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Solution Manual for Essential Foundations of Economics, Global Edition, 7th Edition

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    Getting Started Chapter 1 ANSWERS TO CHAPTER CHECKPOINT S  Study Plan Problems and Applications 1. Provide three examples of scarcity that illustrate why even the 1, 826 bi l lionaires in the world face scarcity. The 1, 826 billionaires might want to be able to eat unlimited meals wit h- out gaining weight; live to be at least 140 years old and enjoy perfect health everyday; be able to wake up in San Francisco and go to sleep in Paris after spending no more than 3 hours on a plane. None of these wants can be fulfilled given the present state of technology and r e sources available. 2. Label each entry in the l ist as dealing with a microeconomic topic or a macroeconomic topic. Explain your answer.  Motor vehicle s production in China is growing by 10 percent a year . This entry is a microeconomic topic because individuals and businesses make decisions whether to buy or sell cars.  Coffee prices rocket . This entry is a microeconomic topic because individuals and businesses make decisions whether to buy or sell coffee.  Globalization has reduced African poverty . This entry is a macroeconomic topic because globalization is the result of choices made by billions of people rather than an individual or bus i- ness .  The government must cut its budget deficit . This entry is a m a croeconomic topic because neither an individual nor a business makes decision to cut expenditures .  Apple sells 20 million iPhone 6 s martphones a month . This entry is a m i croeconomic topic because individual s and Apple make decision whether to buy or sell iPhones .

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    2 Part 1 . INTRODUCTION Use the following information to work Problems 3 to 6. Jurassic World had world - wide box office receipts of $ 1.66 b illion. The movie ’s production budget was $ 15 0 million with additional marketing costs . A successful movie brings pleasure to millions, creates work for tho u sands, and makes a few people rich. 3. What contribution does a movie like Jurassic World make to coping with scarcity? When you buy a movie ticket, are you buying a good or a se r- vice? Scarcity still exists but the amount of entertainment available in the eco n- omy increases. Buying a ticket to watch a movie is buying a service. 4. Who decides whether a movie is going to be a blockbuster? How do you think the creation of a blockbuster movie influences what , how , and for whom goods and services are produced? The audience decides whether a movie will be a blockbuster because the audience decides whether to attend the movie. The “what” question is affected in three ways: First, one good or service that is produced is the blockbuster movie. Second, the people whose i n- comes are higher as a r e sult of the blockbuster then buy an assortment of goods and services and so this assortment of goods and services is pr o- duced. Finally, the “what” question is influenced if the movie leads to spinoff goods (such as toys) or creates a series of sequels or similar films. The “how” question is affect ed to the extent that movies use different production methods. Some movies, for instance, have a lot of special e f- fects while other movies have few or none. The “for whom” question is infl u enced because those people who receive the profits of a blockbuster mo v ie have higher incomes and so more goods and services are produced for them. 5. What are some of the components of marginal cost and marginal benefit that the produ c er of a movie faces? Some of the marginal costs the producer faces are the cost of an actor or actress, the costs of the crew for a day, the costs of a location, and the costs of advertising in a newspaper. The marginal benefits the producer enjoys are his or her salary and/or profit participation from the movie, royalties from the movie, the prestige resulting from a successful movie, and any awards given to the producer of the movie. 6. Suppose that Chris Pratt had been offered a part in another movie and that to hire him for Jurassic World , the producer had to double Chris Pratt’s pay. What incentives would have changed? How might the changed i n centives have changed the choices that people made? The higher pay would have increased Mr. Pratt’s incentive to make Jura s- sic World rather than the other movie and perhaps affected his choice to

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    Chapter 1 . Getting Started 3 make Jurassic World rather than the other movie. The higher pay would have increased the incentive of the producer to decrease the expense of other aspects of the movie so the producer might have chosen to reduce the pay of the other stars in the movie. 7 . What is the social interest? Distinguish it from self - interest. In your answer give an example of self - interest and an example of social interest. The social interest looks at what is best for society as a whole; choices that are best for society as a whole are said to be in the social interest. The self - interest looks at what is best for the individual; choices that are best for the individual making the choice are said to be in the self - interest. An e x- ample of a choice made in the self - interest is a student’s decision to take an economics class. An example of a choice made in the social interest is a firm’s decision to reduce its air pollution. 8 . Pam, Pru, and Pat are deciding how they will celebrate the New Year. Pam prefers to take a cruise, is happy to go to Hawaii, but does not want to go skiing. Pru prefers to go skiing, is happy to go to Hawaii, but does not want to take a cruise. Pat prefers to go to Hawaii or to take a cruise but does not want to go skiing. Their decision is to go to Hawaii. Is this decision rational? What is the opportunity cost of the trip to Hawaii for each of them? What is the benefit that each gets? Pam, Pru and Pat’s decision to go to Hawaii is rational. All three of them considered the cost and benefit of various New Year’s plans. All three were at least willing to go to Hawaii while Pam and Pat were unwilling to go skiing and Pru was unwilling to go on a cruise. The opportunity cost of the trip for Pam is a cruise; for Pru, it is skiing; and for Pat, it is a cruise. The benefit each receives is the pleasure, the relaxation, excitement, and/or know l edge gained from the trip. 9 . Label each of the entries in the list as a positive or a normative statement.  Low - income people pay too much for housing . The entry that low - income people pay too much for housing is a norm a- tive statement.  The number of U.S. farms has decreased over the past 50 years . The entry about the number of farms is a positive statement.  Toyota expands parts production in the United States . The entry about Toyota expanding parts production is a positive stat e- ment.  Imports from China are swamping U.S. department stores . The entry about imports is a normative stat e ment.  The rural population in the United States is declining . The entry about the population in rural areas is a positive stat e ment.

