Microeconomics: Canada In The Global Environment, 9th Edition Solution Manual

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’SMANUALto accompanyECONOMICSCanada in the Global EnvironmentNinth EditionMichael ParkinUniversity of Western OntarioRobin Bade

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PrefaceFlexibilityHow to Assemble Your CoursePart 1IntroductionChapter 1What Is Economics?Chapter 2The Economic ProblemPart 2How Markets WorkChapter 3Demand and SupplyChapter 4ElasticityChapter 5Efficiency and EquityChapter 6Markets in ActionChapter 7Global Markets in ActionPart 3Households’ ChoicesChapter 8Utility and DemandChapter 9Possibilities, Preferences, and ChoicesPart 4Firms and MarketsChapter 10Organizing ProductionChapter 11Output and CostsChapter 12Perfect CompetitionChapter 13MonopolyChapter 14Monopolistic CompetitionChapter 15OligopolyPart 5Market Failure and GovernmentChapter 16ExternalitiesChapter 17Public Goods and Common ResourcesPart 6Factor Markets and InequalityChapter 18Markets for Factors of ProductionChapter 19Economic Inequality

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P R E F A C EPart 7Monitoring Macroeconomic PerformanceChapter 20Measuring GDP and Economic GrowthChapter 21Monitoring Jobs and InflationPart 8Macroeconomic TrendsChapter 22Economic GrowthChapter 23Finance, Saving, and InvestmentChapter 24Money, the Price Level, and InflationChapter 25The Exchange Rate and the Balance of PaymentsPart 9Macroeconomic FluctuationsChapter 26Aggregate Supply and Aggregate DemandChapter 27Expenditure MultipliersChapter 28The Business Cycle, Inflation, and DeflationPart 10Macroeconomic PolicyChapter 29Fiscal PolicyChapter 30Monetary PolicyChapter 31International Trade Policy (Macro split only)

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P R E F A C E3PrefaceIntroductionAt no time in history has teaching the principles of economics been either more challenging or more important. Yourdecision to adopt the ninth edition of our textbook brings to your task a set of teaching and learning tools that areunmatched in their clarity, relevance, and currency. It is our hope that with the help of these tools, you will enableyour students to become as excited about economics as you are.Whether you’re teaching the principles course for the first time or are an experienced teacher at this level, wehope you will find this manual helpful.Each chapter in the manual consists of four parts:1.The Big Picture:This part provides a discussion of “Where we are going” and “Where we have been.” Inother words it helps you fit this particular chapter into the context of what has come before and what willcome later. This Big Picture information can help you provide the Big Picture to your students.2.Changes:Both the major and the minor changes in this ninth edition of the textbook are described in thissection. The changes noted are especially those that might affect your lecture, so if you are an experiencedParkin user, glance at these to see what’s different in this edition of the textbook.3.Lecture Notes:We have created a set of ready-to-use lecture notes for each chapter. You will be able toglance over these notes before class, take them into class, and deliver from them your polished lecture.These notes have been heavily revised from the last edition and now incorporate the previous edition’sTeaching Suggestions directly into them.These notes provide:•Concise (bullet point) statements of all the key material•Tables and figures that differ from those in the book so that you can use new examples in your lectures•Key terms in bold print and the definitions from the textbook so that you can be sure that you don’tconfuse your students by defining a term differently than the book•Highlighted boxes with teaching suggestions that reinforce a key concept, provide an additionalanecdote, or suggest how to handle a difficult idea.4.Additional Discussion Questions:Additional discussion questions have been created for eachchapter. Some of these questions are suitable for essay exams; others, more open-ended, are probably bestused for classroom discussion. All of them are designed to make your students think and use the materialyou have been teaching them.The Solutions ManualThe answers and solutions to the Review Quizzes and the Problems and Applications at the end of each chapter areavailable in the Solutions Manual. The Solutions Manual has both the questions from the textbook and completeanswers all in one handy source. You can use these answers and solutions to help you grade exercises you haveassigned to the students or else you can copy them and hand them out directly to the students.

