Principles Of Microeconomics, 8th Edition Solution Manual

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Principles ofMicroeconomics •• Chapter One1CHAPTER ONEThe Economic ProblemOverview CommentsIn Chapter One, we decided to begin by giving students an idea of how diverse and howengaged our discipline is by looking at a number of current controversies. This, we hopehelps tocorrect the perception that many students have of economics as being a dry andtheoretical subject with little relevance to the real world. We next focus on what is,arguably, the most important idea in economics: that scarcity forces choice and choiceinvolves the concept of opportunity cost. We then look at the three fundamental questionsin economics and four methods of co-ordinating an economy and we have found thatstudents react well to a discussion of both of these topics. Perhaps we should remindourselves that introductory chapters are probably the only opportunity for us to encouragestudents to look beyond the market structure and realize that it is only one of variouspossible ways for society to organize its economic affairs.Next, we discuss the fact that the discipline’s methodology is, by necessity, abstract,since this is the only way one can deal with such a broad range of topics. The discussionof the use of abstract methodology leads naturally into a discussion of the role of modelsin economics.We then look at our first model in economics, production possibilities, and show howilluminating this idea can be since it allows us to illustrate some of the basic, but vitaltopics in economics: choice, cost, economic growth, technological improvement and theimmense importance of investment.Suggested Approaches and Helpful HintsAs a starting point in a new course, it may be useful for you to walk students through theStudy Guide (as well as theTest your Understandingquestions in the body of eachchapter) and explain that answers can be found in the Connect Answer Key.It is our experience that if we spend enough time on production possibilities we canillustrate six distinct aspects of economics: the necessity of choice, economic growth,unemployment,efficiency,technologicalchangeandopportunitycost.Thismakesproduction possibilities a powerful model and, more importantly, demonstrates what we

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Principles ofMicroeconomics •• Chapter One2mean by the word model. Given the huge role that models play in economic theory,understanding exactly what a model is can be an important step for any student.Answers toProblems for Further Study1.a) normative;b) positive;c) positive;d) normative.2. a) Kb) Lc) Nd) Ne) E3. a) Cb) Kc) Cd) B4.Economics is interested in how society makes choices about the production andallocation of resources and products.All societies must make choices since they willnever be able to produce everything that people want.The reason for this is thatresources are scarce in relation to unlimited human wants.5.Factors of ProductionFactor explainedFactor PaymentsLabourhuman physical and mental effortwagesCapitalhuman made resourcesinterestLandnatural resourcesrentEnterprisethe innovator and risk-takerprofit6.Normative statement: There are too many poor people in Canada.Positive statement:In 2010, there were more than2.5 million Canadians earningless than $15 000.

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Principles ofMicroeconomics •• Chapter One37.CapitalgoodsPP1PP2Consumer goodsThere aretwo majorcauses of economic growth:an increase in the quantity or quality ofproductiveresourcesan improvement in technology8.The production possibilitycurvewould look as follows:Leather moccasinsShirtsPP

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Principles ofMicroeconomics •• Chapter One4The production possibilities curve would plot as a straight line because the per unit costof production would remain constant. In other words, it would always cost the samenumber of moccasins to produceadditional shirts, and vice versa.9.Both a map and a theory abstract from reality and highlight only the most importantrelationships.10.Command comes in the form of parents insisting that children do certain things such ascleaning their room. Most “big” decisions like where to take a holiday are often madeco-operatively.Custom comes in the form of parents using the same values to raisetheir children as was used by their own parents.Competition might be used, forexample where siblings compete with each other to earn increments of allowance. Thesecond half of the question is asked only to stimulate thought on the effectiveness ofincentives (rewards) and disincentives (penalties) within the family structure.11. Since Kant is a high school dropout with no work experience, we would have torecognize that his next best alternative is probably a minimum wage job. (On the otherhand, if some employer considersKant enough of celebrity to hire him for a publicimage job, then Kant might do better.) Assuming a minimum wage job, his opportunitycost of continuing to play hockey would the minimum wage rate (say $10 and hour)times 40 (hours per week) times 52 (weeks per year) which equals $20.800 per year.12.Seethe following figure:

