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

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GettingStartedChapter1ANSWERS TOCHAPTERCHECKPOINTSStudy Plan Problems and Applications1.Provide three examples of scarcity that illustrate why even the 1,826billionaires in the world face scarcity.The 1,826billionaires might wantto be able to eat unlimited meals with-out gaining weight; live to be at least 140 years old and enjoy perfecthealth everyday; be able to wake up in San Francisco and go to sleep inParis after spending no more than 3 hours on a plane. None of thesewants can be fulfilled given the present state of technology and resourcesavailable.2.Label each entry inthe list as dealing with a microeconomic topic or amacroeconomic topic.Explain your answer.Motor vehiclesproduction in China is growing by 10 percent a year.This entry is a microeconomic topic becauseindividuals and businessesmake decisions whether to buy or sell cars.Coffee prices rocket.This entry is a microeconomic topic becauseindividuals and businessesmake decisions whether to buy or sellcoffee.Globalization has reduced African poverty.This entry is a macroeconomic topic becauseglobalization is the resultof choices made by billions of peoplerather than an individual or busi-ness.The government must cut itsbudgetdeficit.This entry is a macroeconomic topic becauseneither an individual nor abusiness makes decision to cut expenditures.Apple sells20million iPhone6smartphonesa month.This entry is a microeconomic topic becauseindividualsand Applemake decisionwhethertobuy or sell iPhones.

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2Part 1.INTRODUCTIONUse the following information to work Problems 3 to 6.Jurassic Worldhad world-wide box office receipts of $1.66 billion. Themovie’sproduction budgetwas$150 millionwithadditional marketing costs.Asuccessful movie brings pleasure to millions,createswork for thousands,and makes a fewpeoplerich.3.What contribution does a movie likeJurassic Worldmake to coping withscarcity? When you buy amovieticket, are you buying a good or a ser-vice?Scarcity still exists but the amount of entertainment available in the econ-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 youthink the creation of a blockbuster movie influenceswhat,how, andforwhomgoods and services are produced?The audience decides whether a movie will be a blockbuster because theaudience decides whether to attend the movie.The “what” question is affected in three ways: First, one good or servicethat is produced is the blockbuster movie. Second, the people whose in-comes are higher as a result of the blockbuster then buy an assortment ofgoods and services and so this assortment of goods and services is pro-duced. Finally, the “what” question is influenced if the movie leads tospinoff goods (such as toys) or creates a series of sequels or similar films.The “how” question is affected to the extent that movies use differentproduction methods. Some movies, for instance, have a lot of special ef-fects while other movies have few or none. The “for whom” question isinfluenced because those people who receive the profits of a blockbustermovie have higher incomes and so more goods and services are producedfor them.5.What are some of the components of marginal cost and marginal benefitthat the producer of a movie faces?Some of the marginal costs the producer faces are the cost of an actor oractress, the costs of the crew for a day, the costs of a location, and thecosts of advertising in a newspaper. The marginal benefits the producerenjoys 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 thatChris Pratthad been offered a part in another movie andthat to hire him forJurassic World, the producer had to doubleChrisPratt’spay.Whatincentiveswouldhavechanged?Howmightthechanged incentives have changed the choices that people made?The higher pay would have increased Mr.Pratt’sincentive to makeJuras-sic Worldrather than the other movie and perhaps affected his choice to

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Chapter 1.Getting Started3makeJurassic Worldrather than the other movie. The higher pay wouldhave increased the incentive of the producer to decrease the expense ofother aspects of the movie so the producer might have chosen to reducethe pay of the other stars in the movie.7.What is the social interest? Distinguish it from self-interest. In youranswer 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 thatare 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 forthe individual making the choice are said to be in the self-interest. An ex-ample of a choice made in the self-interest is a student’s decision to takean economics class. An example of a choice made inthe social interest is afirm’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 wantto go skiing. Pru prefers to go skiing, is happy to go to Hawaii, but doesnot want to take a cruise. Pat prefers to go to Hawaii or to take a cruisebut does not want to go skiing. Their decision is to go to Hawaii. Is thisdecision rational? What is the opportunity cost of the trip to Hawaii foreach of them? What is the benefit that each gets?Pam, Pru and Pat’s decision to go to Hawaii is rational. All three of themconsidered the cost and benefit of various New Year’s plans. All threewere at least willing to go to Hawaii while Pam and Pat were unwilling togo skiing and Pru was unwilling to go on a cruise. The opportunity costof 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 knowledge 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 norma-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 aboutToyota expanding parts productionis apositivestate-ment.Imports from China are swamping U.S. department stores.The entry about imports is a normative statement.Theruralpopulationin theUnited States is declining.The entry about the population in rural areas is a positive statement.