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    4 Part 1 . INTRODUCTION Use the following information to work Problems 10 to 12. REI is paying its employees to take Black Friday, Thanksgiving off REI, the outdoor gear and apparel retailer, is paying employees to celebrate Thanksgiving 2015 by spending Black Friday outdoors with their families. Source: Sustainable Brands , October 28, 2015 10. With Black Friday off with full pay, explain what is free and what is scarce. The workers’ time remains scarce because Black Friday remains only one day. REI’s gear and apparel remain scarce because there is a still a limited amount of these products. The publicity that REI received is not free b e- cause the company paid for it with less production and, accordingly, less rev e nue and profit. 11 . What is REI’s incentive to give its workers Black Friday off? Was REI’s decision made in self - interest or in the social interest? Explain your a n- swer. REI’s managers have the incentive to give their employees the day off if they believe that the positive publicity that resulted could lead to i n- creased future sales. The managers might also believe that the employees would feel grateful and would worker harder in the future. Of course, the managers also had the incentive to give their workers the day off because many other employers do so. REI’s decision to give its workers a paid day off had elements of both self - interest and social interest. To the extent that his decision was motivated by the free publicity and a resulting rise in sales, or the expectation that its employees would work more diligently in the future, the decision was motivated by self - interest. However, to the extent that a desire to a l low the workers a chance to spend time with their families, the decision also had elements of social i n terest. 12. Do you think that REI workers will shop or spend the day with family? Explain your answer. Some REI workers will shop and others will spend the day with their family, depending on which alternative is in their self - interest. 13. Read Eye on the Benefit and Cost of Sc h ool on p. 1 2 and e xplain why both you and Clayton Kershaw made the right dec i sion. Clayton Kershaw made the correct decision to skip college because the opportunity cost to him of attending college (which includes his forgone salary playing baseball) vastly exceeded the benefits to him of attending college. For most students, the opportunity cost of attending college is not so large, so for most students the benefits from attending college exceed the opportunity cost of attendance. For these students, attending college is the correct decision.

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    Chapter 1 . Getting Started 5  Instructor Assignable Problems and Applications 1. Which of the following are components of the opportunity cost of being a full - time student who lives at home ? The things that the student would have bought with :  A higher income The items the student wou ld have purchased with the higher income he or she would have earned if he or she was not a full - time student are an opportunity cost of being a full - time student.  Expenditure on t uition The cost of tuition is part of the opportunity cost of being a full - time student because th is expense i s paid only because the person is a st u- dent.  A subscription to the Rolling Stone magazine If the subscription was required by a class and the individual su b- scribed only because of the class requirement, then the cost of the su b- scription is an opportunity cost of being a student. However if the pe r- son would have subscribed to Rolling Stone even if he or she was not a student, then the cost of the subscription is not an opportunity cost of being a student.  The income a stu dent will earn after graduating The income earned after graduation is not an opportunity cost of being a student. 2. Think about the following news items and label each as involving a what , how , or for whom question:  Today, most stores use computers to keep their inventory records, whereas 20 years ago most stores used paper records. Stores using computers for inventory records today versus paper 20 years ago answers the how question.  Healthcare professionals and drug companies recommend that Med i- caid drug rebates be made available to everyone in need. Deciding whether to offer lower Medicaid drug rebates, which would lower the prices for drugs, is a for whom que s tion.  A n increase in the gas tax pays for low - cost public transit. Building a low - cost public transit system answers a what question. B e- cause not everyone will use the public transportation equally nor will everyone pay the same amount of taxes, there also is a for whom aspect of the headline. 3. T he headlines in the list appeared in The Wall Street Journal . Classify each headline as a signal that the news article is about a microeconomic to p ic or

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    6 Part 1 . INTRODUCTION a macroeconomic topic. Explain your a n swers.  Job Gains Calm Slump Worries This entry is a macroeconomic topic because the slump concerns a turndown in the overall economy and neither an individual nor a bus i- ness makes the decision to slow the aggregate economy.  Washington Post’s Profit Falls This entry is a m i croeconomic topic because it concerns the profit ou t- come of one business, the Washington Post.  Overcapacity, Fuel Costs Hit Shipping Th is entry is a microeconomic topic . I t describes the situation within one sector — shipping — which is being affected by overcapacity and a rise in the price of fuel.  U.S. Budget Deficit Expands This entry is a macroeconomic topic because the budget deficit is the r e- sult of taxes and government spending spread over all sectors in the e n- tire economy. 4. Your school decides to increase the intake of new students next year. To make its decision, what economic concepts would it have considered? Would the school have used the “economic way of thinking” in reaching its decision? Would the school have made its decision on the margin? The school would consider the extra revenue that each additional st u dent would bring and compare that to the extra cost of providing each student with instruction and service. By comparing the extra revenue and the e x- tra cost, the school is making its decision on the margin and is using the economic way of thinking. If the school compares the additional revenue to the additional cost, it makes its decision on the ma r gin. 5. Provide examples of ( a ) a monetary incentive and (b) a non - monetary incentive, a carrot and a stick of each, that government policies use to i n- fluence behavior. (a) A monetary carrot that the students might answer because it is close to their lives is student aid, such as Pell grants. A monetary stick might be taxes on liquor. (b) A non - monetary carrot is government support for youth sports , such as allowing little league teams to use a county park, and a non - monetary stick is jail terms for illegal drug or a l cohol use. 6. Think about each of the items in the l ist and explain how they affect ince n tives and might change the choices that people make:  A hurricane hits Central Florida. The hurricane affects the people in Central Florida and the consumers who purchase the products produced in Central Florida, such as oran g-

