Solution Manual for ISE Microeconomics and Behavior, 10th Edition

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1Chapter 1Thinking Like an EconomistAnswers to Review Questions1.The opportunity cost of reading a novel this evening is not being able to do whatever youwould have done instead. If you would have watched TV, then your opportunity cost is notwatching TV; if you would have studied economics, then your opportunity cost is notstudying economics.2.The tuition is a sunk cost and so your roommate should consider only costs and benefitsrelevant now and in the future. If he will be better off in life by leaving school now, heshould not let the tuition make the rest of life less meaningful.3.Driving an automobile (which pollutes the atmosphere) imposes an external cost on others.Building a house which others admire presents an external benefit. Inventing somethingwhich is new and useful, but which cannot be patented presents another externalbenefit.4.A 50-year-old presumably is in a higher pay bracket than a 20-year-old so the opportunitycost of leaving the job is greater for the older person.5.By definition, a sunk cost is a cost that is incurred regardless of one's current decisions.6.Economists generally argue that people act in their own self-interest even if they do notconsistently evaluate costs and benefits. The analogy mostfrequently used (from MiltonFriedman) is that of a pool player who knows how to sink his shots without having studiedphysics.Answers to Chapter 1 Problems1.Let $X be the amount Jamal earns in a day on his job. The cost to Jamal of going to the parkis then $15 (admission fee) + $5 (gas & parking) + $10 (the lost satisfaction from notworking) + $X (lost salary) = $30 + $X. The benefit of going to the park is$45. He shouldgo to the park if his salary is $10/day, and shouldn't go if his salary is $20/day. At a salary of$15/day, he is indifferent between going and not going.2.If Tom kept the $200 and invested it in additional mushrooms, at the end of a year's time hewould have an additional $400 worth of mushrooms to sell. Dick must therefore give Tom$200 of interest in order for Tom not to lose money on the loan.

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23.It is reasonable to assume that everybody has decreasing satisfaction from each pound offood as consumption level increases. In University A, everybody will eat until the benefitfrom eating an extra pound of food is equal to $0, since this is the cost of each pound of food.In University B, people will eat until the benefit decreases to $2. Thus, everybody will eatless if they are at University B. So, not just average consumption but also each individual’spersonal consumption will be lower. Note that to reach this conclusion we need theassumption that the students at both universities have the same appetites.4.The only costs that vary with mileage are fuel, maintenance, and tires,which are average$0.25/mile (cost of driving for fuel $1,200/10,000 = $0.12, for maintenance $1,100/10,000 =$0.11,and tires $200/10,000= $0.02). The cost of driving will thus be$250(= $0.25 ×1,000), and since this is less than the cost of the bus, you should drive.5.The band and hall rental fees are fixed costs. The caterers charge at the rate of $7/guest ($5catering bill/$2 drink).So,an extra 10 guests will increase total costs by only $70.6.You gave up the $60(= $1,000 × 0.06)you would have earned if the money was in yoursavings account. This assumes that your tax rate on interest earned is zero.7.Monicahas already bought herticket, so hercost-benefit calculation when it is time to go isas follows: benefit of seeing game vs. cost of the drive + time costs, etc.Rachel, not havingbought herticket, faces a different calculation: benefit of seeing game vs. $30 + cost of thedrive + time costs, etc. Since the benefits are the same in each case, but the costs are largerforRachelat the moment of decision,she is less likely to go.8.A plane of either type—largeor small—should use the state-of-the-art device if the extrabenefits of that device exceed its extra costs. Because the device will save more lives inlarge planes than in small planes, its benefits are larger in large planes than in small ones.Your original recommendation was presumably based on the calculation that the benefits forthe larger planes justified the extracost butdid not do so in the case of the smaller planes.Airline passengers are like other people insofar as their willingness to invest in extra safety isconstrained by other pressing uses for their scarce resources. Where extra safety is relativelycheap, as in large planes, they will rationally choose to purchase more than when it isrelatively more expensive, as in small planes.9.With more than a week to go, the $100 driver's fee and the $50 bus cancellation fee are sunkcosts. If the trip takes place, the additional costs will be the remaining $450 of the bus feeplus the $75 in tolls, for a total of $525 in additional costs. Ifat least 30 tickets will be sold,it makes sense to continue the trip, since total revenue ($540) will exceed the additional cost.