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Principles of Microeconomics, 8e •• Chapter 21CHAPTER TWODemand and Supply: AnIntroductionOverview CommentsThis chapter covers one of the most important subjects in economics.We feel that theamount of time, effort, and patience put into developing the basic principles of demandand supply will pay great dividends for students later in the course. Also, unlike someother approaches, we have deliberately relegated the complexities of multiple curve shiftsand other applications of demand and supply toanotherchapter.While most of the material in this chapter is fairly standard, there are three areas whichare treated a little differently from other approaches. First, we introduce the income andsubstitution effects early. Since we emphasize that the concept of demand involves bothwillingness and ability, it seemed a good opportunity to explain that the reason for thedownward slope of the demand curve is that a lower price means both an increasedwillingness (the substitution effect) and ability (the income effect) to purchase. Second,the chapter moves deliberately and quickly to a discussion of equilibrium rather than firstdiscussing what causes shifts in the two curves. We think this direct approach is morehelpful for students who usually grasp the concept with little difficulty. Only after wehave explored the idea of equilibrium and the implications of disequilibrium do we lookat the determinants of demand and supply and the effects of their change. Third, webelieve that it short-changes the students to show the results of a change in equilibriawithout explaining how the market gets there. Therefore, when we do start curve-shiftingwe take great pains to demonstrate just how the market moves, in reaction to surplusesand shortages, from one equilibrium to another.Although we don’t personally use algebra to teach demand and supply in our ownclasses, we recognize that some instructors find this an effective approach and so we haveadded a short Appendix on the algebra of demand and supply.

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Principles of Microeconomics, 8e •• Chapter 22Suggested Approaches and Helpful HintsAs we mentioned, we think it’s essential to move toequilibrium as quickly as possible sothat students are immediately made aware that the price is determined by both thedemand and the supply. If this is not done you will find that you are moving curves aboutin isolation and showing an increase in demand which impacts on nothing: a causelooking for an effect. We find that students can grasp the concepts of equilibrium,surpluses and shortages fairly easily so we get them to this point early.Students need to be aware that the price of the product is not always the most importantfactor that affects consumer spending. At times, incomes, prices of related products andso on may have more significance. Yet we put price at the forefront for two reasons.First, it often is the most important factor. Second, it is the centre of focus for ouranalysis because it is the one factor which links producers and consumers and whichinfluences the actions of both groups.It is probably useful to point out to students that some of the demand curves in thischapter are not straight lines. This is because they are plotted from data that is presentedin a table.This helps to emphasize the link between a demand schedule and a demandcurve and reminds us that demand and supply curves are not always linear.One of the problems that many students have is the obvious one of confusing demandwith quantity demanded (and supply with quantity supplied). The problem is only curedthrough repeated practice. It’s a good idea to keep reminding students that the termsdemand and supply do not relate to specific quantities but to whole ranges of prices andquantities. We find that while they often respond to the concept of demand, they willsometimes continue to use the term supply as a synonym for production or output.Another problem for students is that, understandably, they draw on examples where thefirm rather than the market determines the price of the product. Although we brieflymention in the text that the demand/supply model works best in the context of perfectlycompetitive markets, it is a shame to use only examples of commodity markets. Oncestudents grasp the basics, they are usually eager to put the principles to work analyzingmany different types of markets with which they are familiar, and these include marketswhich are anything but competitive and where the producers are usually price makers.We are hesitant to curb such enthusiasm so early in the game. On the other hand, youneed to tread carefully when dealing with non-competitive markets. Perhaps you couldexplain, as we do early in Chapter 3 with the example of the over-priced automobile, thatwhile the model works exactly as we suggest only in perfectly competitive markets, thatdoesn’t mean that it doesn’t have application to other markets.Answers toProblems for FurtherStudy1.c, dandeare the circled letters