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    Chapter 1 . Getting Started 7 es or vacation services. Residents’ incentives change if they suffered damage from the hurricane because they have the incentive to repair the damage. If the price of home repair rises, residents who specia l ize in home repair have an incentive to work longer hours to earn the higher price. If the hurricane raises the price of the goods and services pr o- duced in Central Florida, consumers have the incentive to buy less of these particular goods and services because they are more expe n sive.  The World Series begins tonight but a storm warning is in effect for the area around the stadium. The report of the possible storm decreases fans’ incentive to attend the game. Some fans decide to stay at home and watch the game on telev i sion .  The price of a personal computer falls to $50. The fall in the price of a computer increases consumers’ incentive to buy a computer. More consumers decide to buy a computer. The fall in the price of a computer decreases producers’ incentives to produce co m- puters. Fewer producers decide to produce computers.  Unrest in the Middle East sends the price of gas to $5 a gallon. The rise in the price of gasoline affects drivers’ incentives to buy gas o- line and large gas - guzzling cars. Drivers decide to buy less gasoline and fewer large gas - guzzling cars. They also might decide to ride public transport a tion more often. 7. Does the decision to make a blockbuster movie mean that some other more desirable activities get fewer resources than they deserve? Is your answer positive or normative? Explain your answer. Making a blockbuster movie means that some other activities get fewer resources. But whether “more desirable” activities get fewer resources than they “deserve” is a normative answer for two reasons. First the que s- tion of whether an activity is more desirable or less desirable depends on the person’s judgment and values. Second the determination of whether an activity gets fewer resources than it deserves also involves the norm a- tive decision about the quant ity of resources an activity deserves. So the answer to the question of whether making a blockbuster movie means that other more desirable activities get fewer resources than they deserve is a normative answer that depends on the st u dent’s values. 8. Provide two examples of economics being used as a tool by (a) a st u dent, (b) a business, and (c) a government. Classify your examples as dealing with microeconomic topics and macroec o nomic topics. (a) Students might answer that they use economics as a tool when they budget their student aid and when they decided which college to a t- tend based on the costs of their options. Both instances deal with m i- croeconomics.

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    8 Part 1 . INTRODUCTION (b) A business uses economics as a tool when it decides the price it charges for its product and the salaries it pays its managers. Both i n- stances are microeconomic examples. (c) The government use economics as a tool when it decides whether to increase taxes on cigarettes or lower the interest rate. The first exa m- ple is microeconomic in nature and the second involves macroec o- nomics. Use the following news clip to work Problems 9 to 12. Obama unveils major climate change policy Obama’s Clean Power Plan, which will set federal limits on carbon emissions from coal - fired power plants, will cost $8.4 billion and reap benefits of more than $34 billion. Opponents of the plan say it will drive up the cost of ele c- tricity for millions of Americans. Source: CNN, August 3, 2015 9. What are the more than $34 billion of benefits from using less coal to produce electricity? Who receives these benefits: the users of electricity or the owners of power plants, or both the users and the owners? Benefits include: (1) a reduction in carbon emissions, which brings a d e- crease in the contribution of human activity to global warming and cl i- mate change, and (2) cleaner air, which contributes to improved health. Both the users of electricity and the owners of power plants receive the benefits. 10. What are the $8.4 billion of costs arising from using less coal to produce electricity? Who bears these costs: the users of electricity or the owners of power plants, or both the users and the owners? To decrease carbon emissions from coal - fired plants requires that the plants install more pollution abatement equipment, such as scrubbers on their stacks that decrease emissions of carbon. The costs of the equipment and its installation account for the costs of the Clean Power Plan. Users of electricity, who pay higher prices for electricity, will pay some of these costs and owners of power plants, who receive lower profits from produ c- ing ele c tricity, also wi ll pay some of the costs. 11. Explain why someone might oppose the Clean Power Plan when its benefits exceed its costs. Someone might oppose the Clean Power Plan because he or she believes that the benefits and costs are measured incorrectly so that in reality the costs exceed the benefits. Others might oppose it because the costs that fall on them exceed the benefits that they receive. 12. Explain whether the Clean Power Plan has an opportunity cost. The Clean Power Plan has an opportunity cost because the resources d e- voted to meeting its goals and requirements could be used instead to pr o- ducing other goods and services.

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    Chapter 1 . Getting Started 9  Multiple Choice Quiz 1. Which of the following describes the reason why scarcity exists? A. Governments make bad economic decisions. B. The gap between the rich and the poor is too wide. C. Wants exceed the resources available to satisfy them. D. There i s too much unemployment. Answer: C Answer C uses the definition of scarcity on page 2. 2. Which of the following defines economics? Economics is the social science that studies ___________. A. the best way of eliminating scarcity B. the choices made to cope with scarcity, how incentives influence those choices, and how the choices are coordinated C. how money is created and used D. the inevitable conflict between self - interest and the social interest Answer: B Answer B uses the definition of economics on page 2. 3. Of the three big questions, what , how , and for whom , which of the fo l- lowing is an example of a how question? A. Why do doctors and lawyers earn high incomes? B. Why don’t we produce more small cars and fewer gas guzzlers? C. Why do we use machines rather than migrant workers to pick grapes? D. Why do college football coaches earn more than professors? Answer: C Answer C describes how grapes are picked. 4 Which of the following is not a key idea in the economic way of thinking? A. People make rational choices by comparing costs and benefits. B. Poor people are discriminated against and should be treated more fairly. C. A rational choice is made at the margin. D. Choices respond to incentives. Answer: B Answer B is not part of description of the economic way of thinking on page 8.

