Skip to content
Textbook Guides

Principles Of Microeconomics, 8th Edition Solution Manual

Principles Of Microeconomics, 8th Edition Solution Manual helps you break down challenging textbook sections for easy learning.

Preview 15 of 47 pages

See the first 15 pages exactly as they appear in the document.

  1. Page 1
    Read page 1 as text

    Principles of Microeconomics • • Chapter One 1 CHAPTER ONE The Economic Problem Overview Comments In Chapter One, we decided to begin by giving students an idea of how diverse and how engaged our discipline is by looking at a number of current controversies. This, we hope helps to correct the perception that many students have of economics as being a dry and theoretical subject with little relevance to the real world. We next focus on what is, arguably, the most important idea in economics: that scarcity forces choice and choice involves the concept of opportu nity cost. We then look at the three fundamental questions in economics and four methods of co - ordinating an economy and we have found that students react well to a discussion of both of these topics. Perhaps we should remind ourselves that introductory chapters are probably the only oppor tunity for us to encourage students to look beyond the market structure and realize that it is only one of various possible ways for society to organize its economic affairs. Next, we discuss the fact that the discipline’s methodology is, by necessity, abstract, since this is the only way one can deal with such a broad range of topics. The discussion of the use of abstract methodology leads naturally into a discussion of the role of models in economics. We then look at our first model in economics, production possibilities, and show how illuminating this idea can be since it allows us to illustrate some of the basic, but vital topics in economics: choice, cost, economic growth, technological improvement and the immense importance of investment. Suggested Approaches and Helpful Hints As a starting point in a new course, it may be useful for you to walk students through the Study Guide (as well as the Test your Understanding questions in the body of each chapter) and explain that answers can be found in the Connect Answer Key. It is our experience that if we spend enough time on production possibilities we can illustrate six distinct aspects of economics: the necessity of choice, economic growth, unemployment, efficiency, technological change and opportunity cost. This makes produc tion possibilities a powerful model and, more importantly, demonstrates what we

  2. Page 2
  3. Page 3
    Read page 3 as text

    Principles of Microeconomics • • Chapter One 2 mean by the word model. Given the huge role that models play in economic theory, understanding exactly what a model is can be an important step for any student. Answers to Problems for Further Study 1. a) normative; b) positive; c) positive; d) normative. 2. a) K b) L c) N d) N e) E 3. a) C b) K c) C d) B 4 . Economics is interested in how society makes choices about the production and allocation of resources and products. All societies must make choices since they will never be able to produce everything that people want. The reason for this is that resources are scarce in relation to unlimited human wants. 5 . Factors of Production Factor explained Factor Payments Labour human physical and mental effort wages Capital human made resources interest Land natural resources rent Enterprise the innovator and risk - taker profit 6 . Normative statement: There are too many poor people in Canada. Positive statement: In 20 10 , there were more than 2 .5 million Canadians earning less than $15 000 .

  4. Page 4
    Read page 4 as text

    Principles of Microeconomics • • Chapter One 3 7 . Capital goods PP1 PP2 Consumer goods There are two major causes of economic growth:  an increase in the quantity or quality of productive resources  an improvement in technology 8 . The production possibility curve would look as follows: Leather moccasins Shirt s PP

  5. Page 5
    Read page 5 as text

    Principles of Microeconomics • • Chapter One 4 The production possibilities curve would plot as a straight line because the per unit cost of production would remain constant. In other words, it would always cost the same number of moccasins to produce additional shirts, and vice versa. 9 . Both a map and a theory abstract from reality and highlight only the most important relationships. 1 0 . Command comes in the form of parents insisting that children do certain things such as cleaning their room. Most “big” decisions like where to take a holiday are often made co - operatively. Custom comes in the form of parents using the same values to raise their children as was used by their own parents. Competition might be used, for example where siblings compete with each other to earn increments of allowance. The second half of the question is asked only to stimulate thought on the effectiveness of incentives (rewards) and disincentives (penalties) within the family structure. 1 1 . Since Kant is a high school dropout with no work experience, we would have to recognize that his next best alternative is probably a minimum wage job. (On the other hand, if some employer consider s Kant enough of celebrity to hire him for a public image job, then Kant might do better.) Assuming a minimum wage job, his opportunity cost of continuing to play hockey would the minimum wage rate (say $10 and hour) times 40 (hours per week) times 52 (weeks per year) which equals $20.800 per year. 1 2 . See the following f igure:

