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

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

2 Part 1 . INTRODUCTION
Use the following information to work Problems 3 to 6.
Jurassic World had world-wide box office receipts of $1.66 billion. The
movie’s production budget was $150 million with additional marketing costs.
A successful movie brings pleasure to millions, creates work for thousands,
and makes a few people rich.
3. What contribution does a movie like Jurassic World make to coping with
scarcity? When you buy a movie ticket, are you buying a good or a 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 you
think the creation of a blockbuster movie influences what, how, and for
whom goods and services are produced?
The audience decides whether a movie will be a blockbuster because the
audience decides whether to attend the movie.
The “what” question is affected in three ways: First, one good or service
that is produced is the blockbuster movie. Second, the people whose in-
comes are higher as a result of the blockbuster then buy an assortment of
goods and services and so this assortment of goods and services is pro-
duced. Finally, the “what” question is influenced if the movie leads to
spinoff goods (such as toys) or creates a series of sequels or similar films.
The “how” question is affected to the extent that movies use different
production methods. Some movies, for instance, have a lot of special ef-
fects while other movies have few or none. The “for whom” question is
influenced because those people who receive the profits of a blockbuster
movie have higher incomes and so more goods and services are produced
for them.
5. What are some of the components of marginal cost and marginal benefit
that the producer of a movie faces?
Some of the marginal costs the producer faces are the cost of an actor or
actress, the costs of the crew for a day, the costs of a location, and the
costs of advertising in a newspaper. The marginal benefits the producer
enjoys are his or her salary and/or profit participation from the movie,
royalties from the movie, the prestige resulting from a successful movie,
and any awards given to the producer of the movie.
6. Suppose that Chris Pratt had been offered a part in another movie and
that to hire him for Jurassic World, the producer had to double Chris
Pratt’s pay. What incentives would have changed? How might the
changed incentives have changed the choices that people made?
The higher pay would have increased Mr. Pratt’s incentive to make Juras-
sic World rather than the other movie and perhaps affected his choice to

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

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

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

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6 Part 1 . INTRODUCTION
a macroeconomic topic. Explain your answers.
 Job Gains Calm Slump Worries
This entry is a macroeconomic topic because the slump concerns a
turndown in the overall economy and neither an individual nor a busi-
ness makes the decision to slow the aggregate economy.
 Washington Post’s Profit Falls
This entry is a microeconomic topic because it concerns the profit out-
come of one business, the Washington Post.
 Overcapacity, Fuel Costs Hit Shipping
This entry is a microeconomic topic. It describes the situation within
one sector—shipping—which is being affected by overcapacity and a
rise in the price of fuel.
 U.S. Budget Deficit Expands
This entry is a macroeconomic topic because the budget deficit is the re-
sult of taxes and government spending spread over all sectors in the en-
tire economy.
4. Your school decides to increase the intake of new students next year. To
make its decision, what economic concepts would it have considered?
Would the school have used the “economic way of thinking” in reaching
its decision? Would the school have made its decision on the margin?
The school would consider the extra revenue that each additional student
would bring and compare that to the extra cost of providing each student
with 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 the
economic way of thinking. If the school compares the additional revenue
to the additional cost, it makes its decision on the margin.
5. Provide examples of (a) a monetary incentive and (b) a non-monetary
incentive, a carrot and a stick of each, that government policies use to in-
fluence behavior.
(a) A monetary carrot that the students might answer because it is close
to their lives is student aid, such as Pell grants. A monetary stick
might be taxes on liquor.
(b) A non-monetary carrot is government support for youth sports, such
as allowing little league teams to use a county park, and a non-
monetary stick is jail terms for illegal drug or alcohol use.
6. Think about each of the items in the list and explain how they affect
incentives and might change the choices that people make:
 A hurricane hits Central Florida.
The hurricane affects the people in Central Florida and the consumers
who purchase the products produced in Central Florida, such as orang-