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310.Assuming that residents are required to recycle cans, they simply cannot put them with theregular trash. In the first case, the fixed cost of $6/week is a sunk cost. Therefore, for theresidents, the cost of disposing an extra can is $0. In the tag system, the cost of disposing anextra can is $2, regardless of the number of cans. Therefore, since the costs are higher andthe benefit of setting out a can is assumed to be the same in both cases, you expect less cansto be collected in the tag system.11.The benefit of the 1st gigabyte is $32, the 2nd is $16, the 3rd is $8, the 4th is $4, the 5this $2,the 6this $1, the 7this $0.50 and the 8this $0.25. At a cost of $8, you should purchase 3gigabytes. At higher levels of benefit, the benefit is less than the cost. At lower levels, benefitexceeds the cost.Price32.0016.008.004.00123456789 Memory (GB)12.The benefit of the 1st gigabyte is $1,600, the 2nd is $800, the 3rd is $400, the 4th is $200, the5th is $100, the 6th is $50, the 7th is $25, and the 8th is $12.50. At a cost of $50and yourwillingness to pay $800 for the first gigabyte, you should purchase5gigabytes.When yourbenefit risesto $1,600 for the first gigabyte, you consume 6 GB of RAM.Price32.0016.008.004.00123456789 Memory (GB)The curve to the right showsthe new benefit function.

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413.False. The fact that Dana would have chosen the party before she bought her ticket meansthat she prefers a party to an event that costs $40. Now her choice is between two events thatshe can attend with no further payment.14.Taylor SwiftBruno MarsBenefitBpBrCost (initial)$75$75Cost (final)$75$50In the problem, we are given thatBp–$75 > Br–$75orBp> Br(*)Now, we need to find out whether the following is true or not:Bp–$75 > Br–$50which is the same asBp> Br+ $25(**)Notice that (*) does not necessarily imply (**). For example, if Bp=$80 and Br=$60, then (*)holds while (**) does not. So we can conclude that you should not go to theTaylor Swiftconcert in the above scenario if you are a rational utility maximizer.Your decision will depend on the relative values of Bpand Br. The fact that you would havebought aTaylor Swiftticket means that the benefit of attending theTaylor Swiftconcert,denoted Bp, must be greater than $75. Let Bsdenote the benefit of going to theBruno Marsconcert. The fact that you would have chosen theTaylor Swiftconcert before receiving yourBruno Marsconcert ticket means that Bp> Bs. But this does not imply that you should go totheTaylor Swiftconcert. Suppose Bp= $80 and Bs= $60. When you now choose between thetwo concerts, the opportunity cost of attending theBruno Marsconcert is $50, so the netbenefits of attending each concert are given by Bd–$75 =$5 and Bs–50 = $10, which meansyou should go to theBruno Marsconcert. So FALSE.15.Safari provides $10,000+/yr more enjoyment than a business job. $70,000 = gross benefit ofbusiness job salary.Costs of Business Job:10,000 opportunity cost of loan50,000 lost salary as safari leader10,000+ lost enjoyment from safari job$70,000+ total cost of taking of business job > benefit, so don't take the job.If business salary was $70,001/yr, he would have taken it.

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516.True. If you got $20,000 for theEquinoxand paid that plus $5,000 more for theExplorer, theentireExplorerexpense would have cost you $25,000. Since you have already shown thatyou did not want theExplorerfor $25,000, why would you spend that for it now?

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1Chapter 2Supply and DemandAnswers to Review Questions1.A shortage occurs when, at a given price, quantity demanded exceeds quantity supplied.Scarcity implies that not everyone can consume as much of a good as he wants. A good canbe scarcewithout a shortage occurring if the price of the good is set at the marketequilibrium.2.The supply curve would be a horizontal line where the price equals zero. The demand curvewould be a typical demand curve. If the price is greater than zero, then the market system isacting to allocate resources; not everyone can have as much as they want.3.Some examples: Parking places for the president of the college; giving seniors priority inclass assignments. Shortage of parking spaces and students being bumped frompreregistration.4.A reduction in supply implies a shift in the supply curve whereas a reduction in the quantitysupplied implies a movement along the supply curve.5.a.Change in demandb.Change in the quantity demanded (shift in supply)c.Change in the quantity demanded (shift in supply)d.Change in demand6.Because consumers prefer to pay a lower price.When there is excess supply, the price isabove the equilibrium price. So as the price falls, the quantity supplied falls, while thequantity demanded increases7.The allocative function of price is not important with vertical, or nearly vertical, supplycurves, e.g., land.8.For the tax burden to fall mostly on consumers rather than producers (buyers rather thansellers), you want to find a product (or products) for which the quantity supplied is very

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2responsive to price but quantity demanded is less responsive to price. Addictive goods likecigarettes and alcohol may fit this description.9.If a poor person were given $50,000 incash, it is unlikely she would spend it on a Mercedes,since she probably has other, more pressing wants. Since the gift Mercedes would fetch lessthan the cash gift, most poor persons would choose the cash.Answers to Chapter 2 Problems1.a.The imposition of the ceiling price on tea causes a reduction in the quantity of teabought, from Q1to Q2(left panel). The result is a leftward shift in the demand forlemons, resulting in a reduction in both price and quantity (right panel).b.The ceiling price for tea lowers the quantity people are able to buy from Q1tto Q2t.There is excess demand for tea at the ceiling price P2t, and some of this excess demandspills over to substitute products such as coffee. The result is that the equilibrium priceof coffee rises.(Note: This result may seem inconsistent with the claim that a fall in the price of a good'ssubstitute reduces the demand for that good. But this claim refers to a fall in theequilibriumprice of the good, not a price reduction caused by a ceiling. Because of thequantity reduction caused by the ceiling, tea buyers would be willing to pay P3tfor tea.So the price ceiling actually raises the opportunity cost of additional units of tea.)