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P R E F A C EAcknowledgmentsTeaching the principles of economics is a “work in progress.” As new insights are uncovered, as new knowledgeemerges, the principles of economics course changes and evolves. So, too, are Parkin-Bade’sMicroeconomicsandMacroeconomicsalways changing and evolving to remain the best books available for you and your students’ use.Thus, it is with a great deal of pleasure that we acknowledge and thank several people who have helped us inshaping this edition of the instructor’s manual.Mark Rush adapted previous work and wrote the new material for this, the ninth edition of this’sManual and played a crucial role in coordinating and producing this manual.Even with all this help, there remains room for improvement in the text and in this manual. Any corrections,suggestions, or comments that you have will be greatly appreciated. Send your comments on this manual to Robin(robin@econ100.com) and your comments on the text to either Robin or Michael (michael.parkin@uwo.ca).Robin BadeMichael Parkin

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P R E F A C E3Micro Flexibility

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P R E F A C EMacro Flexibility

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1WHAT IS ECONOMICS?T h eB i gP i c t u r eWhere w e a re going:After completing Chapter 1, the student will have a good sense for the range of questions thateconomics addresses and will be on the path towards an economic way of thinking. The studentswill begin to think of cost as a forgone alternative—an opportunity cost—and also about makingchoices by balancing marginal costs and marginal benefits.Chapter 2 reinforces the central themes of Chapter 1 by laying out a core economic model, theproduction possibilities frontier (PPF), and using it to illustrate the concepts of tradeoff andopportunity cost. Chapter 2 also provides a deeper explanation, again with a model, of the conceptsof marginal cost and marginal benefit, beginning with the concept of efficiency, and concludingwith a review of the source of the gains from specialization and exchange.N e wi nt h eN i n t hE d i t i o nThis chapter is streamlined and more quickly addresses basic economic thought. It is not one togloss over as it lays down an important foundation that can be drawn from as you move throughmore specific applications later. This edition presents only four issues that juxtapose private interestand social interest: globalization; the information-age economy; global warming; and economicinstability (and the potential end to the “Great Moderation. Students relate well to the section onself-interest and social interest, which introduces issues of efficiency and fairness and is great forclass discussion.Economics in the Newscovers current issues including Facebook and MarkZuckerberg’s vision to have the Internet available to the whole world..

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2C H A P T E R 1L e c t u r eN o t e sWhat Is Economics?I.Definition of Economics•Economic questions arise because we always want more than we can get, so we facescarcity, the inabilityto satisfy all our wants. Everyone faces scarcity because no one can satisfy all of his or her wants.•Scarcity forces us to make choices over the available alternative. The choices we make depend onincentives, a reward that encourages a choice or a penalty that discourages a choice.Bill Gates and Warren Buffet are among the wealthiest businessmen. Do they face scarcity? According toThe WallStreet Journal,both men are ardent bridge players, yet they have never won one of the many national bridgetournaments they have entered as a team. They can easily afford the best bridge coaches in the world, but they don’tallocate enough time to practicing as much as they would need to win. They face scarcity (of time) and must choosehow to spend their time.Economics•Economicsis the social science that studies thechoicesthat individuals, businesses, governments, andentire societies make when they cope withscarcityand theincentivesthat influence and reconcile thosechoices.•Economists work to understand when the pursuit of self-interest advances the social interest•Economics is divided into microeconomics and macroeconomics:•Microeconomicsis the study of the choices that individuals and businesses make, the way thesechoices interact in markets, and the influence of governments.•Macroeconomicsis the study of the performance of the national economy and the globaleconomics.On the first day do a “pop quiz.” Have your students write on paper the answer to “What is Economics?” Reassurethem that this is their opinion since it is the first day. You will find most of the answers focused around moneyand/or business. Stress that Economics is asocialscience, a study ofhumanbehaviour given the scarcity problem.All too often first-time students (especially business students) think that Economics is just about making money.Certainly, the discipline can and does outline reasons why workers work longer hours to increase their wageearnings, or why firms seek profit as their incentive. But Economics also explains why a terminally ill cancer patientmight opt for pain medication as opposed to continued chemotherapy/radiation, or why someone no longer in theworkforce wants to go to college and attain a Bachelor’s degree, in their sheer pleasure of learning andunderstanding. Stressing thesocialpart of our science now will help later when relating details to the overall biggerpicture (especially when time later in the semester seems scarce, no pun intended!).The definition in the text:“Economicsis the social science that studies the choices that individuals, businesses,governments, and societies make as they cope with scarcity and the incentives that influence and reconcile thesechoices,” is a modern language version ofLionel Robbinsfamous definition, “Economics is the science whichstudies human behaviour as a relationship between ends and scarce means that have alternative uses.”Other definitions include those of Keynes and Marshall:John Maynard Keynes:“The theory of economics does not furnish a body of settled conclusions immediatelyapplicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, whichhelps it possessors to draw correct conclusions.”