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Chapter 1 . Getting Started 7
es or vacation services. Residents’ incentives change if they suffered
damage from the hurricane because they have the incentive to repair
the damage. If the price of home repair rises, residents who specialize in
home repair have an incentive to work longer hours to earn the higher
price. If the hurricane raises the price of the goods and services pro-
duced in Central Florida, consumers have the incentive to buy less of
these particular goods and services because they are more expensive.
 The World Series begins tonight but a storm warning is in effect for
the area around the stadium.
The report of the possible storm decreases fans’ incentive to attend the
game. Some fans decide to stay at home and watch the game on television.
 The price of a personal computer falls to $50.
The fall in the price of a computer increases consumers’ incentive to buy
a computer. More consumers decide to buy a computer. The fall in the
price of a computer decreases producers’ incentives to produce 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 and
fewer large gas-guzzling cars. They also might decide to ride public
transportation more often.
7. Does the decision to make a blockbuster movie mean that some other
more desirable activities get fewer resources than they deserve? Is your
answer positive or normative? Explain your answer.
Making a blockbuster movie means that some other activities get fewer
resources. But whether “more desirable” activities get fewer resources
than they “deserve” is a normative answer for two reasons. First the ques-
tion of whether an activity is more desirable or less desirable depends on
the person’s judgment and values. Second the determination of whether
an activity gets fewer resources than it deserves also involves the norma-
tive decision about the quantity of resources an activity deserves. So the
answer to the question of whether making a blockbuster movie means
that other more desirable activities get fewer resources than they deserve
is a normative answer that depends on the 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 dealing
with microeconomic topics and macroeconomic topics.
(a) Students might answer that they use economics as a tool when they
budget their student aid and when they decided which college to at-
tend based on the costs of their options. Both instances deal with mi-
croeconomics.

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8 Part 1 . INTRODUCTION
(b) A business uses economics as a tool when it decides the price it
charges for its product and the salaries it pays its managers. Both in-
stances are microeconomic examples.
(c) The government use economics as a tool when it decides whether to
increase taxes on cigarettes or lower the interest rate. The first exam-
ple is microeconomic in nature and the second involves macroeco-
nomics.
Use the following news clip to work Problems 9 to 12.
Obama unveils major climate change policy
Obama’s Clean Power Plan, which will set federal limits on carbon emissions
from coal-fired power plants, will cost $8.4 billion and reap benefits of more
than $34 billion. Opponents of the plan say it will drive up the cost of elec-
tricity for millions of Americans.
Source: CNN, August 3, 2015
9. What are the more than $34 billion of benefits from using less coal to
produce electricity? Who receives these benefits: the users of electricity or
the owners of power plants, or both the users and the owners?
Benefits include: (1) a reduction in carbon emissions, which brings a 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 the
benefits.
10. What are the $8.4 billion of costs arising from using less coal to produce
electricity? Who bears these costs: the users of electricity or the owners of
power plants, or both the users and the owners?
To decrease carbon emissions from coal-fired plants requires that the
plants install more pollution abatement equipment, such as scrubbers on
their stacks that decrease emissions of carbon. The costs of the equipment
and its installation account for the costs of the Clean Power Plan. Users of
electricity, who pay higher prices for electricity, will pay some of these
costs and owners of power plants, who receive lower profits from produc-
ing electricity, also will pay some of the costs.
11. Explain why someone might oppose the Clean Power Plan when its
benefits exceed its costs.
Someone might oppose the Clean Power Plan because he or she believes
that the benefits and costs are measured incorrectly so that in reality the
costs exceed the benefits. Others might oppose it because the costs that
fall on them exceed the benefits that they receive.
12. Explain whether the Clean Power Plan has an opportunity cost.
The Clean Power Plan has an opportunity cost because the resources 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 Started 9
 Multiple Choice Quiz
1. Which of the following describes the reason why scarcity exists?
A. Governments make bad economic decisions.
B. The gap between the rich and the poor is too wide.
C. Wants exceed the resources available to satisfy them.
D. There is too much unemployment.
Answer: C Answer C uses the definition of scarcity on page 2.
2. Which of the following defines economics?
Economics is the social science that studies ___________.
A. the best way of eliminating scarcity
B. the choices made to cope with scarcity, how incentives influence
those choices, and how the choices are coordinated
C. how money is created and used
D. the inevitable conflict between self-interest and the social interest
Answer: B Answer B uses the definition of economics on page 2.
3. Of the three big questions, what, how, and for whom, which of the fol-
lowing is an example of a how question?
A. Why do doctors and lawyers earn high incomes?
B. Why don’t we produce more small cars and fewer gas guzzlers?
C. Why do we use machines rather than migrant workers to pick grapes?
D. Why do college football coaches earn more than professors?
Answer: C Answer C describes how grapes are picked.
4 Which of the following is not a key idea in the economic way of
thinking?
A. People make rational choices by comparing costs and benefits.
B. Poor people are discriminated against and should be treated more
fairly.
C. A rational choice is made at the margin.
D. Choices respond to incentives.
Answer: B Answer B is not part of description of the economic way of
thinking on page 8.