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4Part 1.INTRODUCTIONUse the following information to work Problems 10 to 12.REI is paying its employees to take Black Friday, Thanksgiving offREI, the outdoor gear and apparel retailer, is paying employees to celebrateThanksgiving 2015 by spending Black Friday outdoors with their families.Source:Sustainable Brands, October 28, 201510.With Black Friday off with full pay, explain what is free and what isscarce.The workers’ time remains scarce because Black Friday remains only oneday. REI’s gear and apparel remain scarce because there is a still a limitedamount of these products. The publicity that REI received is not free be-cause the company paid for it with less production and, accordingly, lessrevenue and profit.11.What is REI’s incentive to give its workers Black Friday off? Was REI’sdecision made in self-interest or in the social interest? Explain your an-swer.REI’s managershave the incentive to give their employees the day off ifthey believe that the positive publicity that resulted could lead to in-creased future sales. The managers might also believe that the employeeswould feel grateful and would worker harder in the future. Of course, themanagers also had the incentive to give their workers the day offbecausemany 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 motivatedby the free publicity anda resultingrise in sales,or the expectation that itsemployees would work more diligently in the future,the decision wasmotivated by self-interest.However,to the extent that a desire to allowthe workers a chance to spend time with their families, the decision alsohad elements of social interest.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 theirfamily, depending on which alternative is in their self-interest.13.ReadEye on the Benefit and Cost ofSchoolon p. 12and explainwhy bothyou andClayton Kershawmade the right decision.Clayton Kershawmade the correct decision to skip college because theopportunity cost to him of attending college (which includes his forgonesalary playing baseball) vastly exceeded the benefits to him of attendingcollege. For most students, the opportunity cost of attending college is notso large, so for most students the benefitsfromattending college exceedthe opportunity cost of attendance. For these students, attending college isthe correct decision.

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Chapter 1.Getting Started5Instructor Assignable Problems and Applications1.Which of the following are components of the opportunity cost of being afull-time studentwho lives at home? Thethings that the student wouldhave bought with:A higher incomeThe items the student would have purchased with the higher income heor she would have earned if he or she was not a full-time student are anopportunity cost of being a full-time student.Expenditure on tuitionThe cost of tuitionispart of the opportunity cost of being a full-timestudent because thisexpenseis paidonlybecause the person is a stu-dent.A subscription to theRolling StonemagazineIf the subscription was required by a class and the individual sub-scribedonlybecause of the class requirement, then the cost of the sub-scription is an opportunity cost of being a student. However if the per-son would have subscribed toRolling Stoneeven if he or she was not astudent, then the cost of the subscription is not an opportunity cost ofbeing a student.The income a student will earn after graduatingThe income earned after graduation is not an opportunity cost of beinga student.2.Think about the following news items and label each as involving awhat,how, orfor whomquestion: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 20years ago answers thehowquestion.Healthcare professionals and drug companies recommend thatMedi-caid drug rebates be made available to everyone in need.Deciding whether to offer lower Medicaid drug rebates, which wouldlower the prices for drugs, is aforwhomquestion.Anincreaseinthe gas taxpays for low-costpublic transit.Building a low-costpublic transit system answers awhatquestion. Be-cause not everyone will use the public transportation equally nor willeveryone pay the same amount of taxes, there also is aforwhomaspectof the headline.3.The headlines inthe listappeared inThe Wall StreetJournal. Classify eachheadline as a signal that the news article is aboutamicroeconomic topic or

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6Part 1.INTRODUCTIONa macroeconomic topic. Explain your answers.Job Gains Calm Slump WorriesThis entry is a macroeconomic topic because the slump concerns aturndown in the overall economy and neither an individual nor a busi-ness makes the decision to slow the aggregate economy.Washington Post’s Profit FallsThis entry is a microeconomic topic becauseit concerns the profit out-come of one business, the Washington Post.Overcapacity, Fuel Costs Hit ShippingThis entry isa microeconomic topic. Itdescribes the situationwithinone sector—shipping—which is being affected byovercapacityand arise in theprice offuel.U.S. Budget Deficit ExpandsThis entry is a macroeconomic topic because thebudget deficit is the re-sult of taxes and government spending spread overall sectors in the en-tireeconomy.4.Your school decides to increase the intake of new students next year. Tomakeits decision, what economic concepts would it have considered?Would theschool have used the “economic way of thinking” in reachingits decision?Would the school have made its decision on the margin?The school would consider the extra revenue that each additional studentwould bring and compare that to the extra cost of providing each studentwith instruction and service. By comparing the extra revenue and the ex-tra cost, the school is making its decision on the margin and is using theeconomic way of thinking. If the school compares the additional revenueto the additional cost, it makes its decision on the margin.5.Provide examples of(a) amonetaryincentiveand(b) anon-monetaryincentive, a carrot and a stick of each, that government policies use to in-fluencebehavior.(a)A monetary carrot that the students might answer because it is closeto their lives is student aid, such as Pell grants. A monetary stickmight be taxes on liquor.(b)A non-monetary carrot is government support foryouth sports, suchasallowing little league teams to use a county park,and a non-monetary stick is jail terms for illegal drug or alcohol use.6.Think about each of the items inthe list and explain how they affectincentivesand might change the choices that people make:A hurricane hits Central Florida.The hurricane affects the people in Central Florida and the consumerswho purchase the products produced in Central Florida, such as orang-

