Solution Manual for Macroeconomics, 13th Edition

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Part 1IntroductionChapter1WhatisEconomics?1AppendixGraphsinEconomics9Chapter2TheEconomicProblem21Chapter3DemandandSupply39Part2MonitoringMacroeconomicPerformanceChapter4MeasuringGDPandEconomicGrowth53Chapter5MonitoringJobsandInflation67Part3Macroeconomic TrendsChapter6EconomicGrowth81Chapter7Finance,Saving,andInvestment93Chapter8Money,thePriceLevel,andInflation105Chapter9TheExchangeRateandtheBalanceofPayments119Part4Macroeconomic FluctuationsChapter10AggregateSupplyandAggregateDemand133Chapter11ExpenditureMultipliers149Chapter12TheBusinessCycle,Inflation,andDeflation165Part5Macroeconomic PolicyChapter13FiscalPolicy181Chapter14MonetaryPolicy195Chapter15InternationalTradePolicy211T a b l e o f C o n t e n t s

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IntroductionAtnotimeinhistoryhasteachingtheprinciplesofeconomicsbeeneithermorechallengingormoreimportant.Yourdecisiontoadoptthethirteentheditionofmytextbookbringstoyourtaskasetofteachingandlearningtoolsthatareunmatchedintheirclarity,relevance,andcurrency.Itismyhopethatwiththehelpofthesetools,youwillenableyourstudentstobecomeasexcitedabouteconomicsasyouare.ThisSolutionsManualhasthecompleteanswerstoallthequestionsandproblemsfromthetextbookinonehandysource.Youcaneitherusethesesolutionstohelpyougradeproblemsyouhaveassignedorphotocopythemandhandthemoutdirectlytothestudents.Inadditiontotheanswers,thisSolutionsManualalsohasthequestionscopieddirectlyfromthetextbook.Ifyouareworkingthroughthequestionsandanswersinclassyouwillnolongerneedtoturnfromthetextbookforthequestionstoanotherbookfortheanswersbecausethisonebookhasboth.Attheendofeachchapterinthisbookthereareextraproblems(andanswers)whicharesimilartosomeoftheEndofChapterproblemsfromthetextbook.Youcanusetheseproblemsbyeitherhandingthemouttoyourclassforcreditorforpractice.Eitherwayyourstudentsaresuretobenefit.AcknowledgmentsMarkRushoftheUniversityofFloridaputtogethertheinitialdraftofthebook.HisworkwascheckedbyJeannieGilmoreoftheUniversityofWesternOntario.MarkreportsthatbasedontheerrorsandextensivecommentsJeanniemade,heisworriedthathemightnotpassthisclass.Evenwiththequalityofallthehelp,thereremainsroomforimprovementinthetextand(saysMark)inthismanual.Anycorrections,suggestions,orcommentsthatyouhavewillbegreatlyappreciated.SendyourcommentsonthismanualtoMark(MarkRush@ufl.edu)andyourcommentsonthetexttome(michael.parkin@uwo.ca).Whetheryou’reteachingtheprinciplescourseforthefirsttimeorareanexperiencedteacheratthislevel,Ihopeyouwillfindthismanualhelpful.Iwishyousuccessandenjoymentinyourcourse!MichaelParkinUniversityofWesternOntarioP r e f a c e

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A n s w e r st ot h eR e v i e wQ u i zPage 21.List some examples ofthescarcitythat you face.Examplesofscarcitycommontostudentsincludenotenoughincometoaffordbothtuitionandanicecar,notenoughlearningcapacitytostudyforbothaneconomicsexamandachemistryexaminonenight,andnotenoughtimetoallowextensivestudyingandextensivesocializing.2.Find examples of scarcity in today’s headlines.AheadlineinTheBaltimoreSunonJune20,2017was“DavisSaysSpecialDeploymentHelpedStallViolence.”ThestorypresentedPoliceCommissionerKevinDavisstatingthataweek-longdeploymentofuniformedpoliceofficersonthestreetsofBaltimorehelpedreduceshootingsinthecity.ButthestorypointedouttheroleofscarcitywhenCommissionerDavissaidthat“thedeploymentwasnotsustainableoverthelongterm”duetoitscost.3.Find anexampleof the distinction between microeconomics and macroeconomics intoday’s headlines.Microeconomics:OnJune20,2017aheadlineinEastBayTimeswas“RealityvsFantasy:FTCtoBlockFanDuel-DraftKingsMerger.”Thisstorycoversamicroeconomictopicbecauseitdiscusseshowtwoon-linefantasysportssites,whichweretryingtomerge,nowfacedoppositionbytheFederalTradeCommission(FTC)whichannounceditwouldchallengethemerger.Macroeconomics:OnJune20,2017,aheadlineinTheWallStreetJournalwas“RyanTalksUpLikelihoodofTaxOverhaul.”Thisstorycoversamacroeconomictopicbecauseitconcernstaxesthataffecteverybusinessandindividualintheentireeconomy.Page71.Describe the broad facts aboutwhat,how, andfor whomgoods and services are produced.Whatgetsproducedissignificantlydifferenttodaythaninthepast.TodaytheU.S.economyproducesmoreservices,suchasmedicaloperations,teaching,andhairstyling,thangoods,suchaspizza,automobiles,andcomputers.Howgoodsandservicesareproducedisbybusinessesdetermininghowthefactorsofproduction,land,labor,capitalandentrepreneurship,arecombinedtomakethegoodsandservicesweconsume.Landincludesallnaturalresources,bothrenewablenaturalresourcessuchaswood,andnonrenewablenatural1WHAT ISECONOMICS?C h a p t e r

