Understanding Economics 7th Edition Solution Manual

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1Table of ContentsIntroductionChapter 1: The Economic ProblemChapter 2: Demand and SupplyChapter 3: ElasticityChapter 4: Costs of ProductionChapter 5: Perfect CompetitionChapter 6: Monopoly and Imperfect CompetitionChapter 7: Economic Welfare and Income DistributionChapter 8: Measures of Economic ActivityChapter 9: Inflation and UnemploymentChapter 10: Economic FluctuationsChapter 11: Fiscal PolicyChapter 12: MoneyChapter 13: Monetary PolicyChapter 14: The Foreign SectorChapter 15: Foreign Trade

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2INTRODUCTIONThis manual proceeds chapter bychapter, providinguseful teaching tips, answers to all problems and questionsfoundin the book, and answers to all internet application questions and simulations found online. Inaddition,thisintroductionsummarizes the variouslearningfeatures ofUnderstanding Economics: A Contemporary Perspectiveand providesan annotated listof the book’ssupplementary articles.Special Featuresof the TextInstructors will note that virtuallyallgraphsin the textincorporate numbersrather than abstract mathematicalterminology.A majority of graphs arealso accompanied by tables to clarify the way that graphs are plotted.The use of formulas is kept to a minimum. Eachformulathat does appear is accompanied by a numerical example.Identifiablefeatures of the text include:-PracticeProblemsThese appear attheend of each chapter section,witheach sectiontied to a setlearningobjective. Allproblemanswersare autogradableandappearbothin theConnectresourceandin this manual.-End of Chapter Problems and QuestionsThe assessment section at the end of each chapter includesautogradableproblemsas well as essay-style instructor-graded questions. Answersappear inConnectas well asinthis manual.-Advancing Economic ThoughtEach chapter includes anarticles that highlight a renowned economist and theideasthat made them famous.Summariesof these articlesappearin the annotated listat the end of this introduction.-Sidelinearticles accompany some of the chapters,eachhighlighting aparticularcontemporaryissue. Severalappear at the end oftextchapters while others are accessible throughimbeddedlinksin theeBook.Summariesappear in the annotated list at the end of this introduction.-Economics as a Second Languageis a series of highlighted text passages that focus on the interpretation ofeconomic terms, and how their application in economics differs from common usage.-Thinking About EconomicsOver forty points of discussion appear in a question-and-answer format throughoutthe text.Answers appear inConnect.Online Learning AidsTheConnectresourceprovides instructorsa widerange of learning and assessment opportunities.It includes thefollowing features:-Answersto allpractice problems, end of chapter problemsand end of chapter questions. The answers for problemsareautogradable, for questions they areinstructor-graded.Some problemsare available inalgorithmic formattoenhance their usefulness in a variety of assessment contexts.-Imbedded videosin the feedback for a few key problems. Thesevideoshighlightgraphsand their application.-Classroom simulationsfor each chapter. Theseare designed to involve the whole classin activity-based learning.Autogradable problemsand instructor-graded questionsare included.The full simulations, including problem andquestion answers,alsoappear in this manual.-Internet Application ProblemsandInternet Application Questions. The problems are autogradable and thequestions are instructor-graded. Thesegive studentsthe chance toaccess onlinedata, and are also foundin thismanual.

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3-ASkills ResourceandaGraphing Module. Theseprovide students with the opportunity to solidifybasicskills,especially graphing skills,essential in learning economics.Teaching Orderof MaterialTime considerations may mean that instructors feel the need to skip portions of the text. They mayalsowish totreatsubjects in an orderdifferent from thetext’ssequence. The book has been structured to enable some of the mostpopularreordering strategies:-Macroeconomic topics in Parts 3 and 4 may be introduced directly after the introductory topics in Chapters 1and2, and before the discussion of microeconomics in Chapter 3 and Part 2.-Discussions of the foreign sector in Chapter 14 and foreign trade in Chapter 15may be treated in reverse order, orone chapter may be covered without covering the other.-Instructors who wish to omit the details of profit-maximization in the four market structures can do so by coveringonly the first section in Chapter 5.-Instructors who wish to deal withthe money market and the determination ofinterest rates before their treatmentofpublic debt and deficits can cover Chapter 12 before returning to thematerial inthe Sideline articleMountain orMirage, which appears atthe end of the previous chapter.Instructor AidsTwo aids are available in addition to this manual:-A series of animatedMicrosoft PowerPoint Presentationsaccompaniesthe text. Thesepresentationshighlightthe logical structure of each chapter for lecture purposes.-TheComputerized Test Bankprovides multiple choice questions and answers for each chapter, categorized bytopic, learning objectiveand level of difficulty.Range of Supplementary ArticlesA total of 18articles appearin the text and another fourinConnect. Allincludeeitherautogradable problems orinstructor-markedquestionsfor assessment purposes.-Each chapter contains at least one article in theAdvancing Economic Thought, its focus linked to thecontent ofthe chapter. Many of these articles have been composed for the text. A feware excerpts from the thinkers’ownwritings or articles from secondary sources.Balance between Contemporary and Historical ThinkersApproximately half of the thinkers in theAdvancingEconomic Thoughtseries are contemporary and half are historical. A rough chronological sequence has beenmaintained in the ordering of theseries. Thinkers from the past are dealt with primarily in the first half of the book,while present-day thinkers dominate the last half.Variety of ApproachesThinkers in the Advancing Economic Thought series can be classified as either supportersor critics of the types of methodology found in mainstream economic theory. In the selection of these highlightedthinkers, care has been taken to provide both mainstream and alternative viewpoints.