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Chapter 1.Getting Started7es or vacation services. Residents’ incentives change if they suffereddamage from the hurricane because they have the incentive to repairthe damage. If the price of home repair rises, residents who specialize inhome repair have an incentive to work longer hours to earn the higherprice. If the hurricane raises the price of the goods and services pro-duced in Central Florida, consumers have the incentive to buy less ofthese particular goods and services because they are more expensive.The World Series begins tonight but a storm warning is in effect forthe area around the stadium.The report of the possible storm decreases fans’ incentive to attend thegame. Some fans decide to stay at home and watch the game on television.The price of a personal computer falls to $50.The fall in the price of a computer increases consumers’ incentive to buya computer. More consumers decide to buy a computer. The fall in theprice of a computer decreases producers’ incentives to produce com-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 gaso-line and large gas-guzzling cars. Drivers decide to buy less gasoline andfewer large gas-guzzling cars. They also might decide to ride publictransportation more often.7.Does the decision to make a blockbuster movie mean that some othermoredesirable activities get fewer resources than they deserve? Is youranswer positive or normative? Explain your answer.Making a blockbuster movie means that some other activities get fewerresources. But whether “more desirable” activities get fewer resourcesthan they “deserve” is a normative answer for two reasons. First the ques-tion of whether an activity is more desirable or less desirable depends onthe person’s judgment and values. Second the determination of whetheran activity gets fewer resources than it deserves also involves the norma-tive decision about the quantity of resources an activity deserves. So theanswer to the question of whether making a blockbuster movie meansthat other more desirable activities get fewer resources than they deserveis a normative answer that depends on the student’s values.8.Provide two examples of economics being used as a tool by(a)a student,(b)a business, and(c)a government. Classify your examples as dealingwithmicroeconomic topics and macroeconomic topics.(a)Students might answer that they use economics as a tool when theybudget their student aid and when they decided which college to at-tend based on the costs of their options. Both instances deal with mi-croeconomics.

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8Part 1.INTRODUCTION(b)A business uses economics as a tool when it decides the price itcharges for its product and the salaries it pays its managers. Both in-stances are microeconomic examples.(c)The government use economics as a tool when it decides whether toincrease taxes on cigarettes or lower the interest rate. The first exam-ple is microeconomic in nature and the second involves macroeco-nomics.Use the following news clip to work Problems9 to 12.Obama unveils major climate change policyObama’s Clean Power Plan, which will set federal limits on carbon emissionsfrom coal-fired power plants, will cost $8.4 billion and reap benefits of morethan $34 billion. Opponents of the plan say it will drive up the cost of elec-tricity for millions of Americans.Source: CNN, August 3, 20159.What are the more than $34 billion of benefits from using less coal toproduceelectricity? Who receives these benefits: the users of electricity ortheowners of power plants, or both the users and the owners?Benefits include: (1) a reduction in carbon emissions, which brings a de-crease in the contribution of human activity to global warming and cli-mate change, and (2) cleaner air, which contributes to improved health.Both the users of electricity and the owners of power plants receive thebenefits.10.What are the $8.4 billion of costs arising from using less coal to produceelectricity?Who bears these costs: the users of electricity or the owners ofpowerplants, or both the users and the owners?To decrease carbon emissions from coal-fired plants requires that theplants install more pollution abatement equipment, such as scrubbersontheir stacksthat decrease emissions of carbon. The costs of the equipmentand its installationaccount for the costs of the Clean Power Plan. Users ofelectricity, who pay higher prices for electricity, will pay some of thesecosts and owners of power plants, who receive lower profits from produc-ing electricity, also will pay some of the costs.11.Explain why someone might oppose the Clean Power Plan when itsbenefitsexceed its costs.Someone might oppose the Clean Power Plan because he or she believesthat the benefits and costs are measured incorrectly so that in reality thecosts exceed the benefits. Others might oppose it because the costs thatfall 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 de-voted to meeting its goals and requirements could be used instead to pro-ducing other goods and services.

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Chapter 1.Getting Started9Multiple Choice Quiz1.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 is too much unemployment.Answer: CAnswer 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 scarcityB.the choices made to cope with scarcity, how incentives influencethosechoices, and how the choices are coordinatedC.how money is created and usedD.the inevitable conflict between self-interest and the social interestAnswer:BAnswerBuses the definition ofeconomicson page 2.3.Of the three big questions,what,how, andfor whom, which of the fol-lowing isan example of ahowquestion?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:CAnswerCdescribeshowgrapes are picked.4Whichof the following isnot a key ideaintheeconomicway ofthinking?A.People make rational choices by comparing costs and benefits.B.Poor people are discriminated against and should be treated morefairly.C.A rational choice is made at the margin.D.Choices respond to incentives.Answer:BAnswerB isnotpart of description of the economic way ofthinking on page 8.