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2C H A P T E R1resourcessuchasnaturalgas.Labor’squalitydependsonpeople’shumancapital.IntheU.S.economy,humancapitalobtainedthroughschoolinghasincreasedovertheyearswithfarmorepeoplecompletinghighschoolandattendingcollegethaninpastyears.Finally,forwhomaregoodsandservicestobeproduceddependsonthewayincomeisdistributedtoU.S.citizens.Thisdistributionisnotequal;the20percentofpeoplewiththelowestincomeearnabout5percentofthenation’stotalincomewhilethe20percentofpeoplewiththehighestincomesearnabout50percentoftotalincome.Ontheaverage,menearnmorethanwomen,whitesmorethannon-whites,andcollegegraduatesmorethanhighschoolgraduates.2.Use headlines from the recent news to illustrate the potential for conflict between self-interest and the social interest.Oneexampleofanissueconcernstheuseofaschoolboard’screditcardtomakepersonalpurchases.AJune20,2017headlinefromStarTribunewas“ShakopeeBoardApprovesSuperintendent’sResignationWillPayHim$50,000.”Thisstorydiscussesthesuperintendent’suseofaschoolboardcreditcardtobuyitemssuchasatelevisionandtriptoNashville.Thesuperintendentwasfollowinghisself-interestbecausehemaynothaverepaidthepurchaseshadtheynotbeenuncovered.Theschoolboardchairsaid“Inlightofthecurrentissuesfacingtheschooldistrict,theschoolboardfeel(sic)thatachangeinleadershipiswarranted.”Thechairbelievesthatthesocialinterestisservedbyhavinganewsuperintendentwithouttheissueofmisuseofacreditcardhangingoverhisorherhead.Page101.Explain the idea of a tradeoff and think of three tradeoffs that you have made today.Atradeoffreflectsthepointthatwhensomeonegetsonething,somethingelsemustbegivenup.Whatisgivenupistheopportunitycostofwhateverisobtained.Threeexamplesoftradeoffsthatarecommontostudentsinclude:a)Whenastudentsleepsinratherthangoingtohisorherearlymorningeconomicsclass,thestudenttradesoffadditionalsleepforstudytime.Theopportunitycostofthedecisionisalowergradeontheexam.b)Whenastudentrunninglateforclassparkshisorhercarillegally,thestudenttradesoffsavingtimefortheriskofaticket.Thepotentialopportunitycostofthedecisionisthegoodsandservicesthatcannotbepurchasedifthestudentreceivesanexpensiveparkingticket.c)Astudenttradesoffhigherincomebyspendingtimeduringthedayworkingatapart-timejobforlesstimespentatleisuretimeandstudy.Theopportunitycostforthehigherincomeislessleisureandlowergradesinclasses.2.Explain what economists mean by rational choice and think of three choices that you’vemade today that are rational.Arationalchoiceisonethatcomparesthecostsandbenefitsofthedifferentactionsandthenchoosestheactionthathasthegreatestbenefitovercostforthepersonmakingthechoice.Threerationalchoicesmadebystudentsinclude:a)Thechoicetoskipbreakfastto

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W H A TI SE C O N O M I C S ?3gotoclass.Inthiscasethebenefitisthehighergradeintheclassandthecostisthebreakfastforgone.b)Thechoicetostoptalkingwithafriendonthephoneandstartstudyingforanimpendingexam.Inthiscasethebenefitistheresultinghighergradeintheclassandthecostistheconversationforgone.c)Thechoicetodolaundrytodayratherthanwatchtelevision.Inthiscasethebenefitisthefactthestudentwillhavecleanclothestowearandthecostisthelossoftheentertainmentthetelevisionshowwouldhaveprovided.3.Explain why opportunity cost is the best forgone alternative and provide examples of someopportunity costs that you have faced today.Whenadecisiontoundertakeoneactivityismade,oftenmanyalternativeactivitiesarenolongerpossible.Oftentheseactivitiesaremutuallyexclusivesoonlythehighestvaluedalternativeisactuallyforgone.Forinstance,thedecisiontogotoastudent’s8:30AMclasseliminatesthepossibilityofsleepinginduringthehourandofjoggingduringthehour.Butinthiscase,itisimpossibletobothsleepinandtojogduringthehour,sotheopportunitycostcannotbebothactivities.Whatislostisonlytheactivitythatotherwisewouldhavebeenchosen—eithersleepinginorjogging—whichiswhateveractivitywouldhavebeenchosen,thatis,themosthighlyvaluedoftheforgonealternatives.Forstudents,attendingclass,doinghomework,studyingforatestareallactivitieswithopportunitycosts.4.Explain what it means to choose at the margin and illustrate with three choices at themargin that you have made today.Choosingatthemarginmeanschoosingtodoalittlemoreoralittlelessofsomeactivity.Threecommonexamplesstudentsencounterare:a)Whenastudentfacesachemistryandaneconomicsfinalexaminoneday,thestudentmustdeterminewhetherspendingthelasthourstudyingalittlemorechemistryoralittlemoreeconomicswillyieldabettercontribution(marginalbenefit)tohisorheroverallGPA.b)Acollegestudentbuyingacomputermustdecidewhetherthemarginalbenefitofadding1GBofadditionalmemoryisworththemarginalcostoftheadditionalmemory.c)Astudentfootballfanwithachoiceofacheapseatinthestudentbleacherslocatedatthefarendoftheplayingfieldoramoreexpensiveseatlocatedonthe30yardlinemustdeterminewhetherthemarginalbenefitofwatchingthegamefromabetterseatisworththemarginalcostofthehigherticketprice.5.Explain why choices respond to incentives and think of three incentives to which you haveresponded today.Peoplemakingrationaldecisionscomparethemarginalbenefitsofdifferentactionstotheirmarginalcosts.Thereforepeople’schoiceschangewhentheirincentives,thatisthemarginalbenefitand/ormarginalcost,ofthechoicechanges.Justaseveryoneelse,studentsrespondtoincentives;a)Astudentstudiesbecauseoftheincentivesofferedbygrades.b)Astudentismorelikelytoattendaclassifattendanceisfactoredintothegrade.c)Astudentmight

