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Solution Manual for ISE Microeconomics and Behavior, 10th Edition

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    1 Chapter 1 Thinking Like an Economist Answers to Review Questions 1. The opportunity cost of reading a novel this evening is not being able to do whatever you would have done instead. If you would have watched TV, then your opportunity cost is not watching TV; if you would have studied economics, then your opportunity cost is not studying economics. 2. The tuition is a sunk cost and so your roommate should consider only costs and benefits relevant now and in the future. If he will be better off in life by leaving school now, he should not let the tuition make the rest of life less meaningful. 3. Driving an automobile (which pollutes the atmosphere) imposes an external cost on others. Building a house which others admire presents an external benefit. Inventing something which is new and useful, but which cannot be patented presents another external benefit. 4. A 50 - year - old presumably is in a higher pay bracket than a 20 - year - old so the opportunity cost of leaving the job is greater for the older person. 5. By definition, a sunk cost is a cost that is incurred regardless of one's current decisions. 6. Economists generally argue that people act in their own self - interest even if they do not consistently evaluate costs and benefits. The analogy most frequently used (from Milton Friedman) is that of a pool player who knows how to sink his shots without having studied physics. Answers to Chapter 1 Problems 1. Let $X be the amount Jamal earns in a day on his job. The cost to Jamal of going to the park is then $15 (admission fee) + $5 (gas & parking) + $10 (the lost satisfaction from not working) + $X (lost salary) = $30 + $X. The benefit of going to the park is $45. He should go to the park if his salary is $10/day, and shouldn't go if his salary is $20/day. At a salary of $15/day, he is indifferent between going and not going. 2. If Tom kept the $200 and invested it in additional mushrooms, at the end of a year's time he would have an additional $400 worth of mushrooms to sell. Dick must therefore give Tom $200 of interest in order for Tom not to lose money on the loan.

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    2 3. It is reasonable to assume that everybody has decreasing satisfaction from each pound of food as consumption level increases. In University A, everybody will eat until the benefit from eating an extra pound of food is equal to $0, since this is the cost o f each pound of food. In University B, people will eat until the benefit decreases to $2. Thus, everybody will eat less if they are at University B. So, not just average consumption but also each individual’s personal consumption will be lower. Note that t o reach this conclusion we need the assumption that the students at both universities have the same appetites. 4. The only costs that vary with mileage are fuel, maintenance, and tires , which are average $0.25/mile ( c ost of driving for fuel $1,200/10,000 = $0.12, for maintenance $1,100/10,000 = $0.11 , and tires $200/10,000 = $0.02) . The cost of driving will thus be $250 (= $0.25 × 1,000) , and since this is less than the cost of the bus, you should drive. 5. The band and hall rental fees are fixed costs. The caterers charge at the rate of $7/guest ($5 catering bill/$2 drink). So, an extra 10 guests will increase total costs by only $70. 6. You gave up the $60 (= $1,000 × 0.06) you wo u ld have earned if the money was in your savings account. This assumes that your tax rate on interest earned is zero . 7. Monica has already bought h er ticket, so h er cost - benefit calculation when it is time to go is as follows: benefit of seeing game vs. cost of the drive + time costs, etc. Rachel , not having bought h er ticket, faces a different calculation: benefit of seeing game vs. $30 + cost of the drive + time costs, etc. Since the benefits are the same in each case, but the costs are larger for Rachel at the moment of decision, s he is less likely to go. 8. A plane of either type — large or small — should use the state - of - the - art device if the extra benefits of that device exceed its extra costs. Because the device will save more lives in large planes than in small planes, its benefits are larger in large planes than in small ones. Your original re commendation was presumably based on the calculation that the benefits for the larger planes justified the extra cost but did not do so in the case of the smaller planes. Airline passengers are like other people insof ar as their willingness to invest in extra safety is constrained by other pressing uses for their scarce resources. Where extra safety is relatively cheap, as in large planes, they will rationally choose to purchase more than when it is relatively more ex pensive, as in small planes. 9. With more than a week to go, the $100 driver's fee and the $50 bus cancellation fee are sunk costs. If the trip takes place, the additional costs will be the remaining $450 of the bus fee plus the $75 in tolls, for a total of $525 in additional costs. If at least 30 tickets will be sold, it makes sense to continue the trip, since total revenue ($540) will exceed the additional cost.