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4Contemporary IssuesThroughout the text and supplementary material, present-day issues are emphasized. Four issues are underscoredthroughout the text.-The New Global EconomyTechnological change and globalization are thecatchwords of many economicandpolitical commentators. The impact of technology on economic growthis dealt within the new growth theory ofPaul Romer, discussed inMaking An Economy Grow(Chapter 10), and the theories of Jane Jacobs, discussed inCities, Creativity and Diversity(Chapter 14). Globalization is defined and itscurrent and projectedeffectsillustrated in Chapter 15.Finally some of the likely effects of the 2008 financial crisis on globalization are analyzedinA Crisis Too Far(Chapter 13).-The Role of GovernmentWhat can a young person today expect from governments in the future? General issuesrelating to government's role are outlined inChapter. More specific aspects are covered inThe Games People Play(Chapter 6). Aspects of the macroeconomic role of government are addressed in Chapters 11 and 13, inEconomistExtraordinaire(Chapter 11),Mountain or Mirage?(Chapter 11) as well asBreaking the Mould(Chapter 13).-Labour Market TrendsFor most students, the economic issue that dominates all others is the choice of a career.Current trends in labour markets are dealt with in Chapter 7. InBoom, Bust & Echo(Chapter 9), David Footdiscusseshow the career prospects of young people today are affected by demographic factors.Brave New World(Chapter 15)highlights how Tyler Cowen’s predictions on the digital revolution will affect the outlook in particular occupations.InFrom Course to Career(Chapter 9,eBookand Connect) Canadian evidence forthe value of education,unemployment and labour demand for recent graduates is explored in a range of occupations and sectors.-EnvironmentIn Chapter 1, environmental sustainability as a major economic goal is introduced. In Chapter 7, theconcept of spillover costs is applied to environmental concern, helping to show exactly how governments canintervene in markets to help meet the goal ofsustainability. MeanwhileGlobalConundrum(Chapter 7,eBookandConnect) focuses on the trade-offs between economic growth and the risk of climatechange, and also describessome of the policy options that could helpreduce global carbon emissions as global per capita incomes rise.

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5INDEX OF SUPPLEMENTARY ARTICLESAdvancing Economic Thought(new articles in this edition marked with anasterisk)Chapter 1The Founder of Modern Economicsintroduces Adam Smith’s concepts of the invisible hand and laissezfaire. Itshows how he used these concepts to justify private markets.Chapter 2Spoilt for Choiceprovides a quantitative treatment of William Stanley Jevons’model of utilitymaximization based on the law of diminishing marginal utility.Chapter 3Prophet of Capitalism's Doomprovides a quantitative treatment of KarlMarx’s theory of capitalistexploitation. It also discusses the impact of this theory on latersocialist thinking.Chapter 4Critic of the Modern Corporationintroduces the basics of corporate financing andanalyses JohnKenneth Galbraith’s theory concerning the separation of ownership and control in mostmodern corporations.Chapter 5Can Capitalism Survive?outlines Joseph Schumpeter’s conception of the role of the entrepreneur incapitalist economies and his pessimistic view of the future of capitalism.Chapter 6The Games People Playintroduces the contributions that contemporary economist Thomas Schelling hasmade in the application of Game Theory.Chapter 7The Doomsday Prophetoutlines Thomas Malthus’s theory of population growth and the significance ofthis theory, both in hisown day and in ours.Chapter 8Adding the Human Dimensiondiscussesthe work ofMahbub ul Haq at the United NationsDevelopment Programme in creating the Human Development Index.Chapter 9Boom, Bust & Echosummarizes David Foot’s use of demographic theory to explain recent social andeconomic trends and to make predictions for the future. (excerpts from Foot and Stoffman,Boom, Bust & Echo)Chapter 10Making An Economy Growdiscusses the ‘new growth theory’of Paul Romer, which focuses on howtechnological change is an integral part of the process of economic growth. (article fromCanadian Banker)Chapter 11Economist Extraordinaireprovidesa theoretical analysis of the contributions that John MaynardKeynes madeto the study of macroeconomics. It also outlines the impact he has had on policy-making since theGreat Depression.Chapter 12Money Matterssummarizes the reasoning used by Milton Friedman to explain how capitalisteconomies are self-stabilizing in the long run.*Chapter 13Breaking the Mouldlooks at thecareer of Canada’s most famous central banker, Mark Carney, andthe way he has combined oversight of monetary policy, first in Canada and now inthe United Kingdom, with aprominentrole in international efforts to improve financial regulation.Chapter 14Cities, Creativity and Diversitygives an overview of the far-reaching theories of Canadian thinker JaneJacobs, both her analysis of the role of cities in economic development and her innovative interpretation of theethical dimensions ofeconomic behaviour.*Chapter 15Brave New Worldoutlines the predictions of Tyler Cowen on the extent to which the digitalrevolution will keep on powerfully transforming economic activity, especially in relation to labour markets incountries such as Canada.