  6. Page 6
    Read page 6 as text

    Principles of Microeconomics, 8e • • Chapter 2 1 CHAPTER TWO Demand and Supply: An Introduction O verview Comments This chapter covers one of the most important subjects in economics. We feel that the amount of time, effort, and patience put into developing the basic principles of demand and supply will pay great dividends for students later in the course. Also, unlike some other approaches, we have deliberately relegated the complexities of multiple curve shifts and other applications of demand and supply to another chapter. While most of the material in this chapter is fairly standard, there are three areas which are treated a little differently from other approaches. First, we introduce the income and substitution effects early. Since we emphasize that the concept of demand involves both willingness and ability, it seemed a good opportunity to explain that the reason for the downward slope of the demand curve is that a lower price means both an increased willingness (the substitution effect) and ability (the income effect) to purchase. Second, the chapter moves deliberately and quickly to a discussion of equilibrium rather than first discussing what causes shifts in the two curves. We think this direct approach is more helpful for students who usually grasp the concept with little difficulty. Only after we have explored the idea of equilibrium and the implications of disequilibrium do we look at the determinants of demand and supply and the effects of their change. Third, we believe that it short - changes the students to show the results of a change in equilibria without explaining how the market gets there. Therefore, when we do start curve - shifting we take great pains to demonstrate just how the market moves, in reaction to surpluses and shortages, from one equilibrium to another. Although we don’t personally use algebra to teach demand and supply in our own classes, we recognize that some instructors find this an effective approach and so we have added a short Appendix on the algebra of demand and supply.

  7. Page 7
    Read page 7 as text

    Principles of Microeconomics, 8e • • Chapter 2 2 Suggested Approaches and Helpful Hints As we mentioned, we think it’s essential to move to equilibrium as quickly as possible so that students are immediately made aware that the price is determined by both the demand and the supply. If this is not done you will find that you are moving curves about in isolation and showing an increase in demand which impacts on nothing: a cause looking for an effect. We find that students can grasp the concepts of equilibrium, surpluses and shortages fairly easily so we get them to this point early. Students need to be aware that the price of the product is not always the most important factor that affects consumer spending. At times, incomes, prices of related products and so on may have more significance. Yet we put price at the forefront for two reasons. First, it often is the most important factor. Second, it is the centre of focus for our analysis because it is the one factor which links producers and consumers and which influences the actions of both groups. It is probably useful to point out to students that some of the demand curves in this chapter are not straight lines. This is because they are plotted from data that is presented in a table. This helps to emphasize the link between a demand schedule and a demand curve and reminds us that demand and supply curves are not always linear. One of the problems that many students have is the obvious one of confusing demand with quantity demanded (and supply with quantity supplied). The problem is only cured through repeated practice. It’s a good idea to keep reminding students that the terms demand and supply do not relate to specific quantities but to whole ranges of prices and quantities. We find that while they often respond to the concept of demand, they will sometimes continue to use the term supply as a synonym for production or output. Another problem for students is that, understandably, they draw on examples where the firm rather than the market determines the price of the product. Although we briefly mention in the text that the demand/supply model works best in the context of perfectly competitive markets, it is a shame to use only examples of commodity markets. Once students grasp the basics, they are usually eager to put the principles to work analyzing many different types of markets with which they are familiar, and these include markets which are anything but competitive and where the producers are usually price makers. We are hesitant to curb such enthusiasm so early in the game. On the other hand, you need to tread carefully when dealing with non - competitive markets. Perhaps you could explain, as we do early in Chapter 3 with the example of the over - priced automobile, that while the model works exactly as we suggest only in perfectly competitive markets, that doesn’t mean that it doesn’t have application to other markets. Answers to Problems for Further Study 1. c, d and e are the circled letters

  8. Page 8
    Read page 8 as text

    Principles of Microeconomics, 8e • • Chapter 2 3 2 . Graph A: increase in demand; increase in quantity supplied Graph B: increase in supply; increase in quantity demanded 3. a) price down and quantity traded down b) price up and quantity traded up c) price down and quantity traded down d) price up and quantity traded up 4. a) supply; increased b) demand; decreased c) supply; decreased d) demand; increased 5. Demand refers to the whole range of quantities that are demanded at various prices as depicted by a demand schedule or demand curve. The quantity demanded refers to a particular quantity at a particular price, i.e. it is a point on a demand curve. 6. Shortages cause competitive bidding among buyers of a product. The result will be that the price will be bid up and will continue to rise until the shortage disappears. 7. Table 2.1 9 (completed) D S P Q a  -   b  -   c -    d  -   e  -   f  -   8. Change the second sentence to: “The quantity demanded for houses decreases when the price increases.” 9. The first determinant of market demand is consumer preferences, i.e. the tastes and fashions of consumer. The second is consumer incomes. For a normal product, higher incomes leads to a higher demand; on the other hand, for an inferior product higher incomes lead to a lower demand. The third determinant is the prices of related products, which include substitute products, and complementary products. The demand will be higher if the price of a substitute increases or the price of a complement decreas es. The fourth determinant is expectations of the future. The demand will increase if future prices or incomes are expected to be higher or a future shortage is anticipated. The final determinant is the population. The market demand for a product