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10Part 1.INTRODUCTION5.A rational choice is ___________.A.the best thing you must forgo to get somethingB.what you are willing to forgo to get somethingC.made by comparing marginal benefit and marginal costD.the best for societyAnswer:CAnswerC is part of description of a rational choice on pages 8and9.6.Whichofthefollowingbestillustratesyourmarginal benefitfromstudying?A.The knowledge you gain from studying 2 hours a night for a monthB.The best things forgone by studying 2 hours a night for a monthC.What you are willing to give up to study for one additional hourD.What you must give up to be able to study for one additional hourAnswer:CPage10shows that answerC is the marginal benefit fromstudying.7.The scientific method uses models to ___________.A.clarify normative disagreementsB.avoid the need to study real questionsC.replicate all the features of the real worldD.focus on those features of reality assumed relevant for understandingacause and effect relationshipAnswer:DAnswer D uses the definition of an economic model on page15.8.Which of the following is a positive statement?A.We should stop using corn to make ethanol because it is raising thecostof food.B.You will get the most out of college life if you play a sport once aweek.C.Competition amongwireless service providersacross the borders ofCanada,Mexico, and the United States has driven roaming ratesdown.D.Bill Gates ought to spend more helping to eradicate malaria in Africa.Answer:CAnswer C is a positive statement because it can, in theory, betested.

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Appendix:Making andUsing GraphsChapter1ANSWERS TOAPPENDIXCHECKPOINTStudy Plan ProblemsThe spreadsheet inthe table provides data onthe U.S. economy: Column A is the year; theother columns are quantities sold in millionsper year of compact discs (column B), musicvideos (column C), and singles downloads (col-umn D). Use this spreadsheet to work Problems1 and 2.1.Draw a scatter diagram to show the relationshipbetween the quantities sold of compact discsand music videos. Describe the relationship.Figure A1.1 illustrates the relationship of the datafrom the spreadsheet between the quantities sold ofcompact discs and the quantities sold of music vid-eos. Over all the period, there appears to be aposi-tiveor directrelationship; that is, when more com-pact discs are sold,moremusic videos are sold.ABCD1200476733139220066202358632008385131,0334201022691,16252012211111,3926201414441,200

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12Part 1.INTRODUCTION2.Draw a time-series graph of quantity of compact discs sold. Say in whichyear or years the quantity sold (a) was highest, (b) was lowest, (c) in-creased the most, and (d) decreased the most. If the data show a trend, de-scribe it.Figure A1.2 illustrates the time series of thequantity of compact discs sold using the datafrom the spreadsheet.a.The quantity sold was the highest in 2004.b.The quantity sold was the lowest in 2014.c.The quantity soldneverincreased.d.The quantity sold decreased the most be-tween 2006 and 2008 when it decreased by235 million.Over the entire time period covered in the fig-ure, there is a downward trend in the quantityof compact discs sold.3.The followingdatashows the relationship between two variablesxandy.x012345y32312823167Is the relationship betweenxandypositive or negative? Calculate theslope of the relationship whenxequals 2 andwhenxequals 4. How doesthe slope change as the value ofxincreases?The relationship is negative: Whenxincreases,ydecreases. The slope ofthe relationship equals the change inydivided by the change inxalongthe tangent line; that is, the slope of the relationship at a point equals theslope of the tangent line at that point. Whenxequals 2, the slope of thetangent line equals–4, so the slope of the relationship equals–4. Whenxequals 4, the slope of the tangent line equals–8, so the slope of the rela-tionship equals–8. The slope of the relationship increases in magnitude(the line becomes steeper) asxincreases.

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Appendix 1.Making and Using Graphs134.The table provides data on theprice of a balloon ride, the tem-perature,andthenumberofridesaday.Drawgraphstoshow the relationship betweenThe price and the number ofrides,whenthe temperatureis 70°F.FigureA1.3illustratesthe relationshipbetween theprice andthe number ofrides when the temperature is 70°F.The number of rides and the tempera-ture,whenthe priceis $15 a ride.Figure A1.4 illustrates the relationshipbetween the number of rides and thetemperature,when the priceis $15 aride.Price(dollarsper ride)Balloon rides(number per day)50F70F90F5325040102740321518322720102718

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14Part 1.INTRODUCTIONInstructor Assignable ProblemsUse the information in the table to workProblems 1 and 2.Column A is the year; theother columns are quantities sold in mil-lions per year of compact discs (column B),musicvideos(columnC),andsinglesdownloads (column D).1.Draw a scatter diagram to show the rela-tionship between quantities sold of musicvideos and singles downloads. Describe therelationship.Figure A1.5 illustrates the relationship of thedata from the spreadsheet between the quanti-ties sold of music videos and singles down-loads. Over all the period, there appears to be anegative or indirect relationship; that is, whenfewer music videos are sold, more singles aredownloaded.ABCD1200476733139220066202358632008385131,0334201022691,16252012211111,3926201414441,200

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Appendix 1.Making and Using Graphs152.Draw a time-series graph of the quantity ofmusic videos sold. Say in which year or yearsthequantitysold(a)washighest,(b)waslowest,(c)decreasedthemost,and(d)decreased the least. If the data show a trend,describe it.Figure A1.6 illustrates the time series of musicvideos sold using the data from the spread-sheet.a.The quantity sold was the highest in 2006.b.The quantity sold was the lowest in 2014.c.The quantity sold decreased the most be-tween 2004 and 2006 and between 2006 and2008, when it decreased by 10 million perperiod.d.Settingaside the periodsduring which thequantity increased, the quantity sold de-creased the least between 2008and 2010.There is a downward trend in the quantity of music videos sold.Use the following data on the relationship between two variablesxandytoworkProblems3and4.x012345y014916253.Is the relationship betweenxandypositive or negative? Explain.The relationship is positive: Whenxincreases,yalso increases.4.Calculate the slope of the relationship whenxequals 2 andxequals 4.Howdoes the slope change as the value ofxincreases?The slope of the relationship equals the change inydivided by the changeinxalong the tangent line; that is, the slope of the relationship at a pointequals the slope of the tangent line at that point. Whenxequals 2, theslope of the tangent line equals 4, so the slope of the relationship equals 4.Whenxequals 4, the slope of the tangent line equals 8, so the slope of therelationship equals 8. The slope of the relationship increases asxincreas-es.