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4C H A P T E R1attendameetingofaclubifthestudent’ssignificantotheriseagertoattendthemeeting.Page 111.Distinguish between a positive statement and a normative statement and provideexamples.Apositivestatementisadescriptionofhowtheworldis.Itistestable.Anormativestatementisadescriptionofhowtheworldoughttobe.Itis,byitsverynature,nottestablebecausethereisnouniversallyapprovedcriterionbywhichthestatementcanbejudged.“IwillreceiveanAforthiscourse,”isapositivestatementmadebyaneconomicsstudent—itmightnotbetrue,butitistestable.“Iwillreceiveagoodgradeforthiscourse,”isanormativestatement.Whethersomeoneagreeswithitdependsonhisorherinterpretationofwhatmakesfora“good”grade.2.What is a model? Can you think of a model that you might use in your everyday life?Amodelisadescriptionofsomeaspectoftheeconomicworld.Itincludesonlythosefeaturesthatarenecessarytounderstandtheissueunderstudy.Aneconomicmodelisdesignedtoreflectthoseaspectsoftheworldthatarerelevanttotheuserofthemodelandignoretheaspectsthatareirrelevant.AtypicalmodelisaGPSmap.Itreflectsonlythoseaspectsoftherealworldthatarerelevantinassistingtheuserinreachinghisorherdestinationandavoidsusinginformationirrelevanttotravel.3.How do economists try to disentangle cause and effect?Economistsusemodelstounderstandsomeaspectoftheeconomicworld.Testingthepredictionsofmodelsmakesitnecessarytodisentanglecauseandeffect.Toovercomethisproblem,economistshavethreemethodsoftestingtheirmodels:Usinganaturalexperiment,usingastatisticalinvestigation,andusingeconomicexperiments.Anaturalexperimentisasituationthatarisesintheordinarycourseoflifeinwhichonefactorbeingstudiedvariesandtheotherfactorsarethesame.Thismethodallowstheeconomisttofocusontheeffectfromthefactorthatdiffersbetweenthetwosituations.Astatisticalinvestigationlooksforcorrelationsbetweenvariablesbutthendeterminingwhetherthecorrelationactuallyreflectscausationcanbedifficult.Aneconomicexperimentputspeopleintodecisionmakingsituationsandthenvariestherelevantfactorsoneatatimetodetermineeachfactor’seffect.4.How is economics used as a policy tool?Individuals,businesses,andgovernmentsuseeconomicsasapolicytool.Individualsusetheeconomicideasofmarginalbenefitandmarginalcostwhenmakingdecisionsforsuchtopicsasattendingcollege,payingcashorcreditforapurchase,andworking.Businessesalsousetheconceptsofmarginalbenefitandmarginalcostwhenmakingdecisionsaboutwhattoproduce,howtoproduce,andevenhowmanyhourstostayopen.Finallygovernmentsalsousemarginalbenefitandmarginalcostwhendecidingissuessuchasthe

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W H A TI SE C O N O M I C S ?5levelofpropertytaxes,theamounttofundhighereducation,orthelevelofatariffonBrazilianethanol.Page 131.What types of jobs do economists do?Economistsarefoundinalargevarietyofjobs.Manyofthesejobsareanalystsofvarioussorts.Someeconomistsaremarketresearchanalysts—theyworkwithdataonsalesandtrytopredictaproduct’ssuccessandthepricethatshouldbesetforit.Othereconomistsarefinancialanalysts—theyworkwithdataoninterestrates,stockandbondpricestotrytoforecastthecostofborrowingthereturnsthatcanbeexpectedoninvestments.Stillothereconomistsworkasbudgetanalysts—theyusedataonanorganization’scashinflows(itsreceipts)anditsoutflows(itspayments)inordertoprepareplansforecastingfuturecashflows.2.What is the range and median level of economists’ pay?Economists’payrangesfrom$41,226to$124,177andhasamediansalaryof$72,279.StudentswhoearnaPhDineconomicstypicallyearnabout$100,000bymid-career.Economistswhoworkasanalystshaveincomesthatrangefromanaverageof$62,000formarketresearchanalyststo$80,000forfinancialanalysts.3.What are the skills needed for an economics job?Economistsneedfiveimportantskills:•Critical-thinkingskills:Economistsneedtheabilitytouselogicalthinkingtoclarifyandthensolvereal-worldproblems.•Analyticalskills:Economistsmustbeabletouseeconomicideasandtoolstoanalyzedatainordertodetermineimportantpatternsandreachlogicalconclusions.•Mathskills:Economistsneedtobeabletousemathematicalandstatisticaltoolstoexploreandanalyzedatainordertoreachvalidconclusions.•Writingskills:Economistsmustbeabletoclearlywritereportspresentingideas,conclusionsfromanyanalysisandreasonswhytheconclusionsarevalid.•Oralcommunicationskills:Economistsneedtheabilitytoorallyexplainideas,conclusions,andthereasonswhytheconclusionsarecorrecttoavarietyofpeople,includingthosewithlittleknowledgeofeconomics.

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6C H A P T E R1A n s w e r s t o t h eS t u d y P l a nP r o b l e m s a n d A p p l i c a t i o n s1.Apple Inc. decides to make iTunes freely available in unlimited quantities.a.Does Apple’s decision change the incentives that people face?Apple’sdecisionchangespeople’sincentives.Forexample,itincreasespeople’sincentivestobuyaniPodtotakeadvantageofthenewly“free”musicavailableoniTunes.b.Is Apple’s decision an example of a microeconomic or a macroeconomic issue?Apple’sdecisionisamicroeconomicdecisionbecauseitaffectsasinglecompanyandasinglemarket.2.Which of thefollowing pairs does not match?a.Labor and wagesLaborearnswages,sothispairmatches.b.Land and rentLandearnsrent,sothispairmatches.c.Entrepreneurship and profitEntrepreneurshipearnsprofit,sothispairmatches.d.Capital and profitCapitalearnsinterest,sothispairdoesnotmatch.3.Explain how the following news headlines concern self-interest and the social interest.a.StarbucksExpands inChinaStarbucks’expansionisadecisionmadebyStarbuckstofurtherStarbucks’interest.ThusthedecisionisdirectlyinSrarbucks’selfinterest.ThesocialinterestisaffectedbecauseStarbucks’expansionwillhaveaneffectinChina.Forinstance,moreChinesecitizensmightdrinkcoffeeratherthanteaandfewercoffeeshopsrunbyChinesefirmsmightopen.b.McDonald’s Moves intoGourmet CoffeeMcDonald’sdecisiontoservegourmetcoffeeisadecisionmadebyMcDonald’stofurtherMcDonald’sinterest.ThusthedecisionisdirectlyinMcDonald’sselfinterest.Thesocialinterestisaffectedbecausemorepeoplewilldrinkcoffeeratherthanotherdrinkssuchassodas.c.Food Must Be Labeled with NutritionDataThedecisiontorequirethatfoodmustbelabeledwithnutritioninformationismadeinthesocialinterest.Thisdecisionisnotmadebyanyonesinglefirmandsodoesnot(necessarily)reflectanyone’sselfinterest.4.The night before an economics test, you decide to go to the movies instead of staying homeand working your MyEconLab Study Plan. Your grade on the test was50 percent, lowerthan your usual70 percent score.a.Did you face a tradeoff?Yes,youfacedatradeoff.Thetradeoffwasbetweenahighertestscoreandaneveningwithyourfriendsatthemovies.

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W H A TI SE C O N O M I C S ?7b.What was the opportunity cost of your evening at the movies?Theopportunitycostofgoingtothemoviesisthefallinyourgrade.Thatisthe20pointsforgonefromchoosingtoseethemovieratherthanstudy.