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6Appendicesand Sidelines(new articles in this edition marked with an asterisk)TheintroductorySkills ResourceandGraphing Module(Connect) reviewthe use and interpretation ofequations,graphs and tables. Theyalso covers the basic skills of critical thinking and ways to apply these skills in research andpresentations. Students learn to detect and evaluate assumptions and value judgements found in economicarguments. The Skills Resourcealso deals with the use of the Internetas a research tool.*Chapter 1Share and Share Alike(eBookand Connect)Sharinggoods and services has always been a partofinformal economic activity. But with the rise of the internet the phenomenon has expanded in new andinnovativeways. This article looks at the opportunities and challenges associated with this phenomenon and the potential forthe sharing economy to become a third mode of production distinguished both from the private and public sectors,which ultimately could make it a key facet of future economic activity.Chapter 5How Resource Markets Operate(text)introduces marginal productivity theory and illustrates the way itcan be applied in perfectly competitive labour markets.*Chapter 7:TheWealthy and the Rest(eBookand Connect)The top onepercent of income earnersand thegrowing economic gap that separates them fromthe other 99 percentof income earners has been the object of muchdiscussionin recent years.This article looks atthis growing gapbased on the influential theories of Frencheconomist Thomas Piketty.* Chapter 7GlobalConundrum(eBookand Connect) asks whether economic growth continue to be pursued if fullaccount is takenof the threat of climate change.If not, what are the options foreconomies such as Canada? Thearticle then looks at the theoretical distinction between the two most influential policies: carbon taxes and cap-and-trade systems.*Chapter 9From Course to Career(eBookand Connect)To what extent is there amismatch of skills betweenthose needed by employers and those possessed by youngjob seekers?This article looks at the Canadian evidencefor unemployment andlabour demand forrecent graduates in a range of occupations and sectors.Chapter 11Mountain or Mirage?(text)presents the debate over the possible costs and benefits of the recent rapidgrowth in Canadian government debt.*Chapter 13A Crisis Too Far(text)deals with the 2008 meltdown and its causes, including the role of speculativebubbles and derivatives, and potential lessons to economists and policy-makers.

