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essentials of economics

Questions and Answers of Essentials of Economics

2. The world price of wine is below the price that would prevail in Canada in the absence of trade.a. Assuming that Canadian imports of wine are a small part of total world wine production, draw a
1. Mexico represents a small part of the world orange market.a. Draw a diagram depicting the equilibrium in the Mexican orange market without international trade. Identify the equilibrium price,
6. What is the difference between the unilateral and multilateral approaches to achieving free trade? Give an example of each
5. List five arguments often given to support trade restrictions. How do economists respond to these arguments?
4. Describe what a tariff is and its economic effects.
12. Suppose that a market is described by the following supply and demand equations:QS = 2P QD = 300 – Pa. Solve for the equilibrium price and the equilibrium quantity.b. Suppose that a tax of T is
11. Hotel rooms in Smalltown go for $100, and 1,000 rooms are rented on a typical day.a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room.After the tax is imposed,
10. This chapter analyzed the welfare effects of a tax on a good. Consider now the opposite policy.Suppose that the government subsidizes a good:For each unit of the good sold, the government pays $2
9. Suppose the government currently raises $100 million through a 1-cent tax on widgets, and another $100 million through a 10-cent tax on gadgets. If the government doubled the tax rate on widgets
7. Daniel Patrick Moynihan, the late senator from New York, once introduced a bill that would levy a 10,000 percent tax on certain hollowtipped bullets.a. Do you expect that this tax would raise much
4. The 19th-century economist Henry George argued that the government should levy a sizable tax on land, the supply of which he took to be completely inelastic.a. George believed that economic growth
3. Consider the market for rubber bands.a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers?
2. Evaluate the following two statements. Do you agree? Why or why not?a. “A tax that has no deadweight loss cannot raise any revenue for the government.”
11. The supply and demand for broccoli are described by the following equations:Supply: QS = 4P – 80 Demand: QD = 100 – 2P.Q is in bushels, and P is in dollars per bushel.a. Graph the supply
10. Consider how health insurance affects the quantity of healthcare services performed.Suppose that the typical medical procedure has a cost of $100, yet a person with health insurance pays only $20
9. Suppose a technological advance reduces the cost of making computers.a. Draw a supply-and-demand diagram to show what happens to price, quantity, consumer surplus, and producer surplus in the
8. There are four consumers willing to pay the following amounts for haircuts:
7. The cost of producing flat-screen TVs has fallen over the past several decades. Let’s consider some implications of this fact.a. Draw a supply-and-demand diagram to show the effect of falling
6. Consider a market in which Bert from Problem 4 is the buyer and Ernie from Problem 5 is the seller.a. Use Ernie’s supply schedule and Bert’s demand schedule to find the quantity supplied and
5. Ernie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to
4. It is a hot day, and Bert is thirsty. Here is the value he places on a bottle of water: P=-5
3. Suppose the demand for French bread rises.Explain what happens to producer surplus in the market for French bread. Explain what happens to producer surplus in the market for flour.Illustrate your
2. An early freeze in California sours the lemon crop. Explain what happens to consumer surplus in the market for lemons. Explain what happens to consumer surplus in the market for lemonade.
1. Melissa buys an iPod for $120 and gets consumer surplus of $80.a. What is her willingness to pay?b. If she had bought the iPod on sale for $90, what would her consumer surplus have been?c. If the
6. Name two types of market failure. Explain why each may cause market outcomes to be inefficient. P=-5
5. What does the invisible hand do? P=-5
4. What is efficiency? Is it the only goal of eco- nomic policymakers? P=-5
3. In a supply-and-demand diagram, show pro- ducer and consumer surplus in the market equilibrium. P=-5
2. Explain how sellers' costs, producer surplus, and the supply curve are related. P=-5
1. Explain how buyers' willingness to pay, con- sumer surplus, and the demand curve are related. P=-5
14. In the spring of 2008, Senators John McCain and Hillary Clinton (who were then running for President) proposed a temporary elimination of the federal gasoline tax, effective only during the
13. A subsidy is the opposite of a tax. With a $0.50 tax on the buyers of ice-cream cones, the government collects $0.50 for each cone purchased;with a $0.50 subsidy for the buyers of ice-cream
12. At Fenway Park, home of the Boston Red Sox, seating is limited to 34,000. Hence, the number of tickets issued is fixed at that figure. (Assume that all seats are equally desirable and are sold at
11. The U.S. government administers two programs that affect the market for cigarettes. Media campaigns and labeling requirements are aimed at making the public aware of the dangers of cigarette
10. In 2007, Rod Blagojevich, the governor of Illinois, proposed a 3 percent payroll tax to finance some state health programs. The proposed legislation provided that the payroll tax “shall not be
8. A case study in this chapter discusses the federal minimum-wage law. P=-5
5. A senator wants to raise tax revenue and make workers better off. A staff member proposes raising the payroll tax paid by firms and using part of the extra revenue to reduce the payroll tax paid
3. A recent study found that the demand and supply schedules for Frisbees are as follows:Price per Quantity Quantity Frisbee Demanded Supplied$11 1 million Frisbees 15 million Frisbees 10 2 12 9 4 9
2. The government has decided that the freemarket price of cheese is too low.a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the
1. Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket.As a result of this policy, do more or fewer people attend classical music concerts?