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8C H A P T E R15.Cost ofRioOlympicsBrazilian federal, state, and local governments spent R$2.8 billion and private sponsorsspent R$4.2 billion on 17 new Olympic facilities, 10 of which will be used for sportingevents after the Olympics.Source:Financial Times,August 6, 2016Was the opportunity cost of theRioOlympicsR$2.8orR$7billion? Explain your answer.TheR$7billionspentonthe17newOlympicfacilitiesisanopportunitycostoftheOlympicsifthefundswouldnothavespentotherwise.However,iftherewerealreadyplansunderwaytobuildthe10facilitiesthatwillbeusedaftertheOlympics,thentheircostisnotanopportunitycostoftheOlympicsbecausethecostwouldhavebeenpaidevenifRiodidnothosttheOlympics..Thecostofthe7facilitiesthatwillnotbeusedafterwards,however,isdefinitelyanopportunitycostoftheRioOlympics.6.Which of the following statements is positive, which is normative, and which can be tested?a.The UnitedStatesshould cut its imports.Thestatementisnormativeandcannotbetested.b.China is the largest trading partnerof the United States.Thestatementispositiveandcanbetested.c.If the price ofgasoline rises, people will drive less and use less gasoline.Thestatementispositiveandcanbetested.

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W H A TI SE C O N O M I C S ?9Answers toAdditionalProblemsandApplications7.Kanye WestOffers Free ConcertTicketsKanye West has teamed with Los Angeles inner-city schools to offer free passes for students.Source:consequenceofsound.net, November 27, 2016WhenKanye Westgave away tickets, what was free and what was scarce? Explain youranswer.Theseatsinthearenasarescarce—thereareonlyalimitednumber.Thetimeofschooladminstratorsusedtodistributetheticketsisalsonotfree.Inaddition,ifthestudentswhoaregiventhe“free”ticketattendedtheconcertratherthanselltheirfreetickets,theyincurredtheopportunitycostoftheforegoneticketprice.Sotheconcertwasfarfrom“free”fortheconcert-goers.ThepublicitythatKanyeWestreceivesisfreetohimbutthepublicityusedreporters’scarcetimetoreportontheticketsratherthanreportingonothernewsworthyevents.8.How does the creation of a successful movie influencewhat,how, andforwhomgoods andservices are produced?The“what”questionisaffectedintwoways.First,onegoodorservicethatisproducedisthesuccessfulmovie.Second,spinoffs(IronManII)and/orsimilarfilmslikelywillbecreatedinthefuture.The“how”questionisaffectedtotheextentthatmoviesusedifferentproductionmethods.Somemovies,forinstance,havealotofspecialeffectswhileothermovieshavefewornone.The“forwhom”questionisinfluencedbecausethosepeoplewho,astheresultoftheblockbustermovie,havehigherincomessothatmoregoodsandservicesareproducedforthem.9.How does a successful movie illustrate self-interested choices that are also in the socialinterest?Theasuccessfulmovieincreasestheincomeofthepeopleinvolvedwiththemovie.Hencethesepeople’schoicesaredrivenlargelybyselfinterest.Howeverthecreationofasuccessfulmoviealsoincreasesthequantityofwidelyenjoyedentertainment.Theamountofentertainmentavailableintheeconomyincreaseswhichbenefitssociety.Sothechoicesthepeoplemadeintheirselfinterestalsoreflectedchoicesmadeinthesocialinterest.10.Before starring inGuardians of the Galaxy,Chris Pratthad appeared in11movies thatgrossed an average of $7million on the opening weekend.Guardiansof the Galaxygrossed$94million.a.Howwillthe success ofGuardians of the Galaxyinfluence the opportunity cost of hiringChris Pratt?ThesalarythatmustbepaidtoChrisPratttoappearinfuturemoviesincreasedbecausesomeofthesuccessofGuardiansoftheGalaxywasattributedtoMr.Pratt.AsaresulttheopportunitycosttomovieproducersofhiringMr.Prattincreased.

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1 0C H A P T E R1b.How have the incentives for a movie producer to hireChris Prattchanged?TherearetwoeffectsontheincentivesofproducerstohireMr.Pratt.First,becausetheopportunitycostofhiringMr.Prattincreased,theincentivetohirehimdecreased.HoweverbecausepartofthesuccessofGuardiansoftheGalaxywasattributedtoMr.Prattactingintheleadingrole,producersexpectthathisactingwillleadtoincreasedsuccessforfuturemovies.Thisbeliefincreasesproducers’incentivestohireMr.Pratt.11.What might be an incentive for you to take a class in summer school?Listsome of thebenefits and costs involved in your decision.Would your choice be rational?Earlygraduation,smallerclasssizes,and/orretainingeligibilityforascholarshipareexamplesofincentivesthatencouragetakingsummerclasses.Thebenefitsoftakingsummerclassesmightincludeearlygraduation,morepersonalattentionfromtheinstructor,retainedeligibilityforascholarship,andincreasedknowledgeaboutsomeaspectoftheworld.Costspotentiallyincludeforgonesummerjobsorinternships,lesstimetospendwithfriends,andadditionaltuitionandotherclass-relatedexpensesiftheclassInotonethatwouldbetakenotherwise.Thechoiceisrationalaslongasthestudentdeterminesthattakingsummerclassesoffersthehighestbenefitovercostfortheuseofhisortimeandefforts.12.Look at today’sWall Street Journal.What is the leading economic news story? With bigeconomicquestionsand tradeoffs does it discuss or imply?OnJune20,2017,thetopeconomicnewsstorydiscussedtheSenatesplantovoteonlegislationrepealinglargepartsoftheAffordableCareAct.OneoptionunderconsiderationwouldcaptheamountthefederalgovernmentwouldpaytowardthecostofMedicaid,theprogramthatpaysforhealthcareforpooranddisabledpeople.Thisstoryclearlydiscussesthe“forwhom”question:IfMedicaidspendingisreduced,fewerpooranddisabledpeoplewillreceivecertaintypesofhealthcare.Italsodiscussesthe“what”question:IffewerAmericanshavehealthinsurance,lessgoodsandservicesrelatedtohealthcarewillbeproduced.Thestoryimplicitlyillustratesatradeoff:Ifchoicesaretakentolimittheamountofhealthcarepooranddisabledpeoplereceive,theirhealthwillgenerallybeworsethanotherwise.13.Provide two microeconomic statementsand two macroeconomic statements.Classifyyourstatements aspositive or normative, and explainyour classifications.Microeconomicstatementsare:FewerdeepwateroilwellsshouldbedrilledintheGulfofMexico.Iflessoilisproduced,thepriceofoilwillrise.Thefirststatementisnormativebecauseitreliesonwhatthepersonthinks“should”bedone.Thesecondstatementispositivebecauseitispossibletotesttheeffectoflessoilbeingproduced.Macroeconomicstatementsare:Thecurrentlyunemploymentrateistoohigh.Thecurrentunemploymentrateishigherforblacksthanforwhites.Thefirststatementisnormativebecauseitdependsonwhat

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W H A TI SE C O N O M I C S ?1 1isdeemed“toohigh.”Thesecondstatementispositivebecauseitcanbecheckedtodetermineitsvalidity.