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1-1Chapter 1Teaching TipsAn Example fromBehavioural EconomicsBehavioural economicsin atextfootnote. Instructors may wish to give anillustration of the types of irrational behaviourhighlightedin thisemergingfieldof study.One of the best-known istheendowment effect. This refers to thefact that peoplevalue an itemthey own more highly than the exact same item when they do not own it. In other words, the mere fact ofownership raises one's utility from an item, which is a sign of irrationality.Distinguishing Among ResourcesThe definitions of natural, capital and human resources seemstraightforwardbut can be challenging in practice.The fuzziestboundaries are betweennatural and capital resourcesand between labour and entrepreneurship.Natural and Capital ResourcesNatural resourcesare definedas gifts of nature while capital resources aretheprocessedmaterials, equipment, and buildings used in production. In some real-world casesthe distinction between these two definitions isnot immediately clear.Consider the case oflivestockfarming. Theanimalsused in this industry might be viewed asnaturalresources, given that these animalsare part of nature. However,given the intensive tending theyrequire--not least in terms ofdaily food required to prepare them for market--theyare a capitalresource. In other words, animal husbandry is a form ofproduction processing.Labour and EntrepreneurshipThedistinction between these two types of human resources is hardestfor entrepreneursthemselves when trying to categorize the time they put into a business.These individualstend to expend large amount of time inhuman effort (i.e. labour) as well as engaging in initiative and risk-taking. In practice, apportioning the business's net revenuesinto wages fromlabour and profit fromrisk-taking is extremely hard.Extensions of the Production Possibilities ModelTheproduction possibilities model can be extended in two main ways.Constant-Cost Production PossibilitiesThetext's treatment focuses on an economy subject to the law of increasing costs, whichcausesthe production possibilities curveto bowout from the origin. It is also possible to sketch out the case whereresources areperfectly transferable between production of the two items andconstant costsapply. As shown in Practice Problem 2 at the end ofchapter section 1.2, theproduction possibilitiescurve in this case is a downward-sloping straight line.Asymmetric GrowthThetext's treatment of economic growth stresses the case where an economy'sability to produce each itemon the graph's axesincreases by the same extent. It ispossible thisassumption is not met. As shown in problem 10 at the end ofthe chapter, it may be that there isan increase in theeconomy'sability to produceonly one of the items on the axes. In thiscasethe economy's productionpossibilities curve rotatesaround either the intercept on the horizontal or vertical axis, rather thanshifting out in a parallel fashion.Share and Share AlikeSharing goods and services has always been a part of informal economic activity. But with the rise of the internet thephenomenon has expanded in new and innovative ways.The eBook articleShare and Share Alikeincluded in Chapter 1looks atthe opportunities and challenges associated with this phenomenon and the potential for the sharing economy to become a thirdmode of production distinguished both from the private and public sectors, which ultimately could make it a key facet of futureeconomic activity, and therefore provides a possible update to the three sectors shown in Figure 1.4.Answersto Thinking About Economics QuestionsPage 3:At one time, communist countries, such as China, tried to persuade their citizens to reduce their selfish material wants.However, such attempts to change mass behaviour were not successful, and have now largely ended in these countries.Page 8:Charitable organizations use such strategies as publicacknowledgement of donors. For example, charitable performancecompanies often list the names of donors in their show programs.Page 12:The information revolution seems to have had some impact on rates of economic growth in industrialized countries. Forexample, between 1995 and the 2008 credit meltdown, growth rates in countries such as Canada and the United States were higherthan in theimmediately preceding period. Many economists suggested that the increased use of computer-based technology wasone important reason for this improved growth performance.

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1-2Answers to Chapter Problems1.1 Practice Problems1.a. The smoker is not behaving rationally because of a physical addiction that has led them to continue engaging in an action theywish to stop.b. By providing themselves with small rewards for abstaining from smoking, and penalizing themselves when they do smoke, thesmoker is much more likely to be able to quit.2.a. The two variables are (i) the economic welfare of the country's citizens, and (ii) the quantity of the country's resources. Thequantity of the country's resources is the independent variable (since it is the cause) and the economic welfare of the country'scitizens is the dependent variable (since it is the effect).b. The relationship is direct because a movement in the independent variable's value leads to a movement of the dependentvariable's value in the same direction.c. The statement is positive, since it is a description of reality that doesnot depend on value judgments.d. For the country described in the statement the economic problem of scarcity has become more severe since its citizens mustmake do with fewer economic resources than previously.3.Rent is a payment to owners of natural resources, interest is paid to owners of capital resources, and human resources receivewages for their labour and profit for their entrepreneurship. A loan repayment is not a resource income because loans are notaneconomic resource. (Recall that interest on a loan can bea resource income. But repayment of the principle is not income.)1.2 Practice Problems1.a.The opportunity cost of the first fish is 4 coconuts, since coconut production is reduced from 24 to 20 when the first fish iscaught. Similarly, the opportunity costs of the second and third fish are 8 (= 20-12) and 12 (= 12-0) coconuts.b.These results conform with the law of increasing opportunity costs, because as fish production is increased so does theopportunity cost of each newly caught fish.c.The curve bows out to the right, reflecting the law of increasing opportunity costs.d.Besides the assumption that only two goods are produced, we must assume that the quantity of the castaway's resources andthe technology he uses are fixed, and that his resources are employed to their full capacity.e.With 12 instead of eight hours of labour devoted each day to acquiring coconuts and fish, the castaway's productionpossibilities curve shifts outwards, with both its vertical and horizontal intercepts increasing. If there are six instead ofeighthours devoted each day by the castaway, the production possibilities curve shifts inwards.f.With a new capital asset that can be used to acquire fish (a fishing rod), the castaway's production possibilities curve shiftsoutwards, with its horizontal or fish intercept (but not its vertical coconut intercept) increasing.2.a. Hotdog production falls from 300 to 250 hotdogs as the first smartphone is produced while moving from point A to B. Theopportunity cost of this first smartphone is therefore 50 (= 300-250) hotdogs. Similarly, the opportunity costs of the second andthird smartphones are 100 (= 250-150) and 150 (= 150-0) hotdogs.b. These results illustrate the law of increasing opportunity costs, because each new smartphone that is produced has a higheropportunity cost than the one before.3.In the case of constant costs the production possibilities curve will be a downward-sloping straight line. Because the slope of theproduction possibilities curve is based on the two products' opportunity costs, if both these opportunity costs are constantthen theslope of the production possibilities curve will be constant as well.