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10 Part 1 . INTRODUCTION
5. A rational choice is ___________.
A. the best thing you must forgo to get something
B. what you are willing to forgo to get something
C. made by comparing marginal benefit and marginal cost
D. the best for society
Answer: C Answer C is part of description of a rational choice on pages 8
and 9.
6. Which of the following best illustrates your marginal benefit from
studying?
A. The knowledge you gain from studying 2 hours a night for a month
B. The best things forgone by studying 2 hours a night for a month
C. What you are willing to give up to study for one additional hour
D. What you must give up to be able to study for one additional hour
Answer: C Page 10 shows that answer C is the marginal benefit from
studying.
7. The scientific method uses models to ___________.
A. clarify normative disagreements
B. avoid the need to study real questions
C. replicate all the features of the real world
D. focus on those features of reality assumed relevant for understanding
a cause and effect relationship
Answer: D Answer D uses the definition of an economic model on page
15.
8. Which of the following is a positive statement?
A. We should stop using corn to make ethanol because it is raising the
cost of food.
B. You will get the most out of college life if you play a sport once a
week.
C. Competition among wireless service providers across the borders of
Canada, Mexico, and the United States has driven roaming rates
down.
D. Bill Gates ought to spend more helping to eradicate malaria in Africa.
Answer: C Answer C is a positive statement because it can, in theory, be
tested.

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Appendix:
Making and
Using Graphs
Chapter
1ANSWERS TO APPENDIX CHECKPOINT
 Study Plan Problems
The spreadsheet in the table provides data on
the U.S. economy: Column A is the year; the
other columns are quantities sold in millions
per year of compact discs (column B), music
videos (column C), and singles downloads (col-
umn D). Use this spreadsheet to work Problems
1 and 2.
1. Draw a scatter diagram to show the relationship
between the quantities sold of compact discs
and music videos. Describe the relationship.
Figure A1.1 illustrates the relationship of the data
from the spreadsheet between the quantities sold of
compact discs and the quantities sold of music vid-
eos. Over all the period, there appears to be a posi-
tive or direct relationship; that is, when more com-
pact discs are sold, more music videos are sold.
A B C D
1 2004 767 33 139
2 2006 620 23 586
3 2008 385 13 1,033
4 2010 226 9 1,162
5 2012 211 11 1,392
6 2014 144 4 1,200

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12 Part 1 . INTRODUCTION
2. Draw a time-series graph of quantity of compact discs sold. Say in which
year or years the quantity sold (a) was highest, (b) was lowest, (c) 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 the
quantity of compact discs sold using the data
from the spreadsheet.
a. The quantity sold was the highest in 2004.
b. The quantity sold was the lowest in 2014.
c. The quantity sold never increased.
d. The quantity sold decreased the most be-
tween 2006 and 2008 when it decreased by
235 million.
Over the entire time period covered in the fig-
ure, there is a downward trend in the quantity
of compact discs sold.
3. The following data shows the relationship between two variables x and y.
x 0 1 2 3 4 5
y 32 31 28 23 16 7
Is the relationship between x and y positive or negative? Calculate the
slope of the relationship when x equals 2 and when x equals 4. How does
the slope change as the value of x increases?
The relationship is negative: When x increases, y decreases. The slope of
the relationship equals the change in y divided by the change in x along
the tangent line; that is, the slope of the relationship at a point equals the
slope of the tangent line at that point. When x equals 2, the slope of the
tangent line equals –4, so the slope of the relationship equals –4. When x
equals 4, the slope of the tangent line equals –8, so the slope of the rela-
tionship equals –8. The slope of the relationship increases in magnitude
(the line becomes steeper) as x increases.