5. Suppose the government removes a tax on buyers of a good and levies a tax of the same size on sellers of the good. How does this change in tax policy affect the price that buyers pay sellers for
4. Explain why economists usually oppose con- trols on prices. P=-5
3. What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium? P=-5
2. Which causes a shortage of a good-a price ceiling or a price floor? Justify your answer with a graph. P=-5
1. Give an example of a price ceiling and an example of a price floor. P=-5
17. Suppose the demand curve for a product is Q =60/P. Compute the quantity demanded at prices of $1, $2, $3, $4, $5, and $6. Graph the demand curve. Use the midpoint method to calculate the price
16. Explain why the following might be true: A drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in Kansas reduces the total revenue
15. Several years ago, flooding along the Missouri and the Mississippi rivers destroyed thousands of acres of wheat.a. Farmers whose crops were destroyed by the floods were much worse off, but
14. Beachfront resorts have an inelastic supply, and automobiles have an elastic supply. Suppose that a rise in population doubles the demand for both products (that is, the quantity demanded at each
13. Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that technological advance doubles the supply of both products (that is, the quantity supplied at each
12. You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. Should you increase or decrease the price of admission? Explain.
11. Consider public policy aimed at smoking.a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government wants to
10. Two drivers—Tom and Jerry—each drive up to a gas station. Before looking at the price, each places an order. Tom says, “I’d like 10 gallons of gas.” Jerry says, “I’d like $10 worth
9. The New York Times reported (Feb. 17, 1996, p. 25) that subway ridership declined after a fare increase: “There were nearly four million fewer riders in December 1995, the first full month after
8. Maria has decided always to spend one-third of her income on clothing.a. What is her income elasticity of clothing demand?b. What is her price elasticity of clothing demand?c. If Maria’s tastes
7. You have the following information about good X and good Y:Income elasticity of demand for good X: –3 Cross-price elasticity of demand for good X with respect to the price of good Y: 2 Would an
6. Suppose that your demand schedule for compact discs is as follows:Quantity Demanded Quantity Demanded Price (income = $10,000) (income = $12,000)$ 8 40 CDs 50 CDs 10 32 45 12 24 30 14 16 20 16 8
5. The equilibrium price of coffee mugs rose sharply last month, but the equilibrium quantity was the same as ever. Three people tried to explain the situation. Which explanations could be right?