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1-31.3 Practice Problems1.a. Beta is likely to have more economic freedom, given the greater importance of Beta's private sector and the consumersovereignty it promotes.b. Alpha is likely to have more economic stability, because of the relative importance of its traditional and public sectors.Both ofthese sectors tendto reduce economic instability.c. In Alpha, traditional culture and national planners are more likely to conflict, given its relatively largetraditional and publicsectors.d. In terms of this triangle, Alpha will be southeast of Beta because it has stronger elements of both a traditional economyand acommand economy.2.As expanding employment tends to push up economic growth at the same time as it stimulates inflation, government policies thatpromote economic growth will tend to lessen price stability. That means economic growth and price stability tend to beconflicting goals.End of Chapter Problems1.a. Paying $10 per visit is most logical. Given your past behaviour of not always following through with your plans, there isagood chance that you will not increase your visits to the gym. Therefore the cost of the $60monthly contract is likely to be morethan the cost of visiting the club two or three times a month at $10 per visit-$60 per month is greater than $20 or $30.b. Your past behaviour is an important factor. If you could be sure that you would follow through with your plans, the $60 permonth might be less than the monthly cost of $10 per visit.

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1-42.a. The main indication that your friend is not behaving rationally is that by making impulse purchases that exhaust his monthlypaycheque he is unable to meet a goal he has already set himself.b. By setting up a separate savings plan with automatic withdrawal as soon as his paycheque is deposited in his account, he is lesslikely to engage in impulse purchases that would otherwise use up these funds.3.a.The two variables are the price of digitally streamed music and the quantity of CDs purchased. The price of digitally streamedmusic is the independent variable, since it is the cause, and the quantity of CDs purchased is the dependent variable, sinceit is theeffect.b.The two variables are Canadian household incomes and transfer payments to households. Canadian household incomes is theindependent variable, since it is the cause, and transfer payments to households is the dependent variable, since it is the effect.c.The two variables are the average salary of computer programmers and the number of people seeking a career in computerprogramming. The average salary of computer programmers is the independent variable, since it is the cause, and the number ofpeople seeking a career in computer programming is the dependent variable, since it is the effect.d.The two variables are the price of wheat fertilizer and the amount of wheat planted by farmers. The price of wheat fertilizeristheindependent variable, since it is the cause, and the amount of wheat planted by farmers is the dependent variable, since it isthe effect.e.The two variables are output per worker in the Canadian economy and Canada's rate of economic growth. Output per worker inthe Canadian economy is the independent variable, since it is the cause, and Canada's rate of economic growth is the dependentvariable, since it is the effect.4a.The relationship is inverse because the changes in the two variables are in the opposite direction.b.The relationship is direct because the changes in the two variables are in the same direction.c.The relationship is direct because the changes in the two variables are in the same direction.d.The relationship is directbecause the changes in the two variables are in the same direction.e.The relationship is inverse because the changes in the two variables are in the opposite direction.5.a. The statement deals with a topic in microeconomics because it focuses on a particular market-in this case the one associatedwith collectibles.b. The statement deals with a topic in microeconomics because it focuses on a particular market-in this case the one associatedwith high fashion clothing.c. The statement deals with a topic in macroeconomics because it focuses on an entire economic sector and the economy as awhole.d. The statement deals with a topic in microeconomics because it focuses on a particular market-in this case the one associatedwith painkillers.e. The statement deals with a topic in macroeconomics because it focuses on an entire economic sector and the economy as awhole.6.a.The statement is normative, since it is a statement of how the world ought to be.b.The statement is positive, since it is a description of reality that doesnot depend on value judgments.c.The statement is positive, since it is a description of reality that doesnot depend on value judgments.d.The statement is normative, since it is a statement of how the world ought to be.7.a. The consumer will choose the video game console because its utility is higher than the utility associated with the flat screenTV.b. Yes, utility does relate to the concept of opportunity cost. The opportunity cost of either item is the utilitysacrificed by notconsuming the other item. Because the utility derived by this consumer from the flat-screen TV is lower than for the video gameconsole, the opportunity cost of the console is less than for the TV.8.a. In moving from points B to C, theoutput of bicycles increases by 1 (= 2-1) while skateboard production decreases by 6 (= 32-38). Therefore, a new bicycle has an opportunity cost of 6 skateboards.In moving from points C to D, bicycle productioncontinues to rise by 1 (= 3-2) while skateboard output declines by 12 (= 20-32). Therefore, a new bicycle now has anopportunity cost of 12 skateboards.These answers illustrate the law of increasing opportunity costs, because as more bicycles areproduced there is a rise in the opportunitycost of this product.b. An output of 38 skateboards and 2 bicycles cannot be produced, since it lies beyond theproduction possibilities curve.c. An output of 32 skateboards and 1 bicycle is within the production possibilities curve. It represents a situation where resourcesare not being used effectively, either because they are unemployed or used atless than their full capacity.