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    10 Part 1 . INTRODUCTION 5. A rational choice is ___________. A. the best thing you must forgo to get something B. what you are willing to forgo to get something C. made by comparing marginal benefit and marginal cost D. the best for society Answer: C Answer C is part of description of a rational choice on page s 8 and 9. 6. Which of the following best illustrates your marginal benefit from studying? A. The knowledge you gain from studying 2 hours a night for a month B. The best things forgone by studying 2 hours a night for a month C. What you are willing to give up to study for one additional hour D. What you must give up to be able to study for one additional hour Answer: C Page 10 shows that a nswer C is the marginal benefit from studying. 7. The scientific method uses models to ___________. A. clarify normative disagreements B. avoid the need to study real questions C. replicate all the features of the real world D . focus on those features of reality assumed relevant for understan d ing a cause and effect relationship Answer: D Answer D uses the definition of an economic model on page 1 5 . 8. Which of the following is a positive statement? A. We should stop using corn to make ethanol because it is raising the cost of food. B. You will get the most out of college life if you play a sport once a week. C. Competition among wireless service providers across the borders of Canada, Mexico, and the United States has driven roaming rates down. D . Bill Gates ought to spend more helping to eradicate malaria in Afr i ca. Answer: C Answer C is a positive statement because it can, in theory, be tested.

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    Appendix: Making and Using Graphs Chapter 1 ANSWERS TO APPENDIX CHECKPOINT  Study Plan Problems The s preadsheet in the t able provides data on the U.S. economy: Column A is the year; the other columns are quantities sold in millions per year of compact discs (column B), music videos (column C), and singles downloads (co l- umn D). Use this spreadsheet to work Pro b lems 1 and 2. 1. Draw a scatter diagram to show the relationship between the quantities sold of compact discs and music videos. Describe the rel a tionship. Figure A1.1 illustrates the relationship of the data from the spreadsheet between the quantities sold of compact discs and the quantities sold of music vi d- eos. Over all the period, there appears to be a pos i- tive or direct relationship; that is, when more co m- pact discs are sold, more music vid e os are sold. A B C D 1 200 4 767 33 1 39 2 200 6 6 20 2 3 586 3 200 8 385 1 3 1,033 4 20 1 0 226 9 1, 162 5 20 1 2 2 11 11 1, 392 6 2014 144 4 1,200

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    12 Part 1 . INTRODUCTION 2. Draw a time - series graph of quantity of compact discs sold. Say in which year or years the quantity sold (a) was highest, (b) was lowest, (c) i n- creased the most, and (d) decreased the most. If the data show a trend, d e- scribe it. Figure A1.2 illustrates the time series of the quantity of compact discs sold using the data from the spreadsheet. a. The quantity sold was the highest in 200 4 . b. The quantity sold was the lowest in 201 4 . c. The quantity sold never increased. d. The quantity sold decreased the most b e- tween 2006 and 2008 when it decreased by 235 million. Over the entire time period covered in the fi g- ure, there is a downward trend in the quantity of compact discs sold. 3. The following data shows the relationship between two variables x and y . x 0 1 2 3 4 5 y 32 31 28 23 16 7 Is the relationship between x and y positive or negative? Calculate the slope of the relationship when x equals 2 and when x equals 4. How does the slope change as the value of x i n creases? The relationship is negative: When x increases, y decreases. The slope of the relationship equals the change in y divided by the change in x along the tangent line; that is, the slope of the relationship at a point equals the slope of the tangent line at that point. When x equals 2, the slope of the tangent line equals – 4, so the slope of the relationship equals – 4. When x equals 4, the slope of the tangent line equals – 8, so the slope of the rel a- tionship equals – 8. The slope of the relationship increases in magnitude (the line becomes steeper) as x increases.

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    Appendix 1 . Making and Using Graphs 13 4 . The table provides data on the price of a balloon ride, the te m- perature, and the number of rides a day. Draw graphs to show the relationship b e tween  The price and the nu m ber of rides, when the temper a ture is 70°F . Figure A1.3 illustrates the relationship between the price and the number of rides when the temperature is 70°F.  The number of rides and the temper a- ture, when the price is $15 a ride . Figure A1.4 illustrates the relationship between the number of rides and the temperature, when the price is $15 a ride. Price (dollars per ride) Balloon rides (number per day) 50  F 70  F 90  F 5 32 50 40 10 27 40 32 15 18 32 27 20 10 27 18

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    14 Part 1 . INTRODUCTION  Instructor Assignable Problems Use the information in the table to work Problems 1 and 2 . Column A is the year; th e other columns are quantities sold in mi l- lions per year of co m pact discs (column B), music videos (column C), and singles downloads (column D). 1. Draw a scatter diagram to show the rel a- tionship between quantities sold of music videos and singles downloads. Describe the rel a tionship. Figure A1.5 illustrates the relationship of the data from the spreadsheet between the quant i- ties sold of music videos and singles dow n- loads. Over all the period, there appears to be a negative or indirect relationship; that is, when fewer music videos are sold, more singles are dow n loaded. A B C D 1 200 4 767 33 1 39 2 200 6 6 20 2 3 586 3 200 8 385 1 3 1,033 4 20 1 0 226 9 1, 162 5 201 2 2 11 11 1, 39 2 6 2014 144 4 1,200