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16Part 1.INTRODUCTION5.Thetableprovidesdataonthe price of hot chocolate, thetemperature, and thecupsofhot chocolate bought. Drawgraphstoshowtherelationship betweenThe price and cups of hotchocolatebought,whenthe temperatureis constant.Figure A1.7 illustrates the relationshipbetween the price and the number ofcupsboughtholding constant the tem-perature. Note that there are three rela-tionships, one for each temperature.The temperature and cups of hot chocolatebought, when the priceisconstant.Figure A1.8 illustrates the relationshipbetween the number of cupsboughtand the temperature, holding constantthe price. Note that there are four rela-tionships, one for each price.Price(dollarspercup)Hot chocolate(cupsperweek)50F70F90F2.004030202.503020103.00201003.501000

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The U.S.and GlobalEconomiesChapter2ANSWERS TOCHAPTERCHECKPOINTStudy PlanProblemsand Applications1.Which of the following items arenotconsumption goods and services?Explain why not.A chocolate barA chocolate barisa consumption good.A ski liftA ski lift is not a consumption good. It is capital that produces a ser-vice for skiers.A golf ballA golf ballisa consumption good.2.Which of the following items arenotcapital goods? Explain why not.An auto assembly lineAn auto assembly lineisa capital good.A shopping mallA shopping mallisa capital good.A golf ballA golf ball is not a capital good. It is a consumption good.3.Which of the following items arenotfactors of production? Explain why not.Vans used by a baker to deliver breadVans used to deliver bread are capital, so they are factors of produc-tion.1,000 shares of Amazon.com stock1,000 shares of Amazon.com stock are not a factor of production. Theshares represent partial ownership of Amazon.com and therefore arefinancial capital.Undiscovered oil in the Arctic OceanUndiscovered oil is not a factor of production because it is not used to

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18Part 1.INTRODUCTIONproduce goods or services. Once it is discovered, it will become a fac-tor of production.4.Which factor of production earns the highest percentage of totalU.S. in-come? Define that factor of production. What is the income earned bythis factor of productioncalled?Labor earns by far the largest percentage of total U.S. income, 63percentof total income in 2014. Labor consists of the work time and the work ef-fort that people devote to producing goods and services.Theincomeearned by labor is awage.5.With more job training and more scholarships to poor American stu-dents,which special factor of production is likely to grow faster than inthe past?As more people go to school and/or receive job training, the nation’s hu-man capital will grow more rapidly. Human capital is the knowledge andskills people obtain from education, on-the-job training, and work experi-ence. With more job training and more scholarships, human capital willgrow more rapidly.6.Define the factor of production called capital. Give three examples ofcapital,different from those in the chapter. Distinguish between the fac-tor of productioncapital and financial capital.Capital is the tools, instruments, machines, buildings, and other itemsthathave been produced in the past and that businesses now use to producegoods and services.Capital includes railroad engines and cars, servers,and ATMs. The factor of production “capital” is the actual good itself; “fi-nancial capital,” such as stocks and bonds, are the funds that providebusinesses with their financialresourceswhich can be used to acquirecapital goods.7.The pace at which new businesses are created in the U.S. economy andthe percentage of U.S. jobs in young firms has fallen.Ryan Decker and others, “The Role of Entrepreneurshipin U.S. Job Creation and Economic Dynamism.”Journalof Economic Perspectives, 2014.Explain how you would expect these facts to influence what, how, and forwhom goods and services are produced in the United StatesThe answer to thewhatquestion changesif, as is probably the case, newand young business produce different goods and services than more es-tablished business.For example, new and young firms are more likely tocreate apps than older and more established firms.If these groups of pro-ducers produced their goods and services using different technologiesthan the rest of the producers, then the question ofhowgoods and ser-vices would change.For whomgoods and services are produced would

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Chapter 2.The U.S. and Global Economies19changeif some groups of consumers prefer the goods and services pro-duced bythenew and young firms while other groups do not.8.In the circular flow model, explain the real flow and/or the money flowin which each itembelowbelongs. Illustrate your answers on a circularflow diagram.Youbuy a coffee at Starbucks.InFigure2.1thedarkarrowsrepre-sentmoneyflowsand the grey arrowsrepresentflowsofgoodsandservicesandfactorsofpro-duction. If youbuy acoffeeatStarbucks,yourexpenditureisa money flow fromhouseholdstothegoodsmarket,la-beledain the figure.ThegovernmentbuyssomeDellcomputers.Thepurchaseofcomputersbythegovernmentrepre-sents a flow of com-putersfromthegoods market to thegovernment, labeledbin the figure.A student works ata FedEx office.The student working atFedExis a factor of production, so the flow isa flow of the services of factor of production from households to thefactor markets, labeledcin the figure.Donald Trump rents a Manhattan building to a hotel.Donald Trump’s building in Manhattan is a factor of production, sothe flow is the services from this factor of production from house-holds to the factor markets, labeleddin the figure.You pay your income tax.Your income tax payment is a money flow from households to thegovernment and is labeledein the figure.