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1-5d. The technological improvement in the assembly of bicycles would cause the production possibilities curve to rotate rightward,with the horizontal intercept shifting outward but the vertical intercept staying constant. This shows that the economy's potentialoutput of bicycles has increased while the potential output of skateboards has stayed the same.e. An increase in theeconomy's supply of labour would cause the production possibilities curve to shift to the right, with both thevertical and horizontal intercepts increasing. This shows that the economy's potential output of both bicycles and skateboards hasincreased.9.a. The most stable culture is likely to be found in the country with the largest traditional sector (Country B), since a traditionalsector tends to promote stability.The most equal distribution of income is likely to be found in the country with the largest publicsector (Country C), since one of the main functions of government is to redistribute income.The greatest economic freedom islikely to be found in the country with the largest private sector (Country A), since private markets provide individuals with theliberty to pursue their own self-interest.b. With a larger private sector, Country B will move up and to the left as it becomes morelike a pure market economy.With alarger public sector, Country C will move up and to the right as it becomes more like a pure command economy.10.a. In moving from pointsatob, the output of industrial robots increases by 2 (= 2-0) while ice-cream soda production decreasesby 5,000 (= 45,000-50,000). Therefore, the two new industrial robots each have an opportunity cost of 2,500 (= 5,000 / 2)ice-cream sodas.In moving from pointsbtoc, the production of industrial robots continues to rise by 2 (= 4-2) while ice-creamsoda output declines by 10,000 (= 35,000-45,000) sodas. Therefore, the two new industrial robots each have an opportunity costof 5,000 (= 10,000 / 2) sodas.In moving from pointsetod, the output of ice-cream sodas increases by 20,000 (= 20,000-0)while industrial robot production decreases by 2 (= 6-8). Therefore, the 20,000 new sodas each have an opportunity cost of0.0001= 2 / 20,000 industrial robots.In moving from pointsdtoc, the output of ice-cream sodas increases by 15,000 (= 35,000-20,000) while industrial robot production decreases by 2 (= 4-6). Therefore, the 15,000 new sodas each have an opportunity costof 0.00013= 2 / 15,000 industrial robots.Yes, these answers illustrate the law of increasing opportunity costs. As the productionof industrial robots increases (fromatoband frombtoc) so does the opportunity cost of the new robots produced, and when theproduction of ice-cream sodas increases (frometodand fromdtoc) so does the opportunitycost of the new sodas produced.b. The technological improvement in the assembly of industrial robots would cause the production possibilities curve to rotaterightward, with the horizontal intercept shifting outward but the vertical intercept staying constant. This shows that the economy'spotential output of robots has increased while the potential output of sodas has stayed the same.c. If this economy produces more industrial robots, which are capital goods, then the economy will increase its amount ofavailable resources and thereforeshift out its future production possibilities curve, with both the vertical and horizontal interceptsincreasing. This shows that the economy's future potential output of both sodas and industrial robots will increase.11.Because households cannot keep any income above $60,000, those that could earn more by supplying their resources are unlikelyto do so, reducing the overall amount ofresources available to the economy.12..a.YearInflation(%)Unemployment(%)MiseryIndexAbove,below, orat theaverage?YearInflation(%)Unemployment(%)MiseryIndexAbove,below orat theaverage?19904.88.1[12.9][above]20002.76.8[9.5][below]19915.610.3[15.9][above]20012.57.2[9.7][below]19921.411.2[12.6][above]20022.27.7[9.9][below]19931.911.4[13.3][above]20032.87.6[10.4][average]19940.110.4[10.5][above]20041.87.2[9.0][below]19952.29.5[11.7][above]20052.26.8[9.0][below]19961.59.6[11.1][above]20062.06.3[8.3][below]19971.79.1[11.8][above]20072.26.0[8.2][below]19981.08.3[9.3][below]20082.36.1[8.4][below]19991.87.6[9.4][below]20090.38.3[8.6][below]20101.88.0[9.8][below]b. The average value during the years 1990-2010 was 10.4%.The misery index was above the average in 1990 to 1997. It wasbelow the average in 1998 to 2002 and between 2005 and 2010.c. The misery index is an indicator of the distress to Canadians caused by both inflation and unemployment. In this index, theinflation rate and the unemployment rate are each given the same weighting. Not everyone would agree with this weighting. For