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    Appendix 1 . Making and Using Graphs 15 2. Draw a time - series graph of the quantity of music videos sold. Say in which year or years the quantity sold (a) was highest, (b) was lowest, (c) decreased the most, and (d) decreased the least. If the data show a trend, describe it. Figure A1.6 illustrates the time series of music videos sold using the data from the sprea d- sheet. a. The quantity sold was the highest in 200 6 . b. The quantity sold was the lowest in 201 4 . c. The quantity sold decreased the most b e- tween 2004 and 2006 and between 2006 and 2008, when it decreased by 10 million per period. d. Setting aside the period s during which the quantity increased, the quantity sold d e- creased the least between 200 8 and 20 1 0. There is a downward trend in the quantity of music videos sold. Use the following data on the relationship between two variables x and y to work Problems 3 and 4. x 0 1 2 3 4 5 y 0 1 4 9 16 25 3. Is the relationship between x and y positive or neg a tive? Explain. The relationship is positive: When x increases, y also increases. 4. Calculate the slope of the relationship when x equals 2 and x equals 4. How does the slope change as the value of x increases? The slope of the relationship equals the change in y divided by the change in x along the tangent line; that is, the slope of the relationship at a point equals the slope of the tangent line at that point. When x equals 2, the slope of the tangent line equals 4, so the slope of the relationship equals 4. When x equals 4, the slope of the tangent line equals 8, so the slope of the relationship equals 8. The slope of the relationship increases as x increa s- es.

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    16 Part 1 . INTRODUCTION 5. T he t able provides data on the price of hot chocolate, the temperature, and the cups of hot chocolate bought . Draw graphs to show the relationship between  The price and cups of hot chocolate bought , when the temperature is constant. Figure A1.7 illustrates the relationship between the price and the number of cups bought holding constant the te m- perature. Note that there are three rel a- tio n ships, one for each temperature.  The temperature and cups of hot chocolate bought , when the price is constant. Figure A1.8 illustrates the relationship between the number of cups bought and the temperature, holding constant the price. Note that there are four rel a- tio n ships, one for each price. Price (dollars per cup ) Hot chocolate ( cups per week ) 50  F 70  F 90  F 2.00 40 30 20 2.50 30 20 10 3.00 20 10 0 3.50 10 0 0

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    The U.S. and Global Economies Chapter 2 ANSWERS TO CHAPTER CHECKPOINT  Study Plan Problems and Applications 1. W hich of the following items are not consumption goods and services ? Explain why not.  A chocolate bar A chocolate bar is a consumpt ion good.  A ski lift A ski lift is not a consumption good. It is capital that produces a se r- vice for sk i ers.  A golf ball A golf ball is a consumption good. 2. W hich of the following items are not capital goods ? Explain why not.  An auto assembly line An auto assembly line is a capital good.  A shopping mall A shopping mall is a capital good.  A golf ball A golf ball is not a capital good. It is a consumption good. 3. W hich of the following items are not factors of production ? Explain why not .  Vans used by a baker to deliver bread Vans used to deliver bread are capital, so they are factors of produ c- tion.  1,000 shares of Amazon.com stock 1,000 shares of Amazon.com stock are not a factor of production. The shares represent partial ownership of Am a zon.com and therefore are financial capital.  Undiscovered oil in the Arctic Ocean Undiscovered oil is not a factor of produ c tion because it is not used to

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    18 Part 1 . INTRODUCTION produce goods or services. Once it is discovered, it will become a fa c- tor of pr o duction. 4. Which factor of production earns the highest percentage of total U.S. i n- come? Define that factor of production. What is the income earn ed by this factor of production called? Labor earns by far the largest percentage of total U.S. income, 6 3 percent of total income in 201 4 . Labor consists of the work time and the work e f- fort that people devote to producing goods and services. The income earned by labor is a wage. 5. With more job training and more scholarships to poor American st u- dents, which special factor of production is likely to grow faster than in the past? As more people go to school and/or receive job training, the nation’s h u- man capital will grow more rapidly. Human capital is the knowledge and skills people obtain from education, on - the - job training, and work exper i- ence. With more job training and more scholarships, human capital will grow more rapidly. 6 . Define the factor of production called capital. Give three examples of capital, different from those in the chapter. Distinguish between the fa c- tor of production capital and financial cap i tal. Capital is the tools, instruments, machines, buildings, and other items that have been produced in the past and that businesses now use to produce goods and services. Capital includes railroad engines and cars, servers, and ATMs. The factor of production “capital” is the actual good itself; “f i- nancial capital,” suc h as stocks and bonds, are the funds that provide businesses with their financial resources which can be used to acquire capital goods. 7. The pace at which new businesses are created in the U.S. economy and the percentage of U.S. jobs in young firms has fallen. Ryan Decker and others, “The Role of Entrepreneu r ship in U.S. Job Creation and Economic Dynamism.” Journal of Economic Perspe c tives , 2014. Explain how you would expect these facts to influence what, how, and for whom goods and services are produced in the United States The answer to the what question change s if, as is probably the case, new and young business produce different goods and services than more e s- tablished business. For example, new and young firms are more likely to create apps than older and more established firms. If these groups of pr o- ducers produced their goods and services using different technologies than the rest of the producers, then the question of how goods and se r- vices would change. For whom goods and services are produced would