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3PPteacoffeeQQDDDSS21teacoffeePPPPPQQQQ1212tttttccct12312cc2.a.The given supply and demand curves suggest that 16.15 million LPs would havebeen sold in 2018 at a price of $25.50.b.Total revenue is 16.15 million × $25.50 = $411,825,000.c.A possible graph isd.Technology, as represented by music streaming services, and the low price ofstreaming services as a substitute, may represent the fall in demand for CDs. Since, vinylLPs face the same headwinds, their success is more likely attributed to a change inconsumer tastes or, since tastes in music are strongly generational, an actual turnover inconsumers. The pricedifferenceof vinyl LPs may reflect higher per unit productioncosts, but the relative pricestrengthof LPs could have many explanations. Commentatorshave speculated that consumers value LPs (and their covers) as artwork as well as meansof listening to music. When it comes to music, “collectibles” may command higher pricesthan consumables.$20$21$22$23$24$25$26$27$28$29$301011121314151617181920Price of Vinyl LPsMillions of LPsThe US Market for New Vinyl LPs-2018LP Demand

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

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

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

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

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86. a.Change in quantity demanded.b.Change in demand.c.Change in demand.d.Change in demand.e.Change in quantity demanded.7.a.The equilibrium quantity isQ= 90,000 seats and the equilibrium price isP=1,900–(1/50)(90,000) = 1,900–1,800 = $100.b.At a price ceiling ofP= $50, quantity demanded is found by solving 50 = 1,900–(1/50)QforQ= 92,500 seats. Since the stadium only holdsQ= 90,000 seats, there willbe 92,500–90,000 = 2,500 dissatisfied fans who want to buy a ticket atP= $50 butcannot find one available.c.Quantity demanded for the higher demand is found by solving 50 = 2,100–(1/50)QforQ= 102,500 seats. Now there will be 102,500–90,000 = 12,500 dissatisfied fans whowant to buy a ticket atP= $50 but cannot find one available. The excess demand is12,500–2,500 = 10,000 seats more than for the not so big game.d.Normally a price ceiling both raises quantity demanded and lowers quantity supplied.Here, only the first effect is present because the stadium capacity is fixed.

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98.a.Under the original demand curve, quantity demanded wasQ= 900 units andquantity suppliedQ= 300 units, so excess demand was 900–300 = 600 units. With thelarger demand, quantity demanded becomesQ= 1,100 units, so excess demand becomes1100–300 = 800 units. Excess demand has grown by 800–600 = 200 units.b.Quantity demanded isQ= 1400–P; quantity supplied isQ=P. Subtracting quantitysupplied form quantity demanded gives excess demand of 1,400–2Punits. Set excessdemand equal to the original level of 600 and solve 600 = 1,400–2Pfor the requiredprice floor ofP= $400. If the government accommodates the increase in demand byraising the rent control from $300 to $400, the degree of excess demand will beunchanged.9.a.With a price support ofP= $500/ton and the original supply ofP=Q, quantitysupplied must beQ=P= 500 tons. Meanwhile, quantity demanded isQ= 100 tons, soexcess supply is 500–100 = 400 tons. With the expanded supply ofP= (1/2)Q, quantitysupplied grows toQ= 2P= 1,000 tons. Quantity demanded is stillQ= 100 tons, soexcess supply grows to 1,000–100 = 900 tons.b.The extra 500 tons (= 900–400) the government has to buy of excess supply costs thegovernment $500/ton, so the added expenditure is 500 × 500 = $250,000.

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1010.a.Set the supply for each area equal to the demand and solve forPandQ.Nimbyville:Qd= 2,000–0.75Ps=Qsn= 100 + 2Psn; 1,900 = 2.75Psn;Psn= $691;Qsn=1,481 apartmentsYimbyville:Qd= 2,000–0.75Ps=Qsy= 400 + 2Psy; 1,600 = 2.75Psy;Psy= $582;Qsn=1,564 apartmentsb.We would expect that the restrictions in Nimbyville would cause some residents to moveto Yimbyville, in search of housing bargains. The population increase would cause thedemand curve to shift for apartments in Yimbyville to shift to the right and—absent anynew supply—apartment prices would rise. In Nimbyville, the loss of population mightcause apartment prices to fall.c.No. The given equations, if solved in terms ofPfor the demand equation would beP=1,600–0.8Qwould yield the same equilibrium figures.11.The supply curve becomesP= 2 + 2Qand the demand remainsP= 8–2Q. By setting thetwo equations equal to each other and solving forQwe haveQ= 1.5. Substituting 1.5 intothe demand equation results in a price of 5.

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