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W H A T I S E C O N O M I C S ?3Alfred Marshall:“Economics is a study of mankind in the ordinary business of life; it examines that part ofindividual and social action which is most closely connected with the attainment and with the use of the materialrequisites of wellbeing.”II.Two Big Economic QuestionsHow do choices wind up determining what, how, and for whom goods and services areproduced?What, How and For Whom?•Goods and servicesare the objects that people value and produce to satisfy human wants. What weproduce changes over time—today we produce more DVDs and fewer video tapes than five years ago.•Goods and services are produced using productive resources calledfactors of production.These areland(the “gifts of nature”, natural resources),labour(the work time and work effort people devote toproduction),capital(the tools, instruments, machines, buildings, and other constructions used to producegoods and services), andentrepreneurship(the human resource that organizes labour, land, and capital).•The quality of labour depends onhuman capital,which is the knowledge and skill that people obtainfrom education, work experience, and on-the-job training.•People earn their incomes by selling the services of the factors of production they own: Land earnsrent,labour earnswages, capital earnsinterest, and entrepreneurship earnsprofit.Do Choices Made in the Pursuit of Self-Interest also Promote the Social Interest?•You make a choice in yourself-interestif you think that choice is the best one available for you.•An outcome is in thesocial interestif it is best for society as a whole.•Could it be possible that when each of us makes choices in our self-interest, these choices are in the socialinterest?The Two Big Economic QuestionsDon’t skip the questions. Open your students’ eyes to economic in the worldaround them. Ask them to bring a newspaper to class and to identify headlines that deal with stories aboutWhat,How,andFor Whom.UseEconomics in the News Todayon your MyEconLab Web site for a current news item andfor an archive of past items (with questions). Pose questions but hold off on the answers letting them know that “wecan have a much more fruitful discussion when our toolbox is full.” Remind them that this course is about learningsimple economic models that provide tools to seek answers to complex issues.Students (and others!) often take the answers to the what, how, and for whom questions for granted. For instance,most of the time we do not bother to wonder “How does our economy determine how many light bulbs,automobiles, and pizzas to produce?”(what),or “Why does harvesting wheat from a plot of land in India occur withhundreds of labourers toiling with oxen pulling threshing machines, while in Canada, a single farmer listening to aGarth Brooks CD and sitting in an air-conditioned cab of a $500,000 machine harvests the same quantity of wheatfrom the same sized plot of land?”(how),or “Why is the annual income of an inspiring and effective grade schoolteacher much less than that of an average major-league baseball player?”(for whom).Explaining the answers tothese types of questions and determining whether the answers are in the social interest is a major part ofmicroeconomics.Figure 1.1 in the textbook “Trends in What We Produce” ties in nicely with Chapter 2’s discussion on thePPF.Figure 1.1 also links the three questions of what, how, and for whom nicely to the component parts of those