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    Chapter 2 . The U.S. and Global Economies 19 change if some groups of consumers prefer the goods and services pr o- duced by the new and young firms while other groups do not. 8 . In the circular flow model, explain the real flow and/or the money flow in which each item below belongs. Illustrate your answers on a circular flow diagram.  You buy a coffee at Starbucks . In Figure 2.1 the dark arrows repr e- sent money flows and the grey a r rows represent flows of goods and services and factors of pr o- duction . If you buy a coffee at Starbucks , your expenditure is a money flow from households to the goods market, l a- beled a in the fi g ure.  The government buys some Dell computers. The purchase of computers by the government repr e- sents a flow of co m- puters from the goods market to the government, labeled b in the fi g ure.  A student works at a FedEx office . The student working at FedEx is a factor of production, so the flow is a flow of the services of factor of production from households to the factor markets, labeled c in the fi g ure.  Donald Trump rents a Ma n hattan building to a hotel. Donald Trump’s building in Manhattan is a factor of production, so the flow is the services from this factor of production from hous e- holds to the factor markets, labeled d in the figure.  You pay your income tax. Your income tax payment is a money flow from households to the government and is labeled e in the fi g ure.

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    20 Part 1 . INTRODUCTION 9. Why you can get a free college education in Germany but not in California Even American students can get a free college degree in Germany, where high taxes pay for colleges. D e spite college being free, fewer students in Germany earn college degrees than in the United States and more enter vocational apprenticeships. Source: Los Angeles Times , October 29, 2015 If California adopted the German model of higher education, how would that change for whom goods and services are produced? The students in California who otherwise would not have gone to co l- lege but who take advantage of the “ free ” college education will have higher incomes than otherwise. Consequently, more goods and se r- vices will be produced for them. The taxpayers who must pay the taxes necessary to fund these college educations will have less income to spend on goods and services, so fewer goods and services will be produced for them. 10. Read Eye on the Dreamliner on p. 4 3 and then answer the following que s- tions:  How many firms are involved in the production of the Dreamliner and how many are identified in the fi g ure on p. 4 3 ? Over 400 firms are involved in the production of the Dreamliner. O n- ly 15 of them are identified in the figure.  Is the Dreamliner a capital good or a consumption good? Explain why? The Dreamliner is a capital good because it will be used to produce services (airline travel) throughout many future years.  State the factors of production that make the Dreamliner and pr o vide an example of each. All the factors of production — land, labor, capital, and entrepreneu r- ship — are used to make the Dreamliner. The copper used for wiring is an example of the land used; the engineer who helped design the landing gear is an example of labor; the huge cranes that lift the var i- ous pieces of the Dreamliner to assemble them is an example of cap i- tal; and the creative and imaginative input of Boeing ’ s top managers who organize the resources used to produce the Dreamliner exempl i- fy entrepreneurship .  Explain how the production of the Dreamliner influences wha t , how , and for whom , goods and se r vices are produced. Dreamliner influences “what” goods and services are produced by creating a demand for components manufactured around the world . It influences “how: goods are produced because Boeing and the other 400 firms all determine the best way to produce each particular part

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    Chapter 2 . The U.S. and Global Economies 21 of the Dreamliner. It influences “for whom” because factors of pr o- duction employed to make the Dreamliner receive income from this production, thereby increasing the quantity of goods and services they can purchase.  Use a graph to show where in the circular flow model of the global economy the flows of the components listed on p. 4 3 appear and where the sales of Drea m liners appear. Except for the components built in the United States, spending on the other components appear in the flow of e x- penditure on U.S. imp orts. Sales of Dreamliners appear in the flow of e x- penditure on U.S. e x ports.

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    22 Part 1 . INTRODUCTION  Instructor Assignable Problems and Applications 1. Boeing’s Dreamliner has had a rocky start.  Why doesn’t Boeing manufacture all the components of the Drea m- liner at its own facto ry in the United States? Boeing wants to manufacture the Dreamliner at the lowest possible cost. It would be more expensive for Boeing to manufacture Drea m- liners at its own factory in the United States because Boeing does not have the expertise possessed by its subcontractors and because the wages Boeing pay s U.S. workers exceed the wages its subco n tractors pay s their workers.  Describe some of the changes in what , how , and for whom , that would occur if Boeing manufactured all the components of the Dreamliner at its own factories in the United States. If Boeing manufactured all the components of the Dreamliner at its own factories in the United States, more components would be pr o- duced in the United States and more capital would have been used in their production. U.S. workers and investors would have received higher incomes but the Dreamliner would cost more to produce so Boeing would have earned a lower profit.  State some of the tradeoffs that Boeing faces in making the Drea m- liner. Boeing faced a huge number of tradeoffs. For example, when desig n- ing the plane, Boeing’s engineers had to make decisions about fuel economy and passenger load. Increasing the passenger load d e- creased fuel economy, so the engineers traded passenger load for fuel economy . Another example revolves around the construction of the Dreamliner. Boeing could have constructed the plane using just a few companies but instead it used over 400. Boeing was trading off the simplicity of dealing with just a handful of com panies for the i n- creased specialization by dealing with many specialized companies.  Why might Boeing’s decisions in making the Dreamliner be in the social interest? Building the Dreamliner itself advances the social interest because it increases the quantity of comfortable, rapid transportation. The amount of high - quality transportation available in the economy i n- creases, which benefits society. The decisions in making the Drea m- liner advance the social interest because they were designed to make the Dreamliner at low cost and thereby avoid wasting resources. 2. The global economy has seen a fall in the number of landlines and rapid growth in the number of smartphones. In the United States, 41 percent of