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    3 10. Assuming that residents are required to recycle cans, they simply cannot put them with the regular trash. In the first case, the fixed cost of $6/week is a sunk cost. Therefore, for the residents, the cost of disposing an extra can is $0. In the tag system , the cost of disposing an extra can is $2, regardless of the number of cans. Therefore, since the costs are higher and the benefit of setting out a can is assumed to be the same in both cases, you expect less cans to be collected in the tag system. 11. The benefit of the 1st gigabyte is $32, the 2nd is $16, the 3rd is $8, the 4th is $4, the 5 th is $2, the 6 th is $1, the 7 th is $ 0 .50 and the 8 th is $ 0 .25. At a cost of $8, you should purchase 3 gigabytes. At higher levels of benefit, the benefit is less than the cost. At lower levels, benefit exceeds the cost. Price 32.00 16.00 8.00 4.00 1 2 3 4 5 6 7 8 9 Memory (GB) 12. The benefit of the 1st gigabyte is $1,600, the 2nd is $800, the 3rd is $400, the 4th is $200, the 5th is $100, the 6th is $50, the 7th is $25, and the 8th is $12.50. At a cost of $50 and your willingness to pay $800 for the first gigabyte , you should purchase 5 gigabytes. When your benefit rises to $1,600 for the first gigabyte , you consume 6 GB of RAM. Price 32.00 16.00 8.00 4.00 1 2 3 4 5 6 7 8 9 Memory (GB) The curve to the right shows the new benefit function.

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    4 13. False. The fact that Dana would have chosen the party before she bought her ticket means that she prefers a party to an event that costs $40. Now her choice is between two events that she can attend with no further payment. 14. Taylor Swift Bruno Mars Benefit Bp B r Cost (initial) $75 $75 Cost (final) $75 $50 In the problem, we are given that B p – $75 > B r – $75 or B p > B r (*) Now, we need to find out whether the following is true or not: B p – $75 > B r – $50 which is the same as B p > B r + $25 (**) Notice that (*) does not necessarily imply (**). For example, if B p = $80 and B r = $60, then (*) holds while (**) does not. So we can conclude that you should not go to the Taylor Swift concert in the above scenario if you are a rational utility maximizer. Your decision will depend on the relative values of B p and B r . The fact that you would have bought a Taylor Swift ticket means that the benefit of attending the Taylor Swift concert, denoted B p , must be greater than $75. Let B s denote the benefit of going to the Bruno Mars concert. The fact that you would have chosen the Taylor Swift concert before receiving your Bruno Mars concert ticket means that B p > B s . But this does not imply that you should go to the Taylor Swift concert. Suppose B p = $80 and B s = $60. When you now choose between the two concerts, the opportunity cost of attending the Bruno Mars concert is $50, so the net benefits of attending each concert are given by B d – $75 =$5 and B s – 50 = $10, which means you should go to the Bruno Mars concert. So FALSE. 15. Safari provides $10,000+/yr more enjoyment than a business job. $70,000 = gross benefit of business job salary. Costs of Business Job : 10,000 opportunity cost of loan 50,000 lost salary as safari leader 10,000 + lost enjoyment from safari job $70,000 + total cost of taking of business job > benefit, so don't take the job. If business salary was $70,001/yr, he would have taken it.

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    5 16. True. If you got $ 20 ,000 for the Equinox and paid that plus $5,000 more for the Explorer , the entire Explorer expense would have cost you $25,000. Since you have already shown that you did not want the Explorer for $25,000, why would you spend that for it now?