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A n s w e r st ot h eR e v i e wQ u i zPage301.Explain how we “read” the three graphs in Figs.A1.1 and A1.2.Thepointsinthegraphsrelatethequantityofthevariablemeasuredontheoneaxistothequantityofthevariablemeasuredontheotheraxis.Thequantityofthevariablemeasuredonthehorizontalaxis(thex-axis)ismeasuredbythehorizontaldistancefromtheorigintothepoint.Similarly,thequantityofthevariablemeasuredontheverticalaxis(they-axis)ismeasuredbytheverticaldistancefromtheorigintothepoint.Thepointrelatesthesetwoquantities.Forinstance,inFigureA1.2,pointAshowsthatatapriceof$8.43perticket,1.3billionticketsaresold.2.Explain what scatter diagrams show and why we use them.Scatterdiagramsplotthevalueofoneeconomicvariableagainstthevalueofanothervariableforanumberofdifferentvaluesofeachvariable.Weusescatterdiagramsbecausetheyquicklyrevealifarelationshipexistsbetweenthetwovariables.Moreover,ifarelationshipexists,scatterdiagramsshowwhetherincreasesinonevariableareassociatedwithincreasesordecreasesintheothervariable.3.Explain how we “read” the three scatter diagrams in Figs.A1.3 and A1.4.ThescatterdiagraminFigureA1.3showstherelationshipbetweenafilm’sworldwideboxofficeticketsalesandthefilm’sproductionbudget.Thefigureshowsthathigherboxofficesalesareassociatedwithahigherproductionbudget.ThescatterdiagraminFigureA1.4ashowstherelationshipbetweenincome,inthousandsofdollarsperyear,andexpenditure,alsointhousandsofdollarsperyear,fortheyears2001to2016.Thescatterdiagramshowsthathigherincomeleadstohigherexpenditure.Thefigurealsoshowsthattherelationshipisrelativelystrong.ThescatterdiagraminFigureA1.4bshowstherelationshipbetweentheinflationrateandtheunemploymentratefortheyears2001to2016.Thefigureshowsthatformostoftheyears,therewasaweakrelationshipbetweenthesevariables,withperhapshigherinflationbeingassociatedwithlowerunemployment.1GRAPHS INECONOMICSA p p e n d i x

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1 0A P P E N D I X14.Draw a graph to show the relationship between two variables that move in the samedirection.Agraphthatshowstherelationshipbetweentwovariablesthatmoveinthesamedirectionisshownbyalinethatslopesupward.FigureA1.1illustratessucharelationship.5.Draw a graph to show the relationship betweentwo variables that move in oppositedirections.Agraphthatshowstherelationshipbetweentwovariablesthatmoveintheoppositedirectionsisshownbyalinethatslopesdownward.FigureA1.2illustratessucharelationship.F I G U R EA l .1Review problem 42 _1 __t----1----1----1----1----1----1----1----1----1----1---- x2 345678910 1 1 1 2F I G U R EA l .2Review problem 52 _1 __t---- 1----1---- 1----1---- 1----1----1----1---- 1----1----x2 345678910 1 1 1 2

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G R A P H SI NE C O N O M I C S1 16.Draw a graphoftwo variableswhose relationship shows (i)a maximum and(ii)aminimum.Agraphthatshowstherelationshipbetweentwovariablesthathaveamaximumisshownbyalinethatstartsoutslopingupward,reachesamaximum,andthenslopesdownward.FigureA1.3illustratessucharelationshipwithcurveB.Agraphthatshowstherelationshipbetweentwovariablesthathaveaminimumisshownbyalinethatstartsoutslopingdownward,reachesaminimum,andthenslopesupward.FigureA1.3illustratessucharelationshipwithcurveA.7.Which of the relationships in Questions 4 and 5 is a positive relationship and which is anegativerelationship?TherelationshipinQuestion4betweenthetwovariablesthatmoveinthesamedirectionisapositiverelationship.TherelationshipinQuestion5betweenthetwovariablesthatmoveintheoppositedirectionsisanegativerelationship.8.What are the two ways of calculating the slope of a curved line?To calculate the slope of a curved line we can calculate the slope at a point or across anarc.Theslopeofacurvedlineatapointonthelineisdefinedastheslopeofthestraightlinetangenttothecurvedlineatthatpoint.Theslopeofacurvedlineacrossanarc—betweentwopointsonthecurvedline—equalstheslopeofthestraightlinebetweenthetwopoints.9.How do we graph a relationship among more than two variables?Tographarelationshipamongmorethantwovariables,holdconstantthevaluesofallthevariablesexcepttwo.Thenplotthevalueofoneofthevariablesagainsttheothervariable.10.Explain what change will bring amovement alonga curve.Amovementalongacurveoccurswhenthevalueofavariableononeoftheaxeschangeswhilealloftheotherrelevantvariablesnotgraphedontheaxesdonotchange.Themovementalongthecurveshowstheeffectofthevariablethatchanges,ceterisparibus(holdingalloftheothernon-graphedvariablesconstant).F I G U R E A l .3Review problem 65432 _B1 __t --------1---------1--------1---------1---------1---------1---------1---------1--------1---------1---------x2 345678910 1 1 1 2

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1 2A P P E N D I X111.Explain what change will bring ashiftof a curve.Acurveshiftswhenthereisachangeinthevalueofarelevantvariablethatisnotgraphedontheaxes.Inthiscasetheentirecurveshifts.

