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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

This chapter analyzed the welfare effects of a tax on a good. Now consider the opposite policy. Suppose that the government subsidizes a good: For each unit of the good sold, the government pays $2
The government places a tax on the purchase of socks.a. Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following areas both before and after the
Daniel Patrick Moynihan, the late senator from New York, once introduced a bill that would levy a 10,000 percent tax on certain hollow-tipped bullets.a. Do you expect that this tax would raise much
After economics class one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic. In what sense is taxing food a “good” way
Suppose that the government imposes a tax on heating oil.a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.b. Would the
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? Use
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.”b. “A tax that raises no revenue for the
The market for pizza is characterized by a downward-sloping demand curve and an upwardsloping supply curve.a. Draw the competitive market equilibrium.Label the price, quantity, consumer surplus, and
What happens to the deadweight loss and tax revenue when a tax is increased?
Why do experts disagree about whether labor taxes have small or large deadweight losses?
How do the elasticities of supply and demand affect the deadweight loss of a tax? Why do they have this effect?
Draw a supply-and-demand diagram with a tax on the sale of a good. Show the deadweight loss. Show the tax revenue.
What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus compare to the tax revenue? Explain.
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
A friend of yours is considering two cell phone service providers. Provider A charges $120 per month for the service regardless of the number of phone calls made. Provider B does not have a fixed
One of the largest changes in the economy over the past several decades is that technological advances have reduced the cost of making computers.a. Draw a supply-and-demand diagram to show what
There are four consumers willing to pay the following amounts for haircuts:Gloria: $35 Jay: $10 Claire: $40 Phil: $25 There are four haircutting businesses with the following costs:Firm A: $15 Firm
The cost of producing flat-screen TVs has fallen over the past decade. Let’s consider some implications of this fact.a. Draw a supply-and-demand diagram to show the effect of falling production
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
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
It is a hot day, and Bert is thirsty. Here is the value he places on each bottle of water:Value of first bottle $7 Value of second bottle $5 Value of third bottle $3 Value of fourth bottle $1a. From
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
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.Illustrate
Kyra buys an iPhone for $240 and gets consumer surplus of $160.a. What is her willingness to pay?b. If she had bought the iPhone on sale for $180, what would her consumer surplus have been?c. If the
Name two types of market failure. Explain why each may cause market outcomes to be inefficient.
What is efficiency? Is it the only goal of economic policymakers?
In a supply-and-demand diagram, show producer and consumer surplus at the market equilibrium.
Explain how sellers’ costs, producer surplus, and the supply curve are related.
Explain how buyers’ willingness to pay, consumer surplus, and the demand curve are related.
A market is described by the following supply and demand curves:Q P Q P SD 2300 55 2a. Solve for the equilibrium price and quantity.b. If the government imposes a price ceiling of $90, does a
At Fenway Park, home of the Boston Red Sox, seating is limited to about 38,000. Hence, the number of tickets issued is fixed at that figure. Seeing a golden opportunity to raise revenue, the City of
A case study in this chapter discusses the federal minimum-wage law.a. Suppose the minimum wage is above the equilibrium wage in the market for unskilled labor. Using a supply-and-demand diagram of
Congress and the president decide that the United States should reduce air pollution by reducing its use of gasoline. They impose a $0.50 tax on each gallon of gasoline sold.a. Should they impose
If the government places a $500 tax on luxury cars, will the price paid by consumers rise by more than$500, less than $500, or exactly $500? Explain.
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 by
Suppose the federal government requires beer drinkers to pay a $2 tax on each case of beer purchased. (In fact, both the federal and state governments impose beer taxes of some sort.)a. Draw a
A recent study found that the demand-and-supply schedules for Frisbees are as follows:Price per Frisbee Quantity Demanded Quantity Supplied$11 1 million Frisbees 15 million Frisbees 10 2 12 9 4 9 8 6
The government has decided that the free-market price of cheese is too low.a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-anddemand diagram to show the
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? Explain.
What determines how the burden of a tax is divided between buyers and sellers? Why?
How does a tax on a good affect the price paid by buyers, the price received by sellers, and the quantity sold?
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 this
Explain why economists usually oppose price controls.
What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?
Which causes a shortage of a good—a price ceiling or a price floor? Justify your answer with a graph.
Give an example of a price ceiling and an example of a price floor.
You are the curator of a museum. The museum is running short of funds, so you would like to increase revenue. Should you increase or decrease the price of admission? Explain.
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 $5 and the government wants to
Two drivers, Walt and Jessie, each drive up to a gas station. Before looking at the price, each places an order. Walt says, “I’d like 10 gallons of gas.”Jessie says, “I’d like $10 worth of
The New York Times reported (Feb. 17, 1996) that subway ridership declined after a fare increase:“There were nearly four million fewer riders in December 1995, the first full month after the price
Suppose that your demand schedule for pizza is as follows:Price Quantity Demanded(income 5 $20,000)Quantity Demanded(income 5 $24,000)$8 40 pizzas 50 pizzas 10 32 45 12 24 30 14 16 20 16 8 12a. Use
The price of aspirin rose sharply last month, while the quantity sold remained the same. Five people suggest various diagnoses of the phenomenon:Meredith: Demand increased, but supply was perfectly
Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane destroys half the coffee bean crop. Use appropriately labeled diagrams to answer the following questions.a. What
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 inelastic? Explain.
Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run.a. If the price of heating oil rises from $1.80 to$2.20 per gallon, what happens to the quantity
Suppose that business travelers and vacationers have the following demand for airline tickets from Chicago to Miami:Price Quantity Demanded(business travelers)Quantity Demanded(vacationers)$150 2,100
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. Adele recordings or pop music recordings in
What do we call a good with an income elasticity less than zero?
If the elasticity is greater than one, is demand elastic or inelastic? If the elasticity equals zero, is demand perfectly elastic or perfectly inelastic?
Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows:Price Quantity Demanded Quantity Supplied$4
Because bagels and cream cheese are often eaten together, they are complements.a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What
Consider the following events: Scientists reveal that eating oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees produce more oranges.
The market for pizza has the following demand and supply schedules:Price Quantity Demanded Quantity Supplied$4 135 pizzas 26 pizzas 5 104 53 6 81 81 7 68 98 8 53 110 9 39 121a. Graph the demand and
Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises, what happens in the market for ketchup? For tomatoes? For tomato juice? For orange juice?
Using supply-and-demand diagrams, show the effects of the following events on the market for sweatshirts.a. A hurricane in South Carolina damages the cotton crop.b. The price of leather jackets
Consider the markets for film streaming services, TV screens, and tickets at movie theaters.a. For each pair, identify whether they are complements or substitutes:• Film streaming and TV screens•
Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or
Explain each of the following statements using supply-and-demand diagrams.a. “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country.”b. “When the
Beer and pizza are complements because they are often enjoyed together. When the price of beer rises, what happens to the supply, demand, quantity supplied, quantity demanded, and price in the market
Does a change in consumers’ tastes lead to a movement along the demand curve or to a shift in the demand curve? Does a change in price lead to a movement along the demand curve or to a shift in the
Are the following statements true or false? Explain in each case.a. “Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all
Suppose that in a year an American worker can produce 100 shirts or 20 computers and a Chinese worker can produce 100 shirts or 10 computers.a. For each country, graph the production possibilities
The following table describes the production possibilities of two cities in the country of Baseballia:Pairs of Red Socks per Worker per Hour Pairs of White Socks per Worker per Hour Boston 3 3
England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour.Suppose that a Scottish worker can produce 40 scones per
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
Why do economists oppose policies that restrict trade among nations?b. If Diego and Darnell trade foods with each other, who will trade away pizza in exchange for root beer?c. The price of pizza can
Classify each of the following statements as positive or normative. Explain.a. Society faces a short-run trade-off between inflation and unemployment.b. A reduction in the growth rate of the money
Classify each of the following topics as relating to microeconomics or macroeconomics.a. a family’s decision about how much income to saveb. the effect of government regulations on auto emissionsc.
An economy consists of three workers: Larry, Moe, and Curly. Each works 10 hours a day and can produce two services: mowing lawns and washing cars. In an hour, Larry can either mow one lawn or wash
The first principle of economics in Chapter 1 is that people face trade-offs. Use a production possibilities frontier to illustrate society’s trade-off between two“goods”—a clean environment
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 of
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
Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses that use the funds to build new factories, how might this lead to faster growth in productivity?
Discuss each of the following statements from the standpoints of equality and efficiency.a. “Everyone in society should be guaranteed the best healthcare possible.”b. “When workers are laid
Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure
A 1996 bill reforming the federal government’s antipoverty programs limited many welfare recipients to only 2 years of benefits.a. How does this change affect the incentives for working?b. How
The company that you manage has invested$5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of
You win $100 in a basketball pool. You have a choice between spending the money now and putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of
You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing.What is the true cost of going skiing? Now suppose you had been planning to spend the day
You are trying to decide whether to take a vacation.Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in dollars, but the benefits of the vacation are psychological.
Describe some of the trade-offs faced by each of the following:a. a family deciding whether to buy a new carb. a member of Congress deciding how much to spend on national parksc. a company president
13. The following table presents data taken from Finance Canada's Economic and Fiscal Update, November 2003. It shows federal government spending, after removing spending on interest payments on the
12. The following table presents data taken from Finance Canada's Economic and Fiscal Update, November 2003. It shows borrowing in the market for loanable funds by Canadian governments and Canadian
spending.
11. In 1991, the federal government simultaneously reduced the income tax rate and introduced the Goods and Services Tax (GST). Explain why economists applauded this switch from taxing incomes to
10. Surveys suggest that most people are opposed to budget deficits, but these same people elected representatives who in the 1970s and 1980s passed budgets with significant deficits. Why might the
9. Explain how each of the following policies redistributes income across generations. Is the redistribution from young to old, or from old to young?a. an increase in the budget deficitb. more
6. Chapter 2 explains the difference between positive analysis and normative analysis, hi the debate about whether the central bank should aim for zero inflation, which areas of disagreement involve
4. In earlier chapters, we learned about automatic stabilizers in the tax system and government spending programs.a. Provide an example of an automatic stabilizer that works via the tax system in
3. Suppose that people suddenly wanted to hold more money balances. For simplicity, assume Canada is a closed economy.a. What would be the effect of this change on the economy if the Bank of Canada

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