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    1 Chapter 2 Supply and Demand Answers to Review Questions 1. A shortage occurs when, at a given price, quantity demanded exceeds quantity supplied. Scarcity implies that not everyone can consume as much of a good as he wants. A good can be scarce without a shortage occurring if the price of the good is set at the market equilibrium. 2. The supply curve would be a horizontal line where the price equals zero. The demand curve would be a typical demand curve. If the price is greater than zero, then the market system is acting to allocate resources; not everyone can have as much as they want . 3. Some examples: Parking places for the president of the college; giving seniors priority in class assignments. Shortage of parking spaces and students being bumped from preregistration. 4. A reduction in supply implies a shift in the supply curve whereas a reduction in the quantity supplied implies a movement along the supply curve. 5. a. Change in demand b. Change in the quantity demanded (shift in supply) c. Change in the quantity demanded (shift in supply) d. Change in demand 6. Because consumers prefer to pay a lower price. When there is excess supply, the price is above the equilibrium price. So as the price falls, the quantity supplied falls, while the quantity demanded increases 7. The allocative function of price is not important with vertical, or nearly vertical, supply curves, e.g., land. 8. For the tax burden to fall mostly on consumers rather than producers (buyers rather than sellers), you want to find a product (or products) for which the quantity supplied is very

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    2 responsive to price but quantity demanded is less responsive to price. Addictive goods like cigarettes and alcohol may fit this description. 9. If a poor person were given $50,000 in cash, it is unlikely she would spend it on a Mercedes, since she probably has other, more pressing wants. Since the gift Mercedes would fetch less than the cash gift, most poor persons would choose the cash. Answers to Chapter 2 Problems 1. a. The imposition of the ceiling price on tea causes a reduction in the quantity of tea bought, from Q 1 to Q 2 (left panel). The result is a leftward shift in the demand for lemons, resulting in a reduction in both price and quantity (right panel). b. The ceiling price for tea lowers the quantity people are able to buy from Q 1 t to Q 2 t . There is excess demand for tea at the ceiling price P 2 t , and some of this excess demand spills over to substitute products such as coffee. The result is that the equilibrium price of coffee rises. ( Note : This result may seem inconsistent with the claim that a fall in the price of a good's substitute reduces the demand for that good. But this claim refers to a fall in the equilibrium price of the good, not a price reduction caused by a ceiling. Because of the quantity reduction caused by the ceiling, tea buyers would be willing to pay P 3 t for tea. So the price ceiling actually raises the opportunity cost of additional units of tea.)

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    3 P P tea coffee Q Q D D D S S 2 1 tea coffee P P P P P Q Q Q Q 1 2 1 2 t t t t t c c c t 1 2 3 1 2 c c 2. a. The given supply and demand curves suggest that 16.15 million LPs would have been sold in 2018 at a price of $25.50. b. Total revenue is 16.15 million × $25.50 = $411,825,000. c. A possible graph is d. Technology, as represented by music streaming services, and the low price of streaming services as a substitute, may represent the fall in demand for CDs. Since, vinyl LPs face the same headwinds, their success is more likely attributed to a change in consumer tastes or, since tastes in music are strongly generational, an actual t urnover in consumers. The price difference of vinyl LPs may reflect higher per unit production costs, but the relative price strength of LPs could have many explanations. Commentators have speculated that consumers value LPs (and their covers) as artwork a s well as means of listening to music. When it comes to music, “collectibles” may command higher prices than consumables. $20 $21 $22 $23 $24 $25 $26 $27 $28 $29 $30 10 11 12 13 14 15 16 17 18 19 20 Price of Vinyl LPs Millions of LPs The US Market for New Vinyl LPs - 2018 LP Demand

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    4 3. a. A reduction in the price of hardware would raise demand for software and thus cause equilibrium price and quantity of software to rise. b. A rise in the price of software would reduce demand for hardware and thus cause the equilibrium price and quantity of hardware to fall. 4. a. Both price and quantity drop. b. Both quantity and price drop.