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Principles of Microeconomics, 8e •• Chapter 232.Graph A: increase in demand; increase in quantity suppliedGraph B: increase in supply; increase in quantity demanded3.a) pricedownand quantity tradeddownb) priceupand quantity tradedupc) pricedownand quantity tradeddownd) priceupand quantity tradedup4.a) supply;increasedb) demand;decreasedc) supply;decreasedd) demand;increased5.Demand refers to the whole range of quantities that are demanded at various prices asdepicted by a demand schedule or demand curve.The quantity demanded refers to aparticular quantity at a particular price, i.e. itisa point on a demand curve.6.Shortages cause competitive bidding among buyers of a product. The result will be thatthe price will be bid up and will continue to rise until the shortage disappears.7.Table 2.19(completed)DSPQa-b-c-d-e-f-8.Change the second sentence to:“Thequantity demandedfor houses decreases whenthe price increases.”9.The first determinant of market demand is consumer preferences, i.e. the tastes andfashions of consumer. The second is consumer incomes. For a normal product, higherincomes leads to a higher demand; on the other hand, for an inferior product higherincomes lead to a lower demand.The third determinant is the prices ofrelatedproducts, which include substitute products,and complementary products. The demandwill be higher if the price of a substitute increases or the price of a complementdecreases.The fourth determinant is expectations of the future.The demand willincrease if future prices or incomes are expected to be higher or a future shortage isanticipated. The final determinant is the population. The market demand for a product

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Principles of Microeconomics, 8e •• Chapter 24may be affected if there is a change in the size or in the income or age distribution ofthe population.10.An increase in the demand for a product will initially lead to a shortage.As a resultcompetitionamong the buyers will cause the price to increase.The effect of anincrease in the price will be a fall in the quantity demanded and an increase in thequantity supplied. Both factors will help to eliminate the shortage. Eventually both theprice and the quantity traded of the product will have increased.11.Five possible causes are:an increases in the price of resources used;an increase in business taxes;an increase in the price of a substitute in production;the expectation of suppliers that there will be higher prices in the future;a decrease in the number of suppliers.Five specific effects (in order) are:a shortage;a price increases;an increase in the quantity supplied;a decreases in quantity demanded;a decrease in the quantity traded.12.S1S2 (S1 + 5000)RentalP1P2DQ1Q2Number of Rental UnitsAPPENDIX TOCHAPTER TWO

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Principles of Microeconomics, 8e •• Chapter 25Answers toProblems forFurtherStudy1.P = 6;Q = 28.2.a) P = 15;Q = 25.b)Shortage of 12.c) P = 17;Q = 27.3.a) Qd= 244–4Pb) Qs =–8 +½Pc) P = 56;Q = 204. a) Qd= 675–100P (or P = 6.75–0.01Qd).b)Qs= 50P (or P = 0.02Qs)c) P = 4.5;Q = 2255. a) shortage of 60. (Qd= 185; Qs= 125)b)surplus of 24. (Qd= 164; Qs= 1886. a) P =70. (Solve the equation: 380 = 100 + 4P)b)Qd= 310. (Plug 70 into the demand equation.)c) Surplus of 70. (Qd= 310 and Qs= 380).

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Principles ofMicroeconomics, 8e•• Chapter Three1CHAPTER THREEDemand and Supply: AnElaborationOverview CommentsSome textbooks move on to elasticity immediately after having done the basics ofdemand and supply. We decided to place the applications immediately after thebasics,since students often like to play with the concepts of demand and supply a little whilethey are still fresh rather than move directly to the details and measurements of elasticity.However, if you wish to transpose Chapters 3 and 4, it will do no harm.The main part of this chapter deals with price controls and demonstrates just howeffective basic economic theory can be in revealing aspects of the economy that are notalways obvious. It also shows what a powerful tool demand and supply can be inhighlighting the costs and benefits of economic policy.The last section of the chapter (the last 4 pages) is unusual in that it tries to involve thestudent in the art of abstraction, although in a not too rigorous way. It is sometimesinstructive for students to realize that many of the breakthroughs in thinking are not theresult of observation of the “real” world, but of people asking: “What if?” In this way wetry to get students to explore possibilities by asking, for instance, what if the demandcurve were upward sloping? What could cause this? What would be the results? Do theresults fit with any recorded observations? And so on.Suggested Approaches and Helpful HintsWe use this chapter toprovide some examples of government involvement in the world.When students are first introduced to price controls,for example,they often conclude thatgovernments are misguided and that their involvement is always wrong. It is better forthem to understand that there are no absolutes: that any action (or inaction) brings costsand benefits, and one of the major functions of economists is to clearly highlight what thecosts and benefits are and who is affected by them. For this reason, we find the tidal waveexample an instructive one since it sets the stage for a discussion on the purpose ofgovernment intervention.