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

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14 Part 1 . INTRODUCTION
 Instructor Assignable Problems
Use the information in the table to work
Problems 1 and 2. Column A is the year; the
other columns are quantities sold in mil-
lions per year of compact discs (column B),
music videos (column C), and singles
downloads (column D).
1. Draw a scatter diagram to show the rela-
tionship between quantities sold of music
videos and singles downloads. Describe the
relationship.
Figure A1.5 illustrates the relationship of the
data from the spreadsheet between the quanti-
ties sold of music videos and singles down-
loads. Over all the period, there appears to be a
negative or indirect relationship; that is, when
fewer music videos are sold, more singles are
downloaded.
A B C D
1 2004 767 33 139
2 2006 620 23 586
3 2008 385 13 1,033
4 2010 226 9 1,162
5 2012 211 11 1,392
6 2014 144 4 1,200

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Appendix 1 . Making and Using Graphs 15
2. Draw a time-series graph of the quantity of
music videos sold. Say in which year or years
the quantity sold (a) was highest, (b) was
lowest, (c) decreased the most, and (d)
decreased the least. If the data show a trend,
describe it.
Figure A1.6 illustrates the time series of music
videos sold using the data from the 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 and
2008, when it decreased by 10 million per
period.
d. Setting aside the periods during which the
quantity increased, the quantity sold de-
creased the least between 2008 and 2010.
There is a downward trend in the quantity of music videos sold.
Use the following data on the relationship between two variables x and y to
work Problems 3 and 4.
x 0 1 2 3 4 5
y 0 1 4 9 16 25
3. Is the relationship between x and y positive or negative? Explain.
The relationship is positive: When x increases, y also increases.
4. Calculate the slope of the relationship when x equals 2 and x equals 4.
How does the slope change as the value of x increases?
The slope of the relationship equals the change in y divided by the change
in x along the tangent line; that is, the slope of the relationship at a point
equals the slope of the tangent line at that point. When x equals 2, the
slope of the tangent line equals 4, so the slope of the relationship equals 4.
When x equals 4, the slope of the tangent line equals 8, so the slope of the
relationship equals 8. The slope of the relationship increases as x increas-
es.

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

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

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

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

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20 Part 1 . INTRODUCTION
9. Why you can get a free college education in Germany but not in California
Even American students can get a free college degree in Germany, where
high taxes pay for colleges. Despite college being free, fewer students in
Germany earn college degrees than in the United States and more enter
vocational apprenticeships.
Source: Los Angeles Times, October 29, 2015
If California adopted the German model of higher education, how
would that change for whom goods and services are produced?
The students in California who otherwise would not have gone to col-
lege but who take advantage of the “free” college education will have
higher incomes than otherwise. Consequently, more goods and ser-
vices will be produced for them. The taxpayers who must pay the
taxes necessary to fund these college educations will have less income
to spend on goods and services, so fewer goods and services will be
produced for them.
10. Read Eye on the Dreamliner on p. 43 and then answer the following ques-
tions:
 How many firms are involved in the production of the Dreamliner
and 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? Explain
why?
The Dreamliner is a capital good because it will be used to produce
services (airline travel) throughout many future years.
 State the factors of production that make the Dreamliner and provide
an 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 is
an example of the land used; the engineer who helped design the
landing gear is an example of labor; the huge cranes that lift the vari-
ous pieces of the Dreamliner to assemble them is an example of capi-
tal; and the creative and imaginative input of Boeing’s top managers
who organize the resources used to produce the Dreamliner exempli-
fy entrepreneurship.
 Explain how the production of the Dreamliner influences what, how,
and for whom, goods and services are produced.
Dreamliner influences “what” goods and services are produced by
creating a demand for components manufactured around the world.
It influences “how: goods are produced because Boeing and the other
400 firms all determine the best way to produce each particular part

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Chapter 2 . The U.S. and Global Economies 21
of the Dreamliner. It influences “for whom” because factors of pro-
duction employed to make the Dreamliner receive income from this
production, thereby increasing the quantity of goods and services
they can purchase.
 Use a graph to show where in the circular flow model of the global
economy the flows of the components listed on p. 43 appear and
where the sales of Dreamliners appear.
Except for the
components
built in the
United States,
spending on
the other
components
appear in the
flow of ex-
penditure on
U.S. imports.
Sales of
Dreamliners
appear in the
flow of ex-
penditure on
U.S. exports.