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4C H A P T E R 1questions: goods and services, factors of production (land, labour, capital, entrepreneurship), and incomes thatfactors of production earn (rent, wages, interest, and profit).•We can examine whether the self-interested choices serve the social interest for a variety topics:•Globalization:Buying an iPod allows workers overseas to earn a wage and provide for family•Information-Age Monopolies:Anabsence of competitionleadstopricesfarabove the costofproduction•Climate Change:Carbon dioxide emissions led to higher global temperatures and climate change•Economic instability:Volatility and risk in financial markets leads to fewer loans and less lendingavailableIII. Economic Way of ThinkingScarcity requires choices and choices create tradeoffs.What is the difference between scarcity and poverty?Ask the students why they haven’t yet attained all of theirpersonal goals. One reason will be that they lack sufficient money. Ask them if they could attain all of their goals ifthey were as rich as Bill Gates. They quickly realize that time is a big constraint—and the great leveler: we all haveonly 24 hours in a day. They have stumbled on the fact that scarcity, which even Bill Gates faces, is not poverty.A Choice is a Tradeoff•Atradeoffis an exchange—giving up one thing to get another.•Whatever choice you make, you could have chosen something else.Virtually every choice that can be thought of involves a tradeoff. Presenting a few of the following as examples canhelp your class better appreciate this key point:•Consumption and savings:If someone decides to save more of his or her income, savings can be funneledthrough the financial system to finance businesses new capital purchases. As a society, we trade off currentconsumption for economic growth and higher future consumption.•Education and training:A student remaining in school for another two years to complete a degree willneed to forgo a significant amount of leisure time. But by doing so, he or she will be better educated andwill be more productive. As a society, we trade off current production for greater future production.•Research and development:Factory automation brings greater productivity in the future, but meanssmaller current production. As a society, we trade off current production for greater future production.Making a Rational Choice•Arational choiceis one that compares costs and benefits and achieves the greatest benefit over cost forthe person making the choice.•But how do people choose rationally? Why do more people choose an iPod rather than a Zune? Why hasthe Canadian government chosen to build a national highway system and not a national high-speed railsystem? The answers turn on comparing benefits and costs.Benefit: What you Gain•Thebenefitof something is the gain or pleasure that it brings and is determined bypreferences—bywhat a person likes and dislikes and the intensity of those feelings.•Some benefits are large and easy to identify, such as the benefit that you get from being in school. Much ofthat benefit is the additional goods and services that you will be able to enjoy with the boost to your earningpower when you graduate.

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W H A T I S E C O N O M I C S ?5•Some benefits are small, such as the benefit you get from a slice of pizza. That benefit is just the pleasureand nutrition that you get from your pizza.Cost: What You Must Give Up•Seeing choices as tradeoffs shows there is an opportunity cost of a choice. Theopportunity costofsomething is the highest-valued alternative that must be given up to get it. So, for instance, the opportunitycost of being in school is all the good things that you can’t afford and don’t have the spare time to enjoy.What is the Opportunity Cost of Getting a University Degree?When the students calculate their opportunity cost ofbeing in school, be sure they place a value on their leisure time lost to studying on weekends and evenings. Moststudents are shaken when they realize that when lost leisure time and income is included in their calculations, theopportunity cost of a college degree approaches $200,000 or more. Don’t leave them hanging here though. Mentionthat a university education does yield a high rate of financial return over.To ensure that people do not die of any serious side effects, the government requires all drug companies tothoroughly test newly developed medicines before allowing them to be sold in Canada. However, it takes manyyears to perform these tests and many people suffering from the terminal diseases these new medicines are designedto cure will die before good new medicines are eventually approved for use. Yet, if the government were to abandonthis testing process, many others would die from the serious side effects of those bad medicines that made it tomarket. People’s lives will be at risk under either policy alternative. This stark example of a tradeoff reveals the ideathat choices have opportunity costs.How Much? Choosing at the Margin•Making choices at themarginmeans looking at the tradeoffs that arise from making small changes in anactivity. People make choices at the margin by comparing the benefit from a small change in an activity(which is themarginal benefit)to the cost of making a small change in an activity (which is themarginal cost).•Changes in marginal benefits and marginal costs alter the incentives that we face when making choices.When incentives change, people’s decisions change.•For example, if homework assignments are weighed more heavily in a class’s final grade, the marginalbenefit of completing homework assignments has increased and more students will do the homework.Choices Respond to IncentivesEconomists take human nature as given and view people acting in their self-interest.Self-interest actions are not necessarilyselfishactions.Self-interest can be said to be in the eye of the beholder. Thus, covering the next portion on positive versusnormative analysis can be crucial to the student’s understanding how economic agents act in their own self-interest,but perhaps not (and often not) in other’s self-interest.IV. Economics as Social Science and Policy ToolEconomics as Social Science•Economists distinguish between positive statements and normative statements. A positive statement is about“what is” and is testable. A normative statement is about “what ought to be” and is an opinion and so isinherently not testable. A positive statement is “Raising the tax on gasoline will raise the price of gasoline andlead more people to buy smaller cars” while a normative statement is “The tax on a litre of gasoline should beraised.”