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20Part 1.INTRODUCTION9.Why you can get a free college education in Germany but not in CaliforniaEven American students can get a free college degree in Germany, wherehigh taxes pay for colleges. Despite college being free, fewer students inGermany earn college degrees than in the United States and more entervocational apprenticeships.Source:Los Angeles Times, October 29, 2015IfCaliforniaadoptedthe Germanmodelof highereducation, howwould that change for whom goods and services are produced?Thestudents in Californiawho otherwise would not have gone to col-lege but who takeadvantage of the“free”collegeeducation will havehigher incomes than otherwise. Consequently, more goods and ser-vices will be produced for them. The taxpayers who must pay thetaxes necessary to fund these college educations will have less incometo spend on goods and services, so fewer goods and services will beproduced for them.10.ReadEye on the Dreamlineron p. 43and then answer the following ques-tions:How many firms are involved in the production of the Dreamlinerand how many are identified in the figure on p. 43?Over 400 firms are involved in the production of the Dreamliner. On-ly 15 of them are identified in the figure.Is the Dreamliner a capital good or a consumption good? Explainwhy?The Dreamliner is a capital good because it will be used to produceservices (airline travel) throughout many future years.State the factors of production that make the Dreamliner and providean example of each.All the factors of production—land, labor, capital, and entrepreneur-ship—are used to make the Dreamliner. The copper used for wiring isan example of the land used; the engineer who helped design thelanding gear is an example of labor; the huge cranes that lift the vari-ous pieces of the Dreamliner to assemble them is an example of capi-tal; andthe creative and imaginative input of Boeing’s top managerswho organize the resources used to produce the Dreamlinerexempli-fy entrepreneurship.Explain how the production of the Dreamliner influenceswhat,how,andforwhom, goods and services are produced.Dreamliner influences “what” goods and services are produced bycreating a demand for components manufactured around the world.It influences “how: goods are produced because Boeing and the other400 firms all determine the best way to produce each particular part

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Chapter 2.The U.S. and Global Economies21of the Dreamliner. It influences “for whom” because factors of pro-duction employed to make the Dreamliner receive income from thisproduction, thereby increasing the quantity of goods and servicesthey can purchase.Use a graph to show where in the circular flow model of the globaleconomy the flows of the components listed on p. 43appear andwhere the sales of Dreamliners appear.Except for thecomponentsbuiltintheUnitedStates,spendingontheothercomponentsappearintheflowofex-penditureonU.S.imports.SalesofDreamlinersappearintheflowofex-penditureonU.S.exports.

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22Part 1.INTRODUCTIONInstructor Assignable Problems and Applications1.Boeing’s Dreamliner has had a rocky start.Why doesn’t Boeing manufacture all the components of theDream-liner at its own factory in the United States?Boeing wants to manufacture the Dreamliner at the lowest possiblecost. It would be more expensive for Boeing to manufacture Dream-liners at its own factory in the United States because Boeing does nothave the expertise possessed by its subcontractors and because thewages Boeing paysU.S. workers exceed the wages its subcontractorspaystheir workers.Describe some of the changes inwhat,how, andforwhom, thatwouldoccurifBoeingmanufacturedallthecomponentsoftheDreamliner at its own factories in the United States.If Boeing manufactured all the components of the Dreamliner at itsown factories in the United States, more components would be pro-duced in the United States and more capital would have been used intheir production.U.S. workers and investors would have received higher incomes butthe Dreamliner would cost more to produce so Boeing would haveearned a lower profit.State some of the tradeoffs that Boeing faces in making the Dream-liner.Boeing faced a huge number of tradeoffs. For example, when design-ing the plane, Boeing’s engineers had tomake decisions about fueleconomy andpassengerload.Increasing thepassengerloadde-creased fuel economy, so the engineers traded passenger load for fueleconomy. Another example revolves around the construction of theDreamliner. Boeing could have constructed the plane using just a fewcompanies but instead it used over 400. Boeing was trading off thesimplicity of dealing with just a handful of companies for the in-creased specialization by dealing with many specialized companies.Why might Boeing’s decisions in making the Dreamliner be in thesocialinterest?Building the Dreamliner itself advances the social interest because itincreasesthequantityofcomfortable,rapidtransportation.Theamount of high-quality transportation available in the economy in-creases, which benefits society. The decisions in making the Dream-liner advance the social interest because they were designed to makethe Dreamliner at low cost and thereby avoid wasting resources.2.The global economy has seen a fall in the number of landlines and rapidgrowth in the number of smartphones. In the United States, 41 percent of