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G R A P H SI NE C O N O M I C S1 3A n s w e r s t o t h e S t u d y P l a n P r o b l e m s a n d A p p l i c a t i o n sUse the spreadsheet to work Problems1to 3.The spreadsheet provides data onthe U.S. economy: Column A is the year,column B is the inflation rate, column Cis the interest rate, column D is thegrowth rate, and column E is theunemployment rate.1.Draw a scatter diagram of the inflation rate and the interest rate. Describe the relationship.Tomakeascatterdiagramoftheinflationrateandtheinterestrate,plottheinflationrateonthex-axisandtheinterestrateonthey-axis.ThegraphwillbeasetofdotsandisshowninFigureA1.4.Thepatternmadebythedotstellsusthatastheinflationrateincreases,theinterestrateusuallyincreasessothereisa(weak)positiverelationship.2.Draw a scatter diagram of the growth rate and the unemployment rate. Describe therelationship.Tomakeascatterdiagramofthegrowthrateandtheunemploymentrate,plotthegrowthrateonthex-axisandtheunemploymentrateonthey-axis.ThegraphwillbeasetofdotsandisshowninFigureA1.5.ThepatternmadebythedotstellsusthatwhentheABCDE120062.54.92.74.6220074.14.51.84.6320080.11.4−0.35.8420092.70.2−2.89.3520101.50.12.59.6620113.00.11.68.9720121.70.12.28.1820131.50.11.77.4920140.80.02.46.21020150.70.12.65.31120162.10.31.64.9F I G U R EA l. 4Problem 1F I G U R EA l.5Problem 2Unemployment rate (percent)Ooo2345Inflation rate (percent)46Growth rate (percent)

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1 4A P P E N D I X1growthrateincreases,theunemploymentrateusuallydecreasessothereisanegativerelationship.3.Draw a scatter diagram of the interet rate and the unemployment rate. Describe therelationship.Tomakeascatterdiagramoftheinterestrateandtheunemploymentrate,plottheinterestrateonthex-axisandtheunemploymentrateonthey-axis.ThegraphwillbeasetofdotsandisshowninFigureA1.6.Thepatternmadebythedotstellsusthatwhentheinterestrateincreases,theunemploymentrateusuallydecreasessothereisanegativerelationship.Use the following news clip to work Problems 4 to 6.LegoShatters More Records:Source: Boxofficemojo.com,Data for weekend ofMarch10-12, 20174.Draw a graph of the relationshipbetween the revenue per theateron they-axis and the number oftheaters on thex-axis. Describethe relationship.FigureA1.7showstherelationship.Asthefigureshows,thereisapositiverelationship.5.Calculate the slope of the relationshipinProblem 4between3,846and4,071theaters.Theslopeequalsthechangeinrevenuepertheaterdividedbythechangeinthenumberoftheaters.Theslopeequals($15,867−$9,362)/(3,846−MovieTheaters(number)Revenue(dollars pertheater)Kong: SkullIsland3,846$15,867Logan4,071$9,362Get Out,143$6,600TheSha2,888$3,465F I G U R EA l. 6Problem 32123456Interest rate (percent)F I G U R EA 1 . 7Problem 4housands of dollars)15I 100>5©2018 Pearson Educatoo)oo2,0002,5003,0003,5004,000Theaters (number)

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G R A P H SI NE C O N O M I C S1 54,071)whichequals−$28.91pertheater.6.Calculate the slope of the relationshipin Problem 4between4,071and3,143theaters.Theslopeequalsthechangeinrevenuepertheaterdividedbythechangeinthenumberoftheaters.Theslopeequals($9,362−$6,600)/(4,071−3,143whichequals$2.98pertheater.

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1 6A P P E N D I X17.Calculate the slope of the relationshipshown in Figure A1.8.Theslopeis−5/4.Thecurveisastraightline,soitsslopeisthesameatallpointsonthecurve.Slopeequalsthechangeinthevariableonthey-axisdividedbythechangeinthevariableonthex-axis.Tocalculatetheslope,youmustselecttwopointsontheline.Onepointisat10onthey-axisand0onthex-axis,andanotherisat8onthex-axisand0onthey-axis.Thechangeinyfrom10to0isassociatedwiththechangeinxfrom0to8.Thereforetheslopeofthecurveequals−10/8,whichequals−5/4.Use the relationship shown in Figure A1.9 to work Problems 8 and 9.8.Calculate the slope of the relationshipatpointAand at pointB.TheslopeatpointAis−2,andtheslopeatpointBis−0.25.Tocalculatetheslopeatapointonacurvedline,drawthetangenttothecurvedlineatthepoint.Thenfindasecondpointonthetangentandcalculatetheslopeofthetangent.ThetangentatpointAcutsthey-axisat10.Theslopeofthetangentequalsthechangeinydividedbythechangeinx.Thechangeinyequals−4(6minus10)andthechangeinxequals2(2minus0).TheslopeatpointAis−4/2,whichequals−2.Similarly,theslopeatpointBis−0.25.ThetangentatpointBgoesthroughthepoint(4,2).Thechangeinyequals0.5,andthechangeinxequals−2.TheslopeatpointBis−0.25.F I G U R EA l. 8Problem 7y108642012.04.08.0F I G U R EA l. 9Problems 8 and 910.08.06.04.01.5—x10

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G R A P H SI NE C O N O M I C S1 79.Calculate the slope across the arcAB.TheslopeacrossthearcABis−1.125.TheslopeacrossanarcABequalsthechangeiny,whichis4.5(6.0minus1.5)dividedbythechangeinx,whichequals−4(2minus6).TheslopeacrossthearcABequals4.5/−4,whichis−1.125.Price(dollars perride)Balloon rides(number per day)50F70F90F53240501027324015182732

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1 8A P P E N D I X1Use the table to work Problems 10 and 11. The table gives the price of a balloon ride, thetemperature, and the number of rides a day.10.Draw a graph to show the relationship between the price and the number of rides, whentemperature is 70°F. Describe this relationship.FigureA1.10showstherelationshipbetweenthepriceandthenumberofballoonrideswhenthetemperatureis70F.Therelationshipbetweenthepriceandthenumberofridesisinverse;thatis,whenthepricerises,thenumberofridesdecreases.11.What happens in the graph in Problem 10 ifthe temperature rises to 90°F?Ifthetemperaturerisesto90F,thecurveshiftsrightward.ThisshiftisillustratedinFigureA1.11.Inthatfigure,boththeinitialcurve,whichapplieswhenthetemperatureis70F,andthenewcurve,whichapplieswhenthetemperatureis90F,areillustrated.Thecurvewhenthetemperatureis90Fliestotherightofthecurvewhenthetemperatureis70Findicatingthatateveryprice,moreballoonridesaretakenwhenthetemperatureis90Fratherthan70F.FIGUREA l . 1 0Problem 1015.0010.005.005101520253035404550Number of ridesFIGUREA l . 1 1Problem 115.005101520253035404550Number of rides

