Microeconomics: Fourth Edition Solution Manual

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DGraphics Worth: Krugman Economics 3e in ModsPrinciple 7: Resources should be used efficiently toachieve society’s goals. Priceline.com exploited an oppor-tunity to use resources more efficiently. It is inefficientto have empty hotel rooms and airline seats if someone iswilling to pay some price to use them on short notice.Principle 8: Because people usually exploit gains fromtrade, markets usually lead to efficiency. It is inefficientto have planes flying with empty seats and hotels withunoccupied beds. Thus, introducing a market for thoseitems—which is what Priceline.com did—improvesefficiency.Principle 9: When markets don’t achieve efficiency, gov-ernment intervention can improve society’s welfare. Itwould have been inefficient to have major airlines failbecause of the public’s temporary fear of flying. Vastresources would have been wasted as pilots and supportstaff lost their jobs, planes were mothballed, necessarytrips cancelled, and so on. It improved efficiency for thegovernment to step in and temporarily aid the airlineindustry so that it could survive the temporary downturn.Principle 10: One person’s spending is another person’sincome. In the aftermath of the attacks of September2001, as people stopped spending on items like travel theincome of airline workers was severely reduced.Principle 11: Overall spending sometimes gets out of linewith the economy’s productive capacity. The overall econo-my went into a slump after the attacks of September 2001as the economy’s productive capacity exceeded its spending.Principle 12: Government policies can change spending.The $15 billion aid appropriation by Congress was spenton stabilizing the airline industry and prevented majorairline failures.Chapter 21.What is the opportunity cost associated with having aworker wander across the factory floor from task to taskor in search of tools and parts?Suggested Solution1.The opportunity cost of a worker wandering across thefactory floor is forgone output—the output that workercould have produced in the time spent wandering around.2.Explain how lean manufacturing improves the economy’sefficiency in allocation.Suggested Solution2.Lean production (also known as lean manufacturing)improves the economy’s efficiency in allocation because,for example, an automaker can more quickly switch toproducing more of the types of cars that more consum-ers want and fewer of the types of cars that fewer con-sumers want.SUGGESTED SOLUTIONS FOR BUSINESSCASEQUESTIONS FOR THOUGHTThis section offers suggested answers to the “Questions for Thought” that conclude eachbusiness case at the end of chapters.Chapter 11.Explain how each of the twelve principles of economicsis illustrated in this case study.Suggested Solution1.Principle 1: People must make choices because resourcesare scarce. Neither money nor time is unlimited; they areboth scarce resources. Priceline.com caters to customerswho have chosen to sacrifice some of their preferencesabout convenience or quality in order to get a lowerprice.Principle 2: The opportunity cost of an item—what youmust give up in order to get it—is its true cost. The truecost of an empty airplane seat or an empty hotel bed isthe revenue the airline or hotel could have earned fromthe next best use of that seat or bed—namely, the rev-enue earned from a paying customer.Principle 3: “How much” is a decision at the margin.How much more a customer is willing to pay for aticket to a destination depends upon how much timeand inconvenience is saved by purchasing the higherpriced ticket.Likewise, how much more a customer is willing topay for a ticket purchased well in advance of his traveldate depends upon how much more security he gains byadvance planning rather than waiting to purchase. Thesame principle applies to decisions about the quality andlocation of hotels, and so on.Principle 4: People usually respond to incentives,exploiting opportunities to make themselves better off.Priceline.com was successful because its customers—travelers, airlines, and hotels—were exploiting opportu-nities to make themselves better off by using its services.Priceline.com also responded to incentives to make itselfbetter off by expanding into new profitable marketssuch as Europe.Principle 5: There are gains from trade. Travelers gainfrom using Priceline.com’s networks of hotels to find ahotel rather than doing the research themselves. Theygain from using Priceline.com’s services to book a flightrather than contacting each airline individually. Also,travelers gain by using the services of airlines and hotels,rather than transporting themselves or pitching a tentovernight to sleep in. Hotels, particularly in Europe, gainfrom using Priceline.com’s network rather than trying tocontact potential customers directly.Principle 6: Because people respond to incentives, marketsmove towards equilibrium. Expedia and Orbitz movedinto the online travel service industry in order to exploitopportunities that had been pioneered by Priceline.com.In this way, the market for online travel services will movetowards equilibrium until there are no more opportuni-ties for new travel service companies to exploit.BCS-1KrugWellsEC4e_Micro_BCS.indd11/13/151:09 PM

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