  9. Page 9
    Read page 9 as text

    Principles of Microeconomics, 8e • • Chapter 2 4 may be affected if there is a change in the size or in the income or age distribution of the population. 10 . An increase in the demand for a product will initially lead to a shortage. As a result competition among the buyers will cause the price to increase. The effect of an increase in the price will be a fall in the quantity demanded and an increase in the quantity supplied. Both factors will help to eliminate the shortage. Eventually both the price and the quantity traded of the product will have increased. 11. Five possible causes are:  an increases in the price of resources used;  an increase in business taxes;  an increase in the price of a substitute in production;  the expectation of suppliers that there will be higher prices in the future;  a decrease in the number of suppliers. Five specific effects (in order) are:  a shortage;  a price increases;  an increase in the quantity supplied;  a decreases in quantity demanded;  a decrease in the quantity traded. 12. S1 S2 (S1 + 5000) Rental P1 P2 D Q1 Q2 Number of Rental Uni ts A PPENDIX TO CHAPTER TWO

  10. Page 10
    Read page 10 as text

    Principles of Microeconomics, 8e • • Chapter 2 5 Answers to Problems for Further Study 1. P = 6; Q = 28. 2. a) P = 15; Q = 25. b) Shortage of 12. c) P = 17; Q = 27. 3. a) Q d = 244 – 4P b) Qs = – 8 + ½ P c) P = 56; Q = 20 4 . a) Q d = 675 – 100P (or P = 6.75 – 0.01Q d ). b) Q s = 50P (or P = 0.02Q s ) c) P = 4.5; Q = 225 5 . a) shortage of 60. (Q d = 185; Q s = 125) b) surplus of 24. (Q d = 164; Q s = 188 6 . a) P = 70. (Solve the equation: 380 = 100 + 4P) b) Q d = 310. (Plug 70 into the demand equation.) c) Surplus of 70. (Q d = 310 and Q s = 380).

  11. Page 11
    Read page 11 as text

    Principles of Microeconomics , 8e • • Chapter Three 1 CHAPTER THREE Demand and Supply: An Elaboration Overview Comments Some textbooks move on to elasticity immediately after having done the basics of demand and supply. We decided to place the applications immediately after the basics, since students often like to play with the concepts of demand and supply a little while they are still fresh rather than move directly to the details and measurements of elasticity. However, if you wish to transpose Chapters 3 and 4, it will do no harm. The main part of this chapter deals with price controls and demonstrates just how effective basic economic theory can be in revealing aspects of the economy that are not always obvious. It also shows what a powerful tool demand and supply can be in highlighting the costs and benefits of economic policy. The last section of the chapter (the last 4 pages) is unusual in that it tries to involve the student in the art of abstraction, although in a not too rigorous way. It is sometimes instructive for students to realize that many of the breakthroughs in thinking are not the result of observation of the “real” world, but of people asking: “What if?” In this way we try to get students to explore possibilities by asking, for instance, what if the demand curve were upward sloping? What could cause this? What would be the results? Do the results fit with any recorded observations? And so on. Suggested Approaches and Helpful Hints We use this chapter to provide some examples of government involvement in the world. When students are first introduced to price controls, for example, they often conclude that governments are misguided and that their involvement is always wrong. It is better for them to understand that there are no absolutes: that any action (or inaction) brings costs and benefits, and one of the major functions of economists is to clearly highlight what the costs and benefits are and who is affected by them. For this reason, we find the tidal wave example an instructive one since it sets the stage for a discussion on the purpose of government intervention.