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Chapter 2.The U.S. and Global Economies23households have no landline and 90 percent have a smartphone. In Afri-ca, 33 percent have a smartphone. Describe the changes inwhat,how, andfor whomtelecommunication services are produced in the global economy.What: As the number of cell phone users increases, the global economyhas been producing more cell phone telecommunication services. Morecell phones are produced, fewer land phones are produced, and presum-ably more cell phone frequencies are used.How: More telecommunication services are being produced using cellphones rather than fixed-line phones.For whom: While the amount of telecommunication services has been ris-ing throughout the world, it has been increasingmostrapidly in Africa.So more telecommunication services are being produced for residents ofAfrica as well as for residents in the rest of the world.3.Which of the entriesin thelist are con-sumption goods and services? Explain yourchoice.A pack of bubble gum and a movie areconsumption goods. They are purchasedby consumers.4.Which of the entries inthe list are capitalgoods? Explain your choice.An airplane, a garbage truck, and an ATMare capital goods. All provide services toproduce other goods and services. The in-terstate highway and the stealth bomberal-soare capital goods. They alsoprovideservices (transportation and defense) that help produce other goods andservices.5.Which of the entries inthe list are factors of production? Explain yourchoice.An interstate highway, an airplane, a school teacher, a stealth bomber, agarbage truck, the President of the United States, a strawberry field, andan ATM are factors of production. A school teacher and the President arelabor; an interstate highway, an airplane, a stealth bomber, a garbagetruck, 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 BirthCertificate that costs $25. This price is several weeks’ income for manyfamilies.Explain how this requirement is likely to affect the growth ofhumancapital in Senegal.Human capital growth depends, in part, on the extent of schooling: Moreschooling means more human capital. Because of Senegal’s hefty fee for aListAn interstate highwayAn airplaneA school teacherA stealth bomberA garbage truckA pack of bubble gumPresident of the United StatesA strawberry fieldA movieAn ATM

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24Part 1.INTRODUCTIONrequired Birth Certificate, fewer children will enroll in school, thereby de-creasing Senegal’s human capital growth.7.China’s income gap widensThe income gap has widened in China. In 2014, the pay of workers in thecoastal regions increased by 9.7 percent while that of workers in the in-land regions grew by 9 percent.Source:South China Morning Post, May 28, 2015Explain how the distribution of personal income in China can be gettingmore unequal even though the poorest are getting richer.The distribution of income in China can be getting more unequal evenwhen the poorest are getting richer if the richest are getting richer evenfaster. If the rich are getting richer faster, the fraction of the nation’s totalincome received by the poorest 20 percent falls, which makes the personaldistribution of income more unequal.8.Compare the scale of agricultural production in the advanced and devel-opingeconomies. In which is the percentage higher? In which is the totalamount produced greater?Agricultural is a small part of total production in advanced economies. Itis a much larger part in developing economies. Even though advancedeconomies devote only a small part of their total production to agricul-ture, they still produce about one third of the world’s total production offood. The remaining two thirds is produced in thedeveloping nations.

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Chapter 2.The U.S. and Global Economies259.On adiagramof the circular flow model, indicate in which real or moneyfloweach entryin the listbelongs.GeneralMotors’paysitsworkerswages.GeneralMotorswage payment isamoneyflowthat is a paymentfor use of the ser-vicesof afactorofproductionand so flows outof the factor mar-ket to households(it flowed into thefactormarketfromGeneralMotors,afirm).In Figure 2.3thedark arrows rep-resentmoneyflowsandthegrey arrows rep-resentflowsofgoods and services and factors. The flow of wage payments to house-holds is labeledain the figure in Figure 2.3.IBM pays a dividend to its stockholders.IBM’s dividend payment is a money flow that is a payment for use ofthe services of a factor of production and so flows out of the factormarket to households (it flowed into the factor market from IBM, afirm). The flow to households is labeledbin the figure.You buy your groceries.Your purchase of groceries represents a money flow from householdsto the goods market, labeledcin the figure.Southwest rents some aircraft.Theaircraftare factors of production, so the flow is the services fromthese factors of production from the factor markets to firms, labeleddin the figure.Nike paysSerena Williamsfor promoting its sports shoes.Serena Williamsis a factor of production, so the flow is a money flow

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26Part 1.INTRODUCTIONfrom the factor markets to households in exchange for Ms.Williams’services of promoting the sports shoes. The flow is labeledein thefigure.Use the following information to work Problems10and11.Poor India makes millionaires at fastest paceIndia, with the world’s largest population of poor people, also paradoxicallycreatedmillionaires at the fastest pace in the world. Millionaires increased by22.7percent to 123,000. In contrast, the number of Indians living on less than adollara day is 350 million and those living on less than $2 a day is 700 million.Inother words, there are 7,000 very poor Indians for every millionaire.Source:The Times of India, June 25, 200810.How is the personal distribution of income in India changing?If the number of millionaires is growing more rapidly than the number ofother income groups, it will be the case that the personal distribution ofincome in India is becoming less equally distributed.11.Why might incomes of $1 a day and $2 a day underestimate the value ofthe goods and services that these households actually consume?The people living on $1 and $2 a day probably grow a lot of their foodand produce a lot of their clothing and shelter. If these goods and servicesare not taken into account, their share of goods and services is understat-ed. Including them raises the value of the goods and services thesehouseholds actually consume.