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G R A P H SI NE C O N O M I C S1 9Answers toAdditionalProblemsandApplicationsUse the spreadsheet to work Problems12 to 14. The spreadsheet provides dataon oil and gasoline: Column A is theyear, column B is the price of oil (dollarsper barrel), column C is the price ofgasoline (cents per gallon), column D isU.S. oil production, and column E is theU.S. quantity of gasoline refined (both inmillions of barrels per day).12.Draw a scatter diagram of the price of oil and the quantity ofU.S.oilproduced. Describe therelationship.FigureA1.12showsthescatterdiagrambetweenthepriceofabarrelofoilandthequantityofU.S.oilproduced.Itshowsaweaknegativerelationship.13.Draw a scatter diagram of the price of gasoline and the quantity of gasolinerefined.Describe the relationship.FigureA1.13showsthescatterdiagrambetweenthepriceofagallonofgasolineandthequantityofgasolinerefined.Itshowsaweaknegativerelationship.ABCDE12006662625.115.622007722845.115.4320081003305.015.342009622415.414.852010792845.515.262011953545.715.172012943646.515.582013983537.515.292014933448.815.5102015492529.416.6112016452258.916.4F I G U R EA l. 12Problem 12F I G U R EA l. 13Problem 13Price (dollars per barrel of oil)Price (cents per gallon of gasoline)CO°o: O3503002502001505.014.815.215.616.016.416.86.07.08.09.010.0U.S. oil production (millions of barrels per day)U.S. gasoline refined (millions of barrels per day)

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2 0A P P E N D I X114.Draw a scatter diagram of the quantity ofU.S.oilproducedand the quantity of gasolinerefined. Describe the relationship.FigureA1.14showsthescatterdiagrambetweenthequantityofU.S.oilproducedandthequantityofgasolinerefined.Itshowsapositiverelationship.Use the following data to work Problems 15 to 17.Draw a graph that shows the relationshipbetween the two variablesxandyin thetable to the right.Tomakeagraphthatshowstherelationshipbetweenxandy,plotthexvariableonthex-axisandtheyvariableonthey-axis.FigureA1.15showsthisgraph.15.a.Is the relationship positive or negative?Therelationshipisnegativebecausexandymoveinoppositedirections:Asxincreases,ydecreases.b.Does the slope of the relationshipbecomesteeperorflatteras the value ofxincreases?Theslopebecomessteeperasxincreases.c.Think of some economic relationships thatmight be similar to this one.Thelessexpensiveagood,thegreateristhenumberofpeoplewhobuyit.Thehighertheinterestrate,thesmalleristhenumberofpeoplewhotakeouthomemortgages.Thelessexpensivegasoline,thegreaterthemilescarownersdrive.x012345y25242218120F I G U R EA l. 1 4Problem 1410.09.08.0U.S. oil production [millions of barrels per day)OO14.815.216.016.4U.S. gasoline refined (millions of barrels per day)r i u u n cMi .ijProblem 15y2562015105 -X

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G R A P H SI NE C O N O M I C S2 116.Calculate the slope of the relationship betweenxandywhenxequals 3.Theslopeequals−4.0.Theslopeofthecurveatthepointwherexis3isequaltotheslopeofthetangenttothecurveatthatpoint.Plottherelationshipandthendrawthetangentlineatthepointwherexis3andyis18.Nowcalculatetheslopeofthistangentlinebyfindinganotherpointonthetangent.Whenxequals5,yequals10onthetangent,soanotherpointisxequals5andyequals10.Theslopeequalsthechangeiny,8,dividedbythechangeinx,−2,sotheslopeis−4.0.17.Calculate the slope of the relationship across the arc asxincreases from 4 to 5.Theslopeis–12.Theslopeoftherelationshipacrossthearcwhenxincreasesfrom4to5isequaltotheslopeofthestraightlinejoiningthepointsonthecurveatxequals4andxequals5.Whenxincreasesfrom4to5,yfallsfrom12to0.Theslopeequalsthechangeiny,12(12minus0),dividedbythechangeinx,−1(4minus5),sotheslopeacrossthearcis−12.0.18.Calculate the slope of thecurveinFigureA1.16at pointA.Theslopeis−2.Thecurveisastraightline,soitsslopeisthesameatallpointsonthecurve.Slopeequalsthechangeinthevariableonthey-axisdividedbythechangeinthevariableonthex-axis.Tocalculatetheslope,selecttwopointsontheline.Onepointisat18onthey-axisand0onthex-axis,andanotherisat9onthex-axisand0onthey-axis.Thechangeinyfrom18to0isassociatedwiththechangeinxfrom0to9.Thereforetheslopeofthecurveequals−18/9,whichequals−2.Use Figure A1.17to work Problems 19 and 20.19.Calculate the slope at pointAand at pointB.TheslopeatpointAis−4,andtheslopeatpointBis−1.Tocalculatetheslopeatapointonacurvedline,drawthetangenttothelineatthepoint.ThenF I G U R EA l . 1 6Problem 18y1810X049F I G U R EA l .1 7Problems 19 and 204©2018 Pearson Educatio822

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2 2A P P E N D I X1findasecondpointonthetangentandcalculatetheslopeofthetangent.ThetangentatpointAcutsthex-axisat2.5.Theslopeofthetangentequalsthechangeinydividedbythechangeinx.Thechangeinyequals6(6minus0)andthechangeinxequals−1.5(1minus2.5).TheslopeatpointAis6/−1.5,whichequals−4.Similarly,theslopeatpointBis−1.ThetangentatpointBcutsthey-axisat5.Thechangeinyequals3,andthechangeinxequals−3.TheslopeatpointBis−1.20.Calculate the slope across the arcAB.TheslopeacrossthearcABis−2.TheslopeacrossthearcABequalsthechangeiny,whichis4(6minus2)dividedbythechangeinx,whichequals−2(1minus3).TheslopeacrossthearcABequals4/−2,whichequals−2.Use the following table to work Problems 21 to 23.The table gives information about umbrellas:price, the number purchased, and rainfallininches.21.Draw a graph to show the relationshipbetween the price and the number ofumbrellas purchased, holding theamount of rainfall constant at 1 inch.Describe this relationship.FigureA1.18showstherelationship.Todrawagraphoftherelationshipbetweenthepriceandthenumberofumbrellaswhentherainfallequals1inch,keeptherainfallat1inchandplotthedatainthatcolumnagainsttheprice.Thiscurveistherelationshipbetweenpriceandnumberofumbrellaswhentherainfallis1inches.Therelationshipbetweenthepriceandthenumberofumbrellasisaninverserelationship;asthepricerises,thenumberofumbrellasdecreases.22.What happens in the graph in Problem 21 ifthe price rises and rainfall is constant?Ifthepricerises,thenumberofumbrellasdecreases.InFigureA1.18,thereisamovementupwardalongthe(unchanged)curve.Price(dollars perumbrella)Umbrellas(numbers per day)012(inches of rainfall)2047830247424F I G U R EA l. 1 8Problem 2112345678Umbrellas (number)