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6C H A P T E R 1•Economists tend to agree on positive statements, though they might disagree on normative statements.•Aneconomic modeldescribes some aspect of the economic world that includes only those featuresneeded for the purpose at hand. Economic models describe the economic world in the same way that a roadmap explains the road system: Both focus on only what is important and both are abstract depictions of thereal word.•Testing an economic model can be difficult, given we observe the outcomes of the simultaneousoperation of many factors. So, economists use the following to copy with the problem:1.Natural experiment:A situation that arises in the ordinary course of economic life in which theone factor of interest is different and other things are equal or similar.2.Statistical Investigation:A statistical investigation might look for the correlation of twovariables, to see if there is some tendency for the two variables to move in a predictable andrelated way (e.g.cigarette smoking and lung cancer).3.Economic Experiment:Putting people in a decision-making situation and varying the influenceof one factor at a time to see how they respond.Economist as Policy Adviser•Economics is useful. It is a toolkit for advising governments and businesses and for making personaldecisions.•For a given goal, economics provides a method of evaluating alternative solutions—comparing marginalbenefits and marginal costs and finding the solution that makes the best use of the available resources.The success of a model is judged by its ability to predict.Help your student’s appreciate that no matter howappealing or “realistic looking” a model appears to be, it is useless if it fails to predict. And the converse, no matterhow abstract or far removed from reality a model appears to be, if it predicts well, it is valuable.Milton Friedman’s Pool Hall exampleillustrates the point nicely. Imagine a physicist’s model that predicts wherea carefully placed shot of a pool shark would go as he tries to sink the eight ball into the corner pocket. The modelwould be a complex, trigonometric equation involving a plethora of Greek symbols that no ordinary person wouldeven recognize as representing a pool shot. It certainly wouldn’t depict what we actually see—a pool stick striking apool cue on a rectangular patch of green felt. It wouldn’t even reflect the thought processes of the pool shark thatrelies on years of experience and the right “touch.” Yet, constructed correctly, this mathematical model wouldpredict exactly where the cue ball would strike the eight ball, hit opposite the bank, and fall into the corner pocket.(You can easily invent analogous examples from any sport.)