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

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

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

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Chapter 2 . The U.S. and Global Economies 25
9. On a diagram of the circular flow model, indicate in which real or money
flow each entry in the list belongs.
 General Motors’
pays its workers
wages.
General Motors
wage payment is
a money flow
that is a payment
for use of the ser-
vices of a factor
of production
and so flows out
of the factor mar-
ket to households
(it flowed into the
factor market
from General
Motors, a firm).
In Figure 2.3 the
dark arrows rep-
resent money
flows and the
grey arrows rep-
resent flows of
goods and services and factors. The flow of wage payments to house-
holds is labeled a in 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 of
the services of a factor of production and so flows out of the factor
market to households (it flowed into the factor market from IBM, a
firm). The flow to households is labeled b in the figure.
 You buy your groceries.
Your purchase of groceries represents a money flow from households
to the goods market, labeled c in the figure.
 Southwest rents some aircraft.
The aircraft are factors of production, so the flow is the services from
these factors of production from the factor markets to firms, labeled d
in the figure.
 Nike pays Serena Williams for promoting its sports shoes.
Serena Williams is a factor of production, so the flow is a money flow

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

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Chapter 2 . The U.S. and Global Economies 27
 Multiple Choice Quiz
1. Which of the following classifications is correct?
A. City streets are consumption goods because they wear out with use.
B. Stocks are capital goods because when people buy and sell them they
make a profit.
C. The coffee maker in the coffee shop at an airport is a consumption
good because people buy the coffee it produces.
D. White House security is a government service because it is paid for
by the government.
Answer: D Answer D is correct.
2. Which of the following statements about U.S. production is correct?
A. Construction accounts for a larger percentage of total production than
does manufacturing.
B. Real estate services account for 14.5 percent of the value of total pro-
duction, larger than any other item of services or goods.
C. Consumption goods and services represent 78.5 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 total
production.
Answer: C Answer C is correct as the data on page 34 show.
3. Which of the following items is not a factor of production?
A. An oil rig in the Gulf of Mexico
B. A ski jump in Utah
C. A bank loan to a farmer
D. An orange grove in Florida
Answer: C Answer C is not a factor of production because it is financial
capital; see page 37.
4. What is human capital?
A. A fruit picker
B. Unskilled labor
C. Your professor’s knowledge of the economy
D. An auto assembly line robot
Answer: C Answer C uses the definition of human capital on page 37.

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28 Part 1 . INTRODUCTION
5. Which of the following statements is correct?
A. Labor earns wages and entrepreneurship earns bonuses.
B. Land earns interest and capital earns rent.
C. Entrepreneurship earns interest and capital earns profit.
D. Capital earns interest and labor earns wages.
Answer: D Page 39 shows that answer D is correct.
6. How are goods and services produced in the global economy?
A. Developing countries use less human capital but just as much physi-
cal capital as advanced economies.
B. Emerging economies use more capital-intensive technology than do
developing economies.
C. Human capital in all economies is similar.
D. Advanced economies use less capital than developing economies.
Answer: B Developing countries have less capital than emerging 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 bought
B. The flow of income from firms to households for the services of the
factors of production hired
C. The flow of U.S. borrowing from the rest of the world
D. The flow of labor services from households to firms
Answer: D Answer D is a real flow because it is a labor service.

Loading page 29...

The
Economic
Problem
Chapter
3ANSWERS TO CHAPTER CHECKPOINTS
 Study Plan Problems and Applications
1. The table shows the quantities of corn and beef that a farm
can produce in a year. Draw a graph of the farm’s PPF. Mark
on the graph:
 An inefficient combination of corn and beef—label this
point A.
 An unattainable combination of corn and beef—label
this point B.
 An efficient combination of corn and beef—label this point C.
The production possibilities frontier is illus-
trated in Figure 3.1. Any production point in
the interior of the PPF, such as the point
marked A, is an inefficient combination of
corn and beef. Any production point beyond
the PPF, such as the point marked B, is an un-
attainable combination of corn and beef. Any
production point on the PPF, such as the point
marked C is a production efficient combina-
tion of corn and beef.
Corn
(bushels)
Beef
(pounds)
250 and 0
200 and 300
100 and 500
0 and 600

Loading page 30...

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

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