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    5 c. Both price and quantity go up. 5. a. The price goes up, the quantity goes down.

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    6 b. The price and the quantity go down. c. The price and the quantity go up.

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    7 d. The price and the quantity go down. e. The price goes down, the quantity goes up.

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    8 6. a. Change in quantity demanded. b. Change in demand. c. Change in demand. d. Change in demand. e. Change in quantity demanded. 7. a. The equilibrium quantity is Q = 90,000 seats and the equilibrium price is P = 1,900 – (1/50)(90,000) = 1,900 – 1,800 = $100. b. At a price ceiling of P = $50, quantity demanded is found by solving 50 = 1,900 – (1/50) Q for Q = 92,500 seats. Since the stadium only holds Q = 90,000 seats, there will be 92,500 – 90,000 = 2,500 dissatisfied fans who want to buy a ticket at P = $50 but cannot find one available. c. Quantity demanded for the higher demand is found by solving 50 = 2,100 – (1/50) Q for Q = 102,500 seats. Now there will be 102,500 – 90,000 = 12,500 dissatisfied fans who want to buy a ticket at P = $50 but cannot find one available. The excess demand is 12,500 – 2,500 = 10,000 seats more than for the not so big game. d. Normally a price ceiling both raises quantity demanded and lowers quantity supplied. Here, only the first effect is present because the stadium capacity is fixed.

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    9 8. a. Under the original demand curve, quantity demanded was Q = 900 units and quantity supplied Q = 300 units, so excess demand was 900 – 300 = 600 units. With the larger demand, quantity demanded becomes Q = 1 , 100 units, so excess demand becomes 1100 – 300 = 800 units. Excess demand has grown by 800 – 600 = 200 units. b. Quantity demanded is Q = 1400 – P ; quantity supplied is Q = P . Subtracting quantity supplied form quantity demanded gives excess demand of 1 , 400 – 2 P units. Set excess demand equal to the original level of 600 and solve 600 = 1 , 400 – 2 P for the required price floor of P = $400. If the government accommodates the increase in demand by raising the rent control from $300 to $400, the degree of excess demand will be unchanged. 9. a. With a price support of P = $500/ton and the original supply of P = Q , quantity supplied must be Q = P = 500 tons. Meanwhile, quantity demanded is Q = 100 tons, so excess supply is 500 – 100 = 400 tons. With the expanded supply of P = (1/2) Q , quantity supplied grows to Q = 2 P = 1,000 tons. Quantity demanded is still Q = 100 tons, so excess supply grows to 1,000 – 100 = 900 tons. b . The extra 500 tons (= 900 – 400) the government has to buy of excess supply costs the government $500/ton, so the added expenditure is 500 × 500 = $250,000.

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    10 10. a. Set the supply for each area equal to the demand and solve for P and Q . Nimbyville: Q d = 2,000 – 0.75 P s = Q sn = 100 + 2 P sn ; 1,900 = 2.75 P sn ; P sn = $691; Q sn = 1,481 apartments Yimbyville: Q d = 2,000 – 0.75 P s = Q sy = 400 + 2 P sy ; 1,600 = 2.75 P sy ; P sy = $582; Q sn = 1,564 apartments b. We would expect that the restrictions in Nimbyville would cause some residents to move to Yimbyville, in search of housing bargains. The population increase would cause the demand curve to shift for apartments in Yimbyville to shift to the right and — absen t any new supply — apartment prices would rise. In Nimbyville, the loss of population might cause apartment prices to fall. c. No. The given equations, if solved in terms of P for the demand equation would be P = 1,600 – 0.8 Q would yield the same equilibrium figures. 11. The supply curve becomes P = 2 + 2 Q and the demand remains P = 8 – 2 Q . By setting the two equations equal to each other and solving for Q we have Q = 1.5. Substituting 1.5 into the demand equation results in a price of 5.

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