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G R A P H SI NE C O N O M I C S2 323.What happens in the graph in Problem 21 ifthe rainfall increases from 1 inch to 2 inches?AsshowninFigureA1.19,thecurveshiftsrightward.Inthatfigure,boththeinitialcurve,whichapplieswhentherainfallis1inch,andthenewcurve,whichapplieswhentherainfallis2inches,areillustrated.Thecurvewhentherainfallis2inchesliestotherightofthecurvewhentherainfallis1inchindicatingthatateveryprice,moreumbrellasarepurchasedwhentherainfallis2inchesthanwhentherainfallis1inch.F I G U R E A 1. 1 9Problem 23Price (dollars per umbrella)NJcoooo12345678Umbrellas (number)

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A n s w e r st ot h eR e v i e wQ u i z z e sPage 361.How does the production possibilities frontier illustrate scarcity?The unattainable combinations of production that liebeyondthePPFillustrate the concept ofscarcity. There simply are not enough resources to produce any of these combinations of outputs.Additionally, while moving along thePPFto increase the production of one good requires thatthe production of another good be reduced, which also illustrates scarcity.2.How does the production possibilities frontier illustrate production efficiency?The combinations of outputs that lie on thePPFillustrate the concept of production efficiency.These points are the maximum production points possible and are attained only by producingthe goods and services at the lowest possible cost. Any point inside the frontier reflectsproduction where one or both outputs may be increased without decreasing the other outputlevel. Clearly, such points cannot be production efficient.3.How does the production possibilities frontier show that every choice involves a tradeoff?Movements along thePPFfrontier illustrate that producing more of one good requires producingless of other good. This observationreflects the result that atradeoffmust be made whenproducing output efficiently.4.How does the production possibilities frontier illustrate opportunity cost?The negative slope of the production possibility curve illustrates the concept ofopportunity cost.Moving along the production possibility frontier, producing additional units of a good requiresthat the output of another good must fall. This sacrifice is the opportunity cost of producing moreof the first good.5.Why is opportunity cost a ratio?The slope of thePPFis aratiothat expresses the quantity of lost production of the good on they-axisto the increase inthe production of the good on thex-axismoving downward along thePPF.The steeper the slope, the greater ratio, and the greater is the opportunity cost of increasing theoutput of the good measuredonthe horizontal axis.6.Why does thePPFbow outwardand what does that imply about the relationship betweenopportunity costand thequantity produced?Some resources are better suited to produce one type of good or service, like pizza. Otherresources are better suited to produce other goods or services, like DVDs. If society allocatesresources wisely, it will use each resource to produce the kind of output for which it is bestsuited.Consider aPPFwith pizza measured on thex-axis and DVDs measured on they-axis.Asmall increase in pizza output when pizza production is relativelylowrequires onlyasmallincrease in the use of those resources still good at making pizza and not good at making DVDs.This yields a small decrease in DVD production for a large increase in pizza production, creatinga relativelylow opportunity costreflected in the gentle slope of thePPFover this range of output.However, the same small increase in pizza output when pizza production is relativelylargewillrequire society to devote to pizza production those resources that are less suited to making pizza2THE ECONOMICPROBLEMC h a p t e r

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2 2C H A P T E R2and more suitedtomaking DVDs. This reallocation of resources yields a relatively small increasein pizza output for a large decrease in DVD output, creating a relativelyhigh opportunity costreflected in the steep slope of thePPFover this range of output. The opportunity cost of pizzaproduction increases with the quantity of pizza produced as the slope of thePPFbecomes eversteeper. This effectcreatesthebowed outeffect (the concavity of thePPFfunction)and meansthatas more of a good is produced,the opportunity cost ofproducing additional units increases.Page 391.What is marginal cost? How is it measured?Marginal costis the opportunity cost of producingone more unitof a good or service. Along aPPFmarginalcost is reflected in the absolute value of the slope of thePPF. In particular, themagnitude of the slope of thePPFis the marginal cost of a unit of the good measured along thex-axis.As the magnitude of the slope changes moving along thePPF, the marginal cost changes.2.What is marginal benefit? How is it measured?Themarginal benefitfroma good or service is the benefit received fromconsuming one moreunit of it. It is measured by what an individual is willing to give up (or pay) foran additionalthatlast unit.3.How does the marginal benefit from a good change as the quantity produced of that goodincreases?As the more of a good is consumed, the marginal benefit received from each unit is smaller thanthe marginal benefit received from the unit consumed immediately before it, and is larger thanthe marginal benefit from the unit consumed immediately after it. This set of results is known asthe principle ofdecreasing marginal benefitand is often assumed by economists to be a commoncharacteristic of an individual’s preferences over most goods and services in the economy.4.What is allocative efficiency and how does it relate to the production possibilities frontier?Production efficiencyoccurs when production takes place at a point on thePPF. This indicatesthat all available resources are being used for production and society cannot produce additionalunits of one good or service without reducing the output of another good or service.Allocativeefficiency, however, requires that the goods and services produced are those that provide thegreatest possible benefit. This definition means that the allocative efficient level of output is thepoint on thePPF(and hence is a production efficient point) for which the marginal benefit equalsthe marginal cost.5.What conditions must be satisfied if resources are used efficiently?Resources are used efficiently when more of one good or service cannot be produced withoutproducing less of some of another good or service that isvalued more highly. This is known asallocative efficiencyand it occurs when: 1) production efficiency is achieved, and 2) the marginalbenefit received from the last unit produced is equal to the marginal cost of producing the lastunit.Page 441.What gives a person a comparative advantage?A person has a comparative advantage in an activity if that person can perform the activity at alower opportunity cost than anyone else, If the person gives up the least amount of other goodsand services to produce a particular good or service, the person has the lowest opportunity costof producing that good or service.2.Distinguish between comparative advantage and absolute advantage.A person has acomparative advantagein producing a good when he or she has the lowestopportunity cost of producing it.Comparative advantage is based on the output forgone.A person

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