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1-6example, it could be argued that a percentage point of unemployment causes more hardship and distress that a percentage pointofinflation.13.(Essay)a.The provision of health care through the public sector makes it easier to ensure that allCanadians have equal access toservices, thereby meeting an important goal relating to income equity. However, it is argued by many commentators that moreprivate sector involvement in the provision of healthcare will help promote efficiency as well as help save costs, since at presentprices are not allowed to work as a rationing mechanism in the Canadian health care system. This is because the most servicesinthe current system are free. Therefore, some services may be overused, given that consumers facean effective zero price for theseproducts.b. Answers maymake a logical case for either stand using the arguments outlined in part a, depending on whether the goals ofequity or efficiency are stressed.Internet Application Problem1.Access thePenn World Tables (at http://dc2.chass.utoronto.ca/pwt).Using statistics for 2007, rank the following economies-Canada, Finland, Hong Kong, and the United Kingdom-by the size of government in each economy.Enter your responses belowrounded to 1 decimal place.The government share of real gross domestic product per capita was[11.6]% in Canada, [14.0]% in Finland, [3.2]% in HongKong, and [14.1]% in the UK.The government's share was highest in[Canada; Finland; Hong Kong, theUnitedKingdom*], followed by [Canada; Finland*;Hong Kong, theUnited Kingdom]then [Canada*; Finland; Hong Kong, theUnited Kingdom] and lowest in[Canada; Finland;Hong Kong*, theUnited Kingdom].What does your ranking suggest about the systems chosen byeach economy?The ranking suggests that[Canada and Finland; Finland and the United Kingdom; Hong Kong and Canada;all four countries*]have modern mixed economies.Of these countries [Canada; Finland; Hong Kong, theUnited Kingdom*]chooses to laythe greatest stress onthe public sectorand [Canada; Finland; Hong Kong*, theUnited Kingdom]chooses to lay the greatest stress on the private sector.Explanation:Accessing the site, select each of the countries (select all 4 countries at thesame time by holding the 'Ctrl' key when making theselections), the statistic “Government Share of Real Gross Domestic Product per Capita” and the year 2007.In this year the share of government spending of overall GDP per capita was 11.6% in Canada, 14.0% in Finland, 3.2% in HongKong and 14.1% in the United Kingdom.The government's share was highest in United Kingdom, followed by Finland, Canada,and Hong Kong.All four countries have modern mixed economies, with United Kingdom choosing to lay the greatest stress on the public sectorand Hong Kong choosing the lay the greatest stress on the private sector.Advancing Economic Thought Problems1.As workers become more specialized, repetition helps them perform tasks more efficiently andwithout a break from one task toanother. Hence the same number of workers in a pin-making factory will be able to produce a greater output if they performseparate rather than similar tasks.2.(Essay)a. The exorbitant profits made in theproduction of Good W cause the invisible hand of competition to operate byenticing new entrepreneurs to enter the market. As they do, they push up the amount of Good W offered to consumers and pushdown the price. Price keeps falling until all suppliers in the market make only a moderate profit. In this case, the selfish actions ofentrepreneurs hoping to make excess profits ensures that, over time, excess profits are eradicated.b.By taking advantage of the cost-savings associated with the new innovation, businesses that produce Good X now makehigher-than-normal profits. This causes the invisible hand of competition to operate, through the appearance of new entrepreneursin the market for Good X. The result is a rise in the amount supplied for this good, pushing down its price until all businessesproducing this good are earning moderate profits. The selfishness of entrepreneurs seeking out excess profits causes price tofalltomatch the reduction in business costs.

