economy adjusts back to equilibrium in the long run, the price level will be __________ . a. Higher than it is now. b. Lower than it is no

> Why are changes in inventories included as part of investment spending? Suppose inventories declined by $1 billion during 2014. How would this affect the size of gross private domestic investment and gross domestic product in 2014? Explain.

> Suppose the full-employment level of real output (Q) for a hypothetical economy is $250 and the price level (P) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow: a. What will be the level of real

> The per-unit cost of an item is its average total cost (= total cost/quantity). Suppose that a new cell phone application costs $100,000 to develop and only $.50 per unit to deliver to each cell phone customer. What will be the per-unit cost of the appli

> Suppose that work hours in New Zombie are 200 in year 1 and productivity is $8 per hour worked. What is New Zombie’s real GDP? If work hours increase to 210 in year 2 and productivity rises to $10 per hour, what is New Zombie’s rate of economic growth?

> Refer to Figure 28.2 and assume that the values for points a, b, and c are $10 billion, $20 billion, and $18 billion respectively. If the economy moves from point a to point b over a 10-year period, what must have been its annual rate of economic growth?

> Assume that a “leader country” has real GDP per capita of $40,000, whereas a “follower country” has real GDP per capita of $20,000. Next suppose that the growth of real GDP per capita falls to zero percent in the leader country and rises to 7 percent in

> What annual growth rate is needed for a country to double its output in 7 years? In 35 years? In 70 years? In 140 years?

> Suppose an economy’s real GDP is $30,000 in year 1 and $31,200 in year 2. What is the growth rate of its real GDP? Assume that population is 100 in year 1 and 102 in year 2. What is the growth rate of real GDP per capita?

> Distinguish between accounting profit, economic profit, and normal profit. Does accounting profit or economic profit determine how entrepreneurs allocate resources between different business ventures? Explain.

> Compare and contrast the Bretton Woods system of exchange rates with that of the gold standard. What caused the collapse of the gold standard? What caused the demise of the Bretton Woods system?

> Distinguish between explicit and implicit costs, giving examples of each. What are some explicit and implicit costs of attending college?

> Provide three examples of each: consumer durable goods, consumer nondurable goods, and services.

> First, graphically illustrate a doubling of income without price changes in the indifference curve model. Next, on the same graph, show a situation in which the person whose indifference curves you are drawing buys considerably more of good B than good A

> There are economies of scale in ranching, especially with regard to fencing land. Suppose that barbed-wire fencing costs $10,000 per mile to set up. How much would it cost to fence a single property whose area is one square mile if that property also hap

> You are a newspaper publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $500,000 per month, and you have contractual labor obligations of $1 million per month that you can’t get out of. You also have a

> Imagine you have some workers and some hand-held computers that you can use to take inventory at a warehouse. There are diminishing returns to taking inventory. If one worker uses one computer, he can inventory 100 items per hour. Two workers can togethe

> Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that

> Explain graphically how indifference analysis can be used to derive a demand curve.

> Suppose a firm has only three possible plant-size options, represented by the ATC curves shown in the accompanying figure. What plant size will the firm choose in producing (a) 50, (b) 130, (c) 160, and (d) 250 units of output? Draw the firmâ&

> True or false. The U shape of the long-run ATC curve is the result of diminishing returns.

> Indicate how each of the following would shift the (1) marginal-cost curve, (2) average-variable-cost curve, (3) average-fixed-cost curve, and (4) average-total-cost curve of a manufacturing firm. In each case specify the direction of the shift. a.

> A firm has fixed costs of $60 and variable costs as indicated in the table at the bottom of this page. Complete the table and check your calculations by referring to problem 4 at the end of Chapter 10. a. Graph total fixed cost, total variable cost, an

> Explain why an economy’s output, in essence, is also its income.

> Which of the following are short-run and which are long-run adjustments? a. Wendy’s builds a new restaurant. b. Harley-Davidson Corporation hires 200 more production workers. c. A farmer increases the amount of fertilizer used on his corn crop. d. An Al

> Linda sells 100 bottles of homemade ketchup for $10 each. The cost of the ingredients and the bottles and the labels was $700. In addition, it took her 20 hours to make the ketchup and to do so she took time off from a job that paid her $20 per hour. Lin

> Assume that the data in the following table give an indifference curve for Mr. Chen. Graph this curve, putting A on the vertical axis and B on the horizontal axis. Assuming that the prices of A and B are $1.50 and $1, respectively, and that Mr. Chen has

> If a firm's current revenues are less than its current variable costs, when should it shut down? If it decides to shut down, should we expect that decision to be final? Explain using an example that is not in the book.

> “That segment of a competitive firm’s marginal-cost curve that lies above its average-variable-cost curve constitutes the short-run supply curve for the firm.” Explain using a graph and words.

> Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. If GDP and consumption both rise by $6 billion in the second round of the process, what is the MPC in this econom

> What will the multiplier be when the MPS is 0, .4, .6, and 1? What will it be when the MPC is 1, .90, .67, .50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is .80? If the MPC instea

> Refer to the table in Figure 30.5 in the book and suppose that the real interest rate is 6 percent. Next, assume that some factor changes such that that the expected rate of return declines by 2 percentage points at each prospective level of investment.

> Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are $10 billion of investment projects yielding expected returns of between 20 and 25 percent; another $10 billion yield

> Suppose a handbill publisher can buy a new duplicating machine for $500 and the duplicator has a 1-year life. The machine is expected to contribute $550 to the year’s net revenue. What is the expected rate of return? If the real interest rate at which fu

> Why do economists include only final goods and services in measuring GDP for a particular year? Why don’t they include the value of the stocks and bonds bought and sold? Why don’t they include the value of the used furniture bought and sold?

> Use your completed table for problem 1 to solve this problem. Suppose the wealth effect is such that $10 changes in wealth produce $1 changes in consumption at each level of income. If real estate prices tumble such that wealth declines by $80, what will

> Linear equations for the consumption and saving schedules take the general form C = a + bY and S= -a + (1-b)Y where C, S, and Y are consumption, saving, and national income, respectively. The constant a represents the vertical intercept, and b represents

> Suppose that the linear equation for consumption in a hypothetical economy is C = 40 + .8Y. Also suppose that income (Y) is $400. Determine (a) the marginal propensity to consume, (b) the marginal propensity to save, (c) the level of consumption, (d)

> Suppose that disposable income, consumption, and saving in some country are $200 billion, $150 billion, and $50 billion, respectively. Next, assume that disposable income increases by $20 billion, consumption rises by $18 billion and saving goes up by $2