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Principles ofMicroeconomics, 8e•• Chapter Three2This chapter is also a good place to emphasize the role of price as a rationing mechanism.If the demand increases, then the price will increase so as to eliminate shortages. But ifthe price can’t rise, then some other rationing mechanism must be used. One of the smallbut important points that you may wish to bring out in the discussion is the distinctionbetween a meagre supply (at equilibrium) and a shortage (a disequilibrium).This is adistinction that we economists often skirt over. Students need to realize that just becausethere is no shortage in a market does not necessarily mean that a large quantity of theproduct is being bought and sold.You might find that you need to emphasize the point that a minimum wage only affectsthe low-wage markets in the economy. Otherwise, some students get the impression thatminimum wage legislation is the major cause of unemployment throughout the economy.Answers toProblems for Further Study1.See the following figure:Figure 3.22 (completed)2.If the demand were to increase and the supply to decrease then definitely the pricewould rise, but the effect on the quantity traded would be indeterminate since itwould rise as aresult of the increase in demand but decrease because of thedecrease of supply.3. A price control is a government restriction that sets either a maximum orminimum price for a product. There are two types of price controls: apriceceilingimposes a maximum price whereas aprice floorimposes a minimum priceon a product.4. a) $20b) $20

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Principles ofMicroeconomics, 8e•• Chapter Three35. orange juice:price up; quantity indeterminatecigarettes:price indeterminate; quantity downbeer:price down; quantity indeterminateeye glasses:price indeterminate; quantity up6.A higher minimum wage maywell cause some employers to economize on theuse of labour (or where possible, replace labour with capital) so that the quantitydemanded will fall.At the same time a new higher minimum wage may attractmore people to look for jobs.With fewer jobs available and more peoplelooking, the result will be more unemployment.7.An individual demand curve may well be upward-sloping in the case of peopledisplayingconspicuousconsumption(i.e. showing off by demonstrating to othersthat price is not a barrier for them). For such people a higher price for things likeexpensiveclothes,jewelryorperfumesactuallymakestheseproductsmoreattractive for them and so they buy more (but only up to a limit).As far as the market demand curve is concerned, there is the well-documentedinstance of the so-called Giffen goods where, for example, the lower price forstaple products, like rice or potatoes might mean that poor people might buy lessrather than more of them because they can now afford to use the extra money topurchase meat, fish or vegetables.8. A price ceiling imposes an upward limit on market price. If that limit isabovethecurrent market price then the limit has no effect and market price prevails.

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Principles ofMicroeconomics, 8e•• Chapter Three49.See the following figure:Figure3.25 (completed)10.a)The demand curve must be steeper than the supply curve.b)Decreasec)The surplus will disappear.

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Principles ofMicroeconomics •• Chapter Four1CHAPTER FOURElasticityOverview CommentsWe have deliberately linked the concept of price elasticity of demand with the sellers’total revenue at the beginning of the chapter. We then move directly to a specific exampleinvolving the sale ofairline tickets on the Vancouver to Edmonton route (inelasticdemand) and the Vancouver to Calgary route (elastic demand). This is an attempt todemonstrate the usefulness of one of the concepts in economics that, in our experience,students are likely to retain over the years. We then illustrate the concepts of elasticitygraphically which most students grasp immediately.Next, we proceed to discuss thedeterminants of elasticity before asking students to do any more calculations. We hopethat this approach encourages students to keep the idea of elasticity front and centre andthereby not to get lost in detailed calculations, numbers and formulas and, as a result, losesight of the common-sense purpose of this powerful concept.We believe that elasticity is not only an important concept, but also an interesting one.We try to demonstrate this with a discussion of the four specific examples involving asales tax, an excise tax on cigarettes and alcohol, illegal drugs, and wheat.The chapter also includes a fuller discussion of the elasticity of supply than those foundin other texts, with an application involving ticket scalping. Again, unlike some otherapproaches, the chapter offers a complete discussion of both income and cross-elasticity.Suggested Approaches and Helpful HintsThe first five pages of this chapter are very tight and, as a result, we make no apology toour students when we work through them paragraph-by-paragraph and page-by-page. Weusually work through questions like Test Your Understanding 1 and 2 in class beforeproceeding. As a result, we find that the discussion on the determinants of elasticity goesmuch more easily and student participation is usually high.Some instructors may wish to take the following approach to elasticity:ΔQx 100Є=Q=ΔQxP=ΔQxPΔPx 100QΔPΔPQP

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