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Chapter 2.The U.S. and Global Economies27Multiple Choice Quiz1.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 people buy and sell them theymakea profit.C.The coffee maker in the coffee shop at an airport is a consumptiongoodbecause people buy the coffee it produces.D.White House security is a government service because it is paid forby the government.Answer:DAnswerDis correct.2.Which of the following statements about U.S. production is correct?A.Construction accounts for a larger percentage of total production thandoesmanufacturing.B.Real estate services account for 14.5percent of the value of total pro-duction, larger than any other item of services or goods.C.Consumption goods and services represent78.5 percent of U.S. pro-duction by value and that percentage doesn’t fluctuate much.D.The manufacture of goods represents more than 50 percent of totalproduction.Answer:CAnswerCis correct as the data on page 34show.3.Which of the following items isnota factor of production?A.An oil rig in the Gulf of MexicoB.A ski jump in UtahC.A bank loan to a farmerD.An orange grove in FloridaAnswer:CAnswer Cis not a factor of production because it is financialcapital; see page 37.4.What is human capital?A.A fruit pickerB.Unskilled laborC.Your professor’s knowledge of the economyD.An autoassembly line robotAnswer: CAnswer C uses the definition ofhuman capitalon page37.

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28Part 1.INTRODUCTION5.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:DPage 39shows that answerDis correct.6.How are goods and services produced in the global economy?A.Developing countries use less human capital but just as much physi-cal capitalas advanced economies.B.Emerging economies use more capital-intensive technology than dodevelopingeconomies.C.Human capital in all economies is similar.D.Advanced economies use less capital than developing economies.Answer:BDeveloping countries have less capital thanemerging econo-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 boughtB.The flow of income from firms to households for the services of thefactors ofproduction hiredC.The flow of U.S. borrowing from the rest of the worldD.The flow of labor services from households to firmsAnswer:DAnswerDis a real flow because it is a labor service.

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TheEconomicProblemChapter3ANSWERS TOCHAPTERCHECKPOINTSStudy Plan Problems and Applications1.The table shows the quantities of corn and beef thata farmcan produce in ayear. Draw a graph of the farm’sPPF. Markon the graph:An inefficient combination of corn and beef—label thispointA.An unattainable combination of corn and beef—labelthis pointB.An efficient combination of corn and beef—label this pointC.The production possibilities frontier is illus-trated in Figure 3.1. Any production point intheinteriorof thePPF,suchasthepointmarkedA,is an inefficientcombination ofcorn and beef. Any production point beyondthePPF, such as the point markedB, is an un-attainable combination of corn and beef. Anyproduction pointonthePPF, such as the pointmarkedCis a production efficient combina-tion of corn and beef.Corn(bushels)Beef(pounds)250and0200and300100and5000and600

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30Part 1.INTRODUCTIONUse the following information to work Problems2and3.The people of Leisure Island have 50 hours oflabor a day that can be used toproduce enter-tainment and good food. The table shows themaximum quantity ofeitherentertainmentorgood food that Leisure Island can producewith differentquantities of labor.2.Is an output of 50 units of entertainmentand 50 units of good food attainableand efficient? With a production of50 units of entertainment and 50units of good food, do the people ofLeisure Island face a tradeoff?Producing 50 units of good food and 50 units of entertainment is attaina-ble. However, at this production point, Leisure Island’s resources are notfully employed or are misallocated. They are producing within theirPPF.As a result, the people of Leisure Island do not face a tradeoff—they canproduce more entertainment or good food at no opportunity cost.3.What is the opportunity cost of producing an additional unit of enter-tainment?Explain how the opportunity cost of producing a unit of enter-tainmentchanges as more entertainment is produced.If production is initially within thePPF, the opportunity cost of an addi-tional unit of entertainment is zero. If production is on thePPFthere is anopportunity cost of producing a unit of entertainment because good foodmust beforgone. At that point, the opportunity cost while moving alongthePPFequals the loss in good food produced divided by the gain in en-tertainment produced. Once on thePPF, as more entertainment is pro-duced, the opportunity cost of an additional unit increases.Use the following information to work Problems4and5.Malaria can be controlledThe World Health Organization’s malaria chief says that it is too costly to trytofully eradicate the disease. He says that by using nets, medicine, and DDTit ispossible to eliminate 90 percent of malaria cases. But to eliminate 100percent ofcases would be extremely costly.Source:The New York Times, March 4, 20084.Make a graph of the production possibilities frontier with malaria controlonthex-axis and other goods and services on they-axis.Figure 3.2 (on the next page) shows thePPF.5.Describe how the opportunity cost of controlling malaria changes asmoreresources are used to reduce the number of malaria cases.As more resources are used to control malaria, the opportunity cost in-creases. Indeed,the malaria chiefindicated that the opportunity cost ofeliminating the last 10 percent of malaria would have an extremely highLaborEntertainment(units)Good food(units)00or01020or302040or503060or604080or6550100or67

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