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    Chapter 2 . The U.S. and Global Economies 23 households have no landline and 90 percent have a smartphone. In Afr i- ca, 33 percent have a smartphone. Describe the changes in what , how , and for whom telecommunication services are produced in the global econ o my. What : As the number of cell phone users increases, the global economy has been producing more cell phone telecommunication services. More cell phones are produced, fewer land phones are produced, and presu m- ably more cell phone frequencies are used. How : More telecommunication services are being produced using cell phones rather than fixed - line phones. For whom : While the amount of telecommunication services has been ri s- ing throughout the world, it has been increasing most rapidly in Africa. So more telecommunication services are being produced for residents of A f rica as well as for residents in the rest of the world. 3. Which of the entries in the l ist are co n- sumption goods and services? E x plain your choice. A pack of bubble gum and a movie are consumption goods. They are purchased by consumers . 4. Which of the entries in the l ist are capital goods? Explain your choice. An airplane, a garbage truck, and an ATM are capital goods. All provide services to produce other goods and services. The i n- terstate highway and the stealth bomber a l- so are capital goods. They also provide services (transportation and defense) that help produce other goods and se r vices. 5. Which of the entries in the l ist are factors of production? Explain your choice. An interstate highway, an airplane, a school teacher, a stealth bomber, a garbage truck, the President of the United States, a strawberry field, and an ATM are factors of production. A school teacher and the President are labor; an interstate highway, an airplane, a stealth bomber, a garbage truck, and an ATM are capital; and, a strawberry field is land. 6. In the African nation of Senegal, to enroll in school a child needs a Birth Certificate that costs $25. This price is several weeks’ income for many families. Explain how this requirement is likely to affect the growth of human capital in Senegal. Human capital growth depends, in part, on the extent of schooling: More schooling means more human capital. Because of Senegal’s hefty fee for a List  An interstate highway  An airplane  A school teacher  A stealth bomber  A garbage truck  A pack of bu b ble gum  President of the United States  A strawberry field  A movie  An ATM

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    24 Part 1 . INTRODUCTION required Birth Certificate, fewer children will enroll in school, thereby d e- creasing Senegal’s human capital growth. 7. China’s income gap widens The income gap has widened in China. In 2014, the pay of workers in the coastal regions increased by 9.7 percent while that of workers in the i n- land regions grew by 9 percent. Source: South China Morning Post , May 28, 2015 Explain how the distribution of personal income in China can be getting more unequal even though the poorest are getting richer. The distribution of income in China can be getting more unequal even when the poorest are getting richer if the richest are getting richer even faster. If the rich are getting richer faster, the fraction of the nation’s total income received by the poorest 20 percent falls, which makes the personal distribution of income more u n equal. 8. Compare the scale of agricultural production in the advanced and deve l- oping economies. In which is the percentage higher? In which is the total amount produced greater? Agricultural is a small part of total production in advanced economies. It is a much larger part in developing economies. Even though advanced economies devote only a small part of their total production to agricu l- ture, they still produce about one third of the world’s total production of food. The remaining two thirds is produced in the developing n a tions.

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    Chapter 2 . The U.S. and Global Economies 25 9. On a diagram of the circular flow model, indicate in which real or money flow each entry in the list b e longs.  General Motors ’ pays its workers wages. General Motors wage payment is a money flow that is a payment for use of the se r- vices of a factor of production and so flows out of the factor ma r- ket to households (it flowed into the factor market from General Motors, a firm). In Figure 2. 3 the dark arrows re p- resent money flows and the grey arrows re p- resent flows of goods and services and factors. The flow of wage payments to hous e- holds is labeled a in the figure in Fi g ure 2. 3 .  IBM pays a dividend to its stoc k holders. IBM’s dividend pa y ment is a money flow that is a payment for use of the services of a factor of production and so flows out of the factor market to households (it flowed into the factor market from IBM, a firm). The flow to households is labeled b in the figure.  You buy your groce r ies . Your purchase of groceries represents a money flow from hous e holds to the goods market, labeled c in the fi g ure.  Southwest rents some aircraft . The aircraft are factors of production, so the flow is the services from these factors of production from the factor markets to firms, l a beled d in the figure.  Nike pays Serena Williams for promoting its sports shoes. Serena Williams is a factor of production, so the flow is a money flow

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    26 Part 1 . INTRODUCTION from the factor markets to households in exchange for M s . Williams’ services of promoting the sports shoes. The flow is labeled e in the figure. Use the following inform a tion to work Problems 10 and 11. Poor India makes mi l lionaires at fastest pace India, with the world’s largest population of poor people, also paradoxically created millionaires at the fastest pace in the world. Millionaires increased by 22.7 percent to 123,000. In contrast, the number of Indians living on less than a dollar a day is 350 million and those living on less than $2 a day is 700 million. In other words, there are 7,000 very poor I n dians for every millionaire. Source: The Times of India , June 25, 2008 10. How is the personal distribution of income in India changing? If the number of millionaires is growing more rapidly than the number of other income groups, it will be the case that the personal distribution of income in India is becoming less equally distributed. 11. Why might incomes of $1 a day and $2 a day underestimate the value of the goods and services that these households actually consume? The people living on $1 and $2 a day probably grow a lot of their food and produce a lot of their clothing and shelter. If these goods and services are not taken into account, their share of goods and services is understa t- ed. Including them raises the v alue of the goods and services these households actually consume.