Understanding Economics 7th Edition Solution Manual - Page 14 preview image

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1-7c.With the free flow of goods between countries A and B, some businesses in each country now find they can underpricecompetitors in the other country's market. As trade occurs between the two countries, prices of affected goods fall. Due to theself-interested behaviour of profit-seeking business-owners, consumers in both countries can buy certain goods more cheaplythan they could before.3.(Essay)a.It is because hungry stadium-goers have no choice but to purchase food from the catering company that the companycan charge pricesgreater than those charged on comparable food outside the stadium.b.The corporations may try to cooperate with one another to set Good Y's price above what it would be in a fully competitivemarket. The absence of full competition in this market could therefore lead to the self-interested actions of the corporations'managers harming the interests of the consumer.c. It is impossible for Good Z to be made by workers who are not members of the union. As a result of the new union contract,wage costs for all firms producing the good rise, which pushes up Good Z's price. The lack of competition between unionized andnonunionized workers in this labour market means that the self-interested actions of union members harm the interests of theconsumer.Classroom Simulation1. Introductory InformationTime:a minimum of 30 minutes to complete all the parts of the simulation. Parts A, B, and C each have a 3 minute time limit.Materials:tooth picks,several packages of small marshmallows,severalpackages of large marshmallows.Division of Students:Divide the class evenly into three teams (A, B, C).Push the desks together creating three long tables.Have each team sit at theirrespective table. You can have as many students participate as you like.Key Concepts Covered:circular flow diagramdivision of laboureconomic efficiencyeconomic problemeconomicslaw of increasing opportunity costsopportunity costproduct marketsproduction possibilities curveresource marketsLearningObjectives:Part A:-Analyze and apply the concepts of economic efficiency and the division of labour.-Participate in and examine a simulated mini-economy, while gaining insights into how this economy can incorporate productmarkets, resource markets and the circularflow diagram.Part B:-Identify and evaluate specific examples of opportunity cost.-Understand and apply the economic problem and the definition of economics to concrete examples.Part C:-Explain and evaluate the effects of technology on the production possibilities curve as depicted by an outward shift in thecurve.-Create and evaluate a production possibilities curve based on hands-on experience.-Apply the law of increasing opportunity costs.

Understanding Economics 7th Edition Solution Manual - Page 15 preview image

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1-82.Part AExerciseRecall that the class has been divided evenly into three teams (A, B, and C), and that each team is sitting at their respectivetables.Team A:makes only houses out of tooth picks and small marshmallows using the pattern shown below.Team B:makes only cars out of tooth picks, small marshmallows, and large marshmallows using the pattern shown below.Team C:observes the other two teams to count, and keep track of, the number of each product that is made by each team.Timekeeper:the students will be given three minutes to make as many units of their product as they can.Were more houses or cars produced?The number of houses made by team Awas [fill in appropriate value],and the number of cars made by team Bwas [fill inappropriate value].Were some students faster than the other students at putting the models together? How could production have been moreefficient?Explanation:Count the number of units of eachproduct that were made during the allotted time. More houses than cars should have beenproduced because houses are easier to build, using the given patterns.Some students will have been faster at putting the models together than others. Because not all people are created equal some willbe more efficient at this task than others.Some ways the teams could have been more efficient is by having the fastest students assigned to build models, or by breakingthe model building process down into smaller tasks like a production line.Follow-up areas of learning:-Discuss the division of labour and its role in production.-Introduce product markets and resource markets.-Refer to the circular flow diagram by looking at what would be needed to make this a complete mini-economy including bothhouseholds and businesses.3.Part B ExerciseTeams A and B merge as one company, called AB, that serves a town. This town has 50% more familiesthanthere are studentsin the room. Each family must have at least one house and one car produced by the company AB. Coincidentally the total number

Understanding Economics 7th Edition Solution Manual - Page 16 preview image

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1-9of cars and houses demanded by this town is approximately doublethe number produced in Part A.Team A and Team B, now company AB:All members of AB will make houses or cars out of toothpicks and marshmallowsusing the patterns below (same patterns as in Part A). Teams A and B will decide together which of their members will makecars, houses, or some of both products. The goal is to make approximately double the number of houses and cars that wereproduced in Part A. Company AB must find the best way toreach that goal.Team C:observes the other two teams to count, and keep track of, the number of each product that is made.Timekeeper:the students will be given three minutes to make as many units of their product as they can.Were more houses or cars produced than in Part A?The number of houses made by team A was[fill in appropriate value],and the number of cars made by team B was[fill inappropriate value].Were more studentsproducing houses or cars?More students were producing[cars*; houses] becausecars take longer to make than houses.*houses take longer to make than cars.morefamilies want a car.more families want a house.Explanation:It should have already been discovered from Part A that it takes longer to make cars than houses. Teams A and B, or companyAB, should assign their fastest workers to produce cars.Theyshould also assign more workers to produce cars than houses, oreventually some students will have to switch to making cars in order to obtain an identical number of units of both products.Follow-up areas of learning:-Reiterate the concepts of division of labour and economic efficiency.-Discuss the scarcity of economic resources, the unlimited nature of wants and needs, and the way these two concepts mergetocreate the economic problem.4.Part C ExerciseTeams A and B continue as onecompany, called AB, that serves a town with 50% more families as there are students in theroom. And, as in Part B, the total number of cars and houses demanded by this town is approximately double the numberproduced in Part A.Team A and Team B, now company AB:Like in Part B, all members of AB will make houses or cars out of toothpicks andmarshmallows using the patterns below (same patterns as in Part A). The goal is to make approximately double the number ofhouses and cars that were produced in Part A.

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