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W H A T I S E C O N O M I C S ?7A d d i t i o n a lD i s c u s s i o nQ u e s t i o n s1.“Why are economists so concerned about the material aspects of life?”Economists are often criticized forfocusing onmaterialwell-being. Remind students that promoting the emotional (or spiritual) aspect of lifedepends heavily on attaining material well-being. Ask them to consider the need for life- enhancing goodsand services such as health care or education to support spiritual or emotional well-being. Ask howprotestors at the WTO meetings or at the IMF and World Bank meetings would be able to voice theiropinions without low-cost air travel and the power of the Internet to coordinate the activities of hundreds ofprotesters. (Be careful not to seem to be either condoning or condemning these activities.) Most studentswill begin to see that the more efficient we are at producing material prosperity, the more time andopportunity everyone has to promote emotional (or spiritual) goals.2.Mini Case Study Illustrating How Economists Use Modeling:“Women are unfairly underpaid when compared to men.” Ask your students whether this statement ispositiveornormative.Mention that the media frequently reports that the average woman gets paid only 3/4the wages of the average man. Is this “fact” a sufficient test of the positive statement?“If women were paid more than men in one or two professions (like professional modeling or elementaryteaching) is that sufficient evidence to conclude that women in general are not underpaid whencompared to men?”Ask the students to think about how to properly test the model. Are these counterexamples enough to discard the idea that women are underpaid?“What would you take into account when you collected data to compare women’s salaries versus men’ssalaries?”Remind the students that any model directly comparing men’s and women’s wages shouldcontrol for any differences in wage-relevant characteristics between working men and women. You candiscuss many different reasons why a gender wage gap can occur, including:•Women are underrepresented in higher paid occupations and are overrepresented in lower paidoccupations (the problem may not be unequalpaybut instead it may be unequalaccessto high payingjobs (glass ceiling?);•Women are underrepresented among those earning advanced degrees, though mostly among older agecohorts. (Here the problem here might not be unequalpaybut unequalaccessto higher education);•Women have relatively less occupational-specific work experience and have relatively less unbrokenwork experience, as many women struggle between pursuing a career and raising a family. Forexample, one study found that women who were not mothers earned 90 percent of men’s salaries,whereas those who were mothers earned only 77 percent (Waldfogel, “Understanding the ‘FamilyGap’ in Pay for Women with Children,”Journal of EconomicPerspectives, Vol. 12, No. 1, 1998).“Does it further the public interest (and the interests of women workers specifically) to propagatenormative statements about wage inequality based on statistics without taking account of all relevantfactors?”Summarize the discussion by noting that economic studies have indeed found evidence that agender gap in wages exists (in the United States), even after controlling for all known relevant factors.However, the gender wage gap is much less than the 1/3 number often quoted by the media, and has beendecreasing significantly over the last few decades (Blau, “Trends in the Well Being of American Women,1970-1995,”Journal of Economic Literature,Vol. 36, No. l, March 1998). Get the students to see howproperly applying the science of economics to social issues helps us strip away inflammatory rhetoric andexamine the problem carefully and objectively.

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8C H A P T E R 1A p p e n d i x :G r a p h si nE c o n o m i c sL e c t u r eN o t e sGoggle TheoryExplain to students that you are going to ask them to use three sets of goggles to view math in the course.1.Equation Goggles: Write an equation in slope-intercept form and explain that this is one way to showrelationships between two variables. I like to useXandYfor this one and then quickly explain that economicsis much more fun than math because we may be talking about X-rays and Yo-Yo’s. This helps some studentsbreak the barrier early on what “variable” means.2.Graphing Goggles: Work through a graph of the equation you wrote highlighting slope and intercept. Indicatethat this may be a Demand or Supply curve for instance.3.Schedule Goggles: Draw a simple “T” schedule withXandYchoosing your own numbers to “plug and chug”with the equation you first used.Now you can explain that they will see all three of these forms of math at different times during the course and it isimportant for them to understand that you can move between all three anytime.I.Graphing Data•Graphs are valuable tools that clarify what otherwise might be obscure relationships.•Graphs represent “quantity”as a distance. Two-variable graphs use two perpendicular scale lines.The vertical line is they-axis.The horizontal line is thex-axis.The zero point in common to bothaxes is theorigin.•Scatter diagram—a graph that plots the value of one variable on thex-axis and the value of theassociated variable on they-axis. A scatter diagram can make clear the relationship between two variables.II.Graphs Used in Economic Models•Graphs are used to show the relationship between variables. Graphs can immediately convey therelationship between the variables:•Apositive relationship(ordirect relationship)—when the variable on thex-axis increases thevariable on they-axis increases. A straight line is alinear relationship.•Anegative relationship(orinverse relationship)—when the variable on thex-axis increases,the variable on they-axis decreases.•A maximum or a minimum—when the variable has a highest or lowest value.III. The Slope of a Relationship•Theslopeof a curve equals the change in the value of the variable on the vertical axis at the point wherethe slope is being calculated divided by the change in the value of the variable on the horizontal axis at therelevant point.•In terms of symbols, the slope equalsy/x, withstanding for “change in.”•Theslope of a straight lineis constant. The slope is positive if the variables are positively related andnegative if the variables are negatively related.•Theslope of a curved line at a pointequals the slope of the straight line that is tangent to the curved line atthe point.•Theslope of a curved line across an arcequals the slope of the straight line between the two points on thecurved line.

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