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    Chapter 2 . The U.S. and Global Economies 27  Multiple Choice Quiz 1. Which of the following classifications is correct? A . City streets are consumption goods because they wear out with use. B. Stocks are capital goods because when pe ople buy and sell them they make a profit. C. The coffee maker in the coffee shop at an airport is a consumption good because people buy the coffee it produces. D. White House security is a government service because it is paid for by the government. Answer: D Answer D is correct . 2. Which of the following statements about U.S. production is correct? A. Construction accounts for a larger percentage of total production than does manufacturing. B. Real estate services account for 1 4 . 5 percent of the value of total pr o- duction, larger than any other item of services or goods. C. Consumption goods and services represent 7 8 . 5 percent of U.S. pr o- duction by value and that pe r centage doesn’t fluctuate much. D. The manufacture of goods represents more than 50 percent of total production. Answer: C Answer C is correct as the data on page 3 4 show . 3. Which of the following items is not a factor of production? A. An oil rig in the Gulf of Mexico B. A ski jump in Utah C. A bank loan to a farmer D. An orange grove in Florida Answer: C Answer C is not a factor of production because it is financial capital; see page 3 7 . 4. What is human capital? A. A fruit picker B. Unskilled labor C. Your professor’s knowledge of the economy D. A n auto assembly line robot Answer: C Answer C uses the definition of human capital on page 3 7 .

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    28 Part 1 . INTRODUCTION 5. Which of the following statements is correct? A. Labor earns wages and entrepreneurship earns bonuses . B. Land earns interest and capital earns rent . C. Entrepreneurship earns interest and capital earns profit . D. Capital earns interest and labor earns wages . Answer: D Page 3 9 shows that a nswer D is correct . 6. How are goods and services produced in the global economy? A. Developing countries use less human capital but just as much phys i- cal capital as a d vanced economies. B. Emerging economies use more capital - intensive technology than do developing econ o mies. C. Human capital in all economies is similar. D. Advanced economies use less capital than developing economies. Answer: B Developing countries have less capital than emerging econ o- mies . 7. In the circular flow model, which of the following items is a real flow? A. The flow of government expenditures to firms for the goods bought B. The flow of income from firms to households for the services of the factors of production hired C. The flow of U.S. borrowing from the rest of the world D. The flow of labor services from households to firms Answer: D Answer D is a real flow because it is a labor service .

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    The Economic Problem Chapter 3 ANSWERS TO CHAPTER CHECKPOINT S  Study Plan Problems and Applications 1. T he t able shows the quantities of corn and beef that a farm can produce in a year. Draw a graph of the farm’s PPF . Mark on the graph:  An inefficient combination of corn and beef — label this point A .  An unattainable combination of corn and beef — label this point B .  An efficient combination of corn and beef — label this point C . The production possibilities frontier is illu s- trated in Figure 3.1. Any production point in the interior of the PPF , such as the point marked A , is an inefficient combination of corn and beef. Any production point beyond the PPF , such as the point marked B , is an u n- attainable combination of corn and beef. Any production point on the PPF , such as the point marked C is a production efficient combin a- tion of corn and beef. Corn (bushels) Beef (pounds ) 250 and 0 200 and 300 100 and 500 0 and 60 0

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    30 Part 1 . INTRODUCTION Use the following information to work Pro b lems 2 and 3. The people of Leisure Island have 50 hours of labor a day that can be used to p roduce ente r- tainment and good food. T he t able shows the maximum quantity of e i ther entertainment or good food that Leisure Island can produce with different quantities of labor. 2. Is an output of 50 units of entertainment and 50 units of good food attainable and efficient? With a production of 50 units of entertainment and 50 units of good food, do the people of Leisure Island face a tradeoff? Producing 50 units of good food and 50 units of entertainment is attain a- ble. However, at this production point, Leisure Island’s resources are not fully employed or are misallocated. They are producing within their PPF . As a result, the people of Leisure Island do not face a tradeoff — they can produce more entertainment or good food at no o p portunity cost. 3. What is the opportunity cost of producing an additional unit of ente r- tainment? Explain how the opportunity cost of producing a unit of ente r- tainment changes as more entertainment is produced. If production is initially within the PPF , the opportunity cost of an add i- tional unit of entertainment is zero. If production is on the PPF there is an opportunity cost of producing a unit of entertainment b e cause good food must be forgone . At that point, the opportunity cost while moving along the PPF equals the lo ss in good food produced divided by the gain in e n- tertainment produced. Once on the PPF , as more entertainment is pr o- duced, the opportunity cost of an additional unit i n creases. Use the following information to work Problems 4 and 5. Malaria can be controlled The World Health Organization’s malaria chief says that it is too costly to try to fully eradicate the disease. He says that by using nets, medicine, and DDT it is possible to eliminate 90 percent of malaria cases. But to eliminate 100 percent of cases would be extremely costly. Source: The New York Times , March 4, 2008 4. Make a graph of the production possibilities frontier with malaria control on the x - axis and other goods and services on the y - axis. Figure 3.2 (on the next page) shows the PPF . 5. Describe how the opportunity cost of controlling malaria changes as more resources are used to reduce the number of malaria cases. As more resources are used to control malaria, the opportunity cost i n- creases. Indeed, the malaria chief indicated that the opportunity cost of eliminating the last 10 percent of malaria would have an extremely high Labor Entertai n ment (units) Good food (units) 0 0 or 0 10 20 or 30 20 40 or 50 30 60 or 60 40 80 or 65 50 100 or 67

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