  12. Page 12
    Read page 12 as text

    Principles of Microeconomics , 8e • • Chapter Three 2 This chapter is also a good place to emphasize the role of price as a rationing mechanism. If the demand increases, then the price will increase so as to eliminate shortages. But if the price can’t rise, then some other rationing mechanism must be used. One of the small but important points that you may wish to bring out in the discussion is the distinction between a meagre supply (at equilibrium) and a shortage (a disequilibrium). This is a distinction that we economists often skirt over. Students need to realize that just because there is no shortage in a market does not necessarily mean that a large quantity of the product is being bought and sold. You might find that you need to emphasize the point that a minimum wage only affects the low - wage markets in the economy. Otherwise, some students get the impression that minimum wage legislation is the major cause of unemployment throughout the economy. Answers to Problems for Further Study 1. See the following figure: Figure 3.22 (completed) 2. If the demand were to increase and the supply to decrease then definitely the price would rise, but the effect on the quantity traded would be indeterminate since it would rise a s a result of the increase in demand but decrease because of the decrease of supply. 3 . A price control is a government restriction that sets either a maximum or minimum price for a product. There are two types of price controls: a price ceiling imposes a maximum price whereas a price floor imposes a minimum price on a product. 4. a) $20 b) $20

  13. Page 13
    Read page 13 as text

    Principles of Microeconomics , 8e • • Chapter Three 3 5 . orange juice: price up; quantity indeterminate cigarettes: price indeterminate; quantity down beer: price down; quantity indeterminate eye glasses: price indeterminate; quantity up 6 . A higher minimum wage may well cause some employers to economize on the use of labour (or where possible, replace labour with capital) so that the quantity demanded will fall. At the same time a new higher minimum wage may attract more people to look for jobs. With fewer jobs available and more people looking, the result will be more unemployment. 7. An individual demand curve may well be upward - sloping in the case of people displaying conspicuous consumption (i.e. showing off by demonstrating to others that price is not a barrier for them). For such people a higher price for things like expensive clothes, jewelry or perfumes actually makes these products more attractive for them and so they buy more (but only up to a limit). As far as the market demand curve is concerned, there is the well - documented instance of the so - called Giffen goods where, for example, the lower price for staple products, like rice or potatoes might mean that poor people might buy less rather than more of them because they can now afford to use the extra money to purchase meat, fish or vegetables. 8. A price ceiling imposes an upward limit on market price. If that limit is above the current market price then the limit has no effect and market price prevails.

  14. Page 14
    Read page 14 as text

    Principles of Microeconomics , 8e • • Chapter Three 4 9. See the following figure: Figure 3.25 (completed) 10. a) The demand curve must be steeper than the supply curve. b) Decrease c) The surplus will disappear.

  15. Page 15
    Read page 15 as text

    Principles of Microeconomics • • Chapter Four 1 CHAPTER FOUR Elasticity Overview Comments We have deliberately linked the concept of price elasticity of demand with the sellers’ total revenue at the beginning of the chapter. We then move directly to a specific example involving the sale of airline tickets on the Vancouver to Edmonton route (inelastic demand) and the Vancouver to Calgary route (elastic demand). This is an attempt to demonstrate the usefulness of one of the concepts in economics that, in our experience, students are likely to retain over the years. We then illustrate the concepts of elasticity graphically which most students grasp immediately. Next, we proceed to discuss the determinants of elasticity before asking students to do any more calculations. We hope that this approach encourages students to keep the idea of elasticity front and centre and thereby not to get lost in detailed calculations, numbers and formulas and, as a result, lose sight of the common - sense purpose of this powerful concept. We believe that elasticity is not only an important concept, but also an interesting one. We try to demonstrate this with a discussion of the four specific examples involving a sales tax, an excise tax on cigarettes and alcohol, illegal drugs, and wheat. The chapter also includes a fuller discussion of the elasticity of supply than those found in other texts, with an application involving ticket scalping. Again, unlike some other approaches, the chapter offers a complete discussion of both income and cross - elasticity. Suggested Approaches and Helpful Hints The first five pages of this chapter are very tight and, as a result, we make no apology to our students when we work through them paragraph - by - paragraph and page - by - page. We usually work through questions like Test Your Understanding 1 and 2 in class before proceeding. As a result, we find that the discussion on the determinants of elasticity goes much more easily and student participation is usually high. Some instructors may wish to take the following approach to elasticity: Δ Q x 100 Є = Q = Δ Q x P = Δ Q x P Δ P x 100 Q Δ P Δ P Q P

32 more pages in the full document

Unlock it once and it stays in your library, ready to chat with or turn into flashcards.

Unlock the full document

More Economics study materials

See all

Study this document with CramX

Once it is in your library, every tool can work from it.