4. A price change causes the quantity demanded of a good to decrease by 30 percent, while the total revenue of that good increases by 15 percent. Is the demand curve elastic or
3. Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run. P=-5a. If the price of heating oil rises from $1.80 to$2.20 per gallon, what happens to the
2. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston: P=-5
1. For each of the following pairs of goods, which good would you expect to have more elastic demand and why?a. required textbooks or mystery novelsb. Beethoven recordings or classical music
11. How did elasticity help explain why drug inter- diction could reduce the supply of drugs, yet possibly increase drug-related crime? P=-5
10. Is the price elasticity of supply usually larger in the short run or in the long run? Why? P=-5
9. What is the price elasticity of supply of Picasso paintings? P=-5
8. How is the price elasticity of supply calculated? Explain what it measures. P=-5
7. What do we call a good whose income elasticity is less than 0? P=-5
6. If demand is elastic, how will an increase in price change total revenue? Explain. P=-5
5. On a supply-and-demand diagram, show equilibrium price, equilibrium quantity, and the total revenue received by producers. P=-5
4. If the elasticity is greater than 1, is demand elastic or inelastic? If the elasticity equals 0, is demand perfectly elastic or perfectly inelastic? P=-5
3. What is the main advantage of using the mid- point method for calculating elasticity? P=-5
2. List and explain the four determinants of the price elasticity of demand discussed in the chapter. P=-5
1. Define the price elasticity of demand and the income elasticity of demand. P=-5
7. Suppose that in a year an American worker can produce 100 shirts or 20 computers, while a Chinese worker can produce 100 shirts or 10 computers.a. Graph the production possibilities curve for the
4. Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year.a. What is the opportunity cost of producing a car in
3. Pat and Kris are roommates. They spend most of their time studying (of course), but they leave ?
4. An economy consists of three workers: Larry, Moe, and Curly. Each works ten hours a day and can produce two services: mowing lawns and washing cars. In an hour, Larry can either mow one lawn or
2. Imagine a society that produces military goods and consumer goods, which we’ll call “guns”and “butter.”a. Draw a production possibilities frontier for guns and butter. Using the concept
1. Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities.a. Selena pays a
4 "Tariffs and quotas are necessary to protect the high wages of the American worker."Do you agree or disagree? Why?
3 Can both (a) and (b) be true? Explain.(a) "Tariffs and import quotas promote economic inefficiency and reduce the real income of a nation. Economic analysis suggests that nations can gain by
2 Do you think that the United States could benefit if all barriers to trade among North American nations were eliminated? Would Canada gain? Mexico? Why or why not?
1 Suppose that at the time of the Civil War the United States had been divided into two countries and that through the years no trade existed between the two. How would the standard of living in the
10 An exporting nation (or group of nations) can gain by restricting output and raising the price of a product if the demand for its exports is inelastic and the supply is elastic.Under these
9 In the long run, trade restrictions do not create jobs. A decline in our imports from other nations leads to a reduction in those nations' purchasing power and thus a reduced demand for our export
8 National defense, industrial diversity, and the infant-industry arguments can be used to justify trade restrictions for specific industries under certain conditions. However.it is clear that the
7 High wages do not necessarily mean high labor cost. Productivity must also be considered.The law of comparative advantage explains why the United States can benefit from trade-even trade with
6 The application of a tariff, quota, or other import restriction to a product reduces the amount of the product that foreigners supply to the domestic market. As a resu lt of diminished supply,
5 Relative to the no-trade alternative, international exchange and specialization resu lt in lower prices for products that are imported and higher domestic prices for products that are exported.
4 Exports and imports are closely linked. The exports of a nation are the primary source of purchasing power used to import goods.
3 Trade between nations enables each to specialize in the production of those goods for which it has a comparative advantage. Through specialization and trade, aggregate output can be expanded.
2 The trade sector comprises approximately 9 percent of the U.S. GNP. More than half of all U.S. trade is with developed countries, primarily Canada, Japan, and nations of the European Economic
I The volume of international trade has grown rapidly in recent decades. In the early 1980s, approximately 16 percent of the world's output was sold in a different country than that in which it was
7 What's Wrong with This Way of Thinking?"Public policy is necessary to protect the average citizen from the power of vested interest groups. In the absence of government intervention, regulated
6 One explanation for the shortsightedness effect in the public sector is that future voters cannot vote now to represent their future interests. Are the interests of future generations represented
5 The liquor industry contributes a large share of the political funds to political contests on the state level. Yet its contributions to candidates for national office are minimal. Why do you think
4 Do political entrepreneurs ever have an incentive to deceive voters about the cost of legislation? If so, when? Can you give any examples of cases in which this has happened?
3 Which of the following public sector actions are designed primarily to correct"market failure": (a) laws against fraud, (b) truth-in-lending legislation, (c) rate regulation in the telephone
2 Do you think that the political process works to the advantage of the poor? Explain. Are the poor well organized? Do they make substantial campaign contributions to candidates? Are they likely to
1 Do you think that advertising exerts more influence on the type of car chosen by a consumer than on the type of politician chosen by